What's the Fuss About?
Between the major news outlets, the "what's a bitcoin?" questions from Aunt Martha, and the person in your friend group that thinks they are the next Warren Buffet, it's tough to not constantly hear about Bitcoin. Especially this week. The Coinbase IPO has brought a whole new level of attention to the space, and reasonably so, considering the company was valued higher than GM, Fedex, and Dell after it's first day of trading.
But what's the big fuss about? People are constantly asking us "what is the significance of Bitcoin", more specifically, what problem does it solve? I want to break down cryptocurrencies, Blockchain, and the Coinbase IPO to add context to an industry that seems to be impossible to fully understand. I'll try my best at least.
What is Cryptocurrency?
Years ago, I heard a great analogy that has stuck with me: Bitcoin is to Blockchain what email was to the internet. In the nascent stages of the internet, email became incredibly popular and brought a lot of attention to the internet as a whole. As time went on, we realized that it was just a small application of the full functionality of the internet, but it helped the platform become mainstream.
Compared to cryptocurrencies, Bitcoin has generated immense amounts of interest in crypto, but represents a very finite application of Blockchain, such as sending money between parties securely. Bitcoin is just one of the many coins that have been created using Blockchain, and each coin has a unique functionality to accomplish different tasks.
But what is it? Some people consider it a currency, but that is refuted by it's inherent volatility (it's tough to make transactions when the price is moving so quickly). Some people consider it a digital gold, or a hedge against inflation and fiat currency (very popular since so much money was printed this year). Other say "a store of value". And some people say "worthless", with their argument being that it has no intrinsic value, or tangible value.
The reality is, it doesn't really matter what it is if people believe it has value and are ultimately willing to pay a higher price for it.
What is Blockchain?
Distinguishing between cryptocurrencies and Blockchain is very important. Long story short, Blockchain is like a database. It is most commonly used as a ledger that records transactions and stores them securely into perpetuity. It creates this security by having thousands of independent computers constantly fact checking each other to ensure that all of the data being stored has integrity and isn't being falsified by any of the parties involved.
The use of independent computers is what makes the database "decentralized" and unable to be influenced by any one party. This is different than a typical database which has internal systems to monitor the validity of the data being recorded, which can be corrupted by individuals or outside hackers.
What problem are we trying to solve and/or what can we actually use blockchain for?
Enough with the jargon and technical word spew. The big question is, how does this technology add value to our lives, and why does a made up currency of digital tokens represent value to so many people. Here are some examples of how Blockchain is or can be utilized.
- Voting (Not currently being used):
- If we were to vote using blockchain, each eligible citizen could be given a single cryptocurrency token. Then, each candidate would have a unique "wallet" address, and people would deposit their token into the wallet of their candidate of choice. The Blockchain would securely store every "transaction" on a ledger that would be able to keep record and trace every single vote with complete confidence.
- Banking and Finance:
- Let's say you try to deposit a check on Friday at 6pm. Since the bank operates under normal business hours, your funds typically won't show up until Monday, and sometimes longer if the money takes time to settle. Blockchain, on the other hand, never sleeps. So the banks could use Blockchain to authenticate and process all of your transactions in under 10 minutes, with the same (if not more) security measures.
- The same goes for trading stock. Currently, if you sell a stock, you have to wait 2 days for the funds to settle in your account before you can withdrawal them. This can be costly/risky to big institutions if this is occurring over and over again.
- This is one of my favorite examples. We can all relate to the pain of going to the doctor and having to sign dozens of forms just so they can shuffle your paper records between all of your specialists. If we were to upload our medical documents into the Blockchain, we would have proof and confidence that the record could not be changed or tampered with.
- Then, if one of your doctors wanted to send it to a different doctor, they could grant access of your "private key" to the other doctor, which would make your records available only to the people who have that "key". You would be able to see who has access which ensures that your records are only accessible to the right people. If we were just to do this digitally, one hack could compromise the health data of millions of people.
- Supply Chain:
- IBM has created a program called "Food Trust Blockchain" to trace the journey that food products take as they travel around the country. Why would we need to complicate this process? Well, we repeatedly see outbreaks of foodborne illnesses such as E. coli, salmonella, listeria, etc.. Typically it takes weeks to track down the path and origins of the tarnished food products. With IBM's platform, companies can trace the origins of the bad food in a fraction of the time, and can notify food distributors and other parties that have come in contact with the food to limit the number of people exposed, potentially saving lives.
What is the significance of the Coinbase IPO.
The Coinbase IPO has gotten a lot of attention this week. This is because it is the first cryptocurrency trading exchange that has gone public, marking the beginning of what seems to be an era of Wall Street's adoption of the space. Coinbase works like a stock exchange in that it allows users to buy and sell cryptocurrencies between each other, and of course, records all of these transactions on Blockchain.
As these two worlds collide, it will be fascinating to see how mainstream finance adopts the digital world. Is this the final stepping stone that gives crypto enthusiasts the necessary backing to implement a whole new digital ecosystem in our economy?
If you're an idealist, then maybe that's the case. On the flip side, it is yet to be determined if the crypto space is going to be as big as people think, or if regulation will squash some of the hopes and dreams associated with it.
Potential concerns for the space:
While the idea of Blockchain is revolutionary, there are inherent risks with any new technology. Here are what I believe to be the biggest concerns:
- Regulation: If the federal reserve and the federal government believe digital currencies present a threat to the demand and integrity of the US dollar, there will be immense pressure for the SEC to crack down on these currencies and exchanges.
- Environmental Impact: The amount of energy it takes to power the computers that power the Bitcoin Blockchain is equal to over 0.6% of the world's total power consumption. That is more than small countries consume, or about equivalent to 10 million people. Not to mention the power used to power the remaining Blockchain systems for other currencies. This could deter investment from an ESG perspective.
- History of funding illicit activities: These currencies have been known to be used by terrorist organizations and drug traffickers due to the anonymity of the uses within the Blockchain. These groups can send large amounts of money with complete impunity while avoiding government oversight.
This is my best attempt to explain a complex topic as concisely as possible. While I am omitting many of the inner-workings of this technology, I believe this helps provide a base understanding of what all of the hype is about. As always, please reach out with any questions and be careful investing in the space.
Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame, and risk tolerance.