Tag Archives: Blockchain

Blockchain Remains A Solution In Search Of A Problem… For Now

Wall Street rethinks blockchain projects as euphoria meets reality

NEW YORK (Reuters) – Wall Street has been much more excited about the system underpinning bitcoin than the cryptocurrency itself, but the global financial industry has not yet been able to do much with the technology known as blockchain.

Reuters has found several blockchain projects launched by major financial institutions that have been shelved, as development of the technology enters a hype-meets-reality phase.

The casualties include projects by the Depository Trust & Clearing Corporation (DTCC), BNP Paribas SA (BNPP.PA) and SIX Group, Reuters has found.

These were among the wave of blockchain tests touted by the financial industry over the past few years, as firms bet the new technology would displace much of the sector’s infrastructure, cutting out middlemen, speeding transactions and reducing costs for things like securities and payments processing.

Yet as some projects were developed, companies pulled back for various reasons – from costs to industry readiness, underscoring that, for all its potential, blockchain is still in its early days.

DTCC, known as Wall Street’s bookkeeper, recently put the brakes on a blockchain system for the clearing and settlement of repurchase, or repo, agreement transactions, said Murray Pozmanter, head of clearing agency services at the DTCC.

The project, which had successfully tested with startup Digital Asset Holdings (DA), was shelved because banks and other potential users believed the same results could be achieved more cheaply using current technology, he said.

“Basically, it became a solution in search of a problem,” he said.

Post-trade services provider, SIX Securities Services, a unit of the group that operates Switzerland’s stock exchange, has also decided not take into production a prototype built by DA for the processing of securities, SIX spokesman Jürg Schneider, told Reuters.

“We wanted to go into another direction,” Schneider said.

The partnership with DA, run by former JPMorgan Chase & Co (JPM.N) executive Blythe Masters, was announced in 2016.

French bank BNP Paribas in 2016 said its securities services division had partnered with startups including SmartAngels to build a platform for private small businesses to manage their securities.

The bank stopped work on the project, and will instead team up with other financial institutions on another blockchain initiative called LiquidShare, said a source familiar with the matter. “Creating an enterprise-wide robust blockchain platform requires the full cooperation of the whole post trade ecosystem,” the source said.

PROOFS OF CONCEPT

The DTCC, BNP Paribas and SIX tests were among a barrage of blockchain “proofs of concept” announced with great fanfare by financial institutions.

“A large part of the problem has been expectation management, or rather lack thereof by many vendors and large consultancies that made claims that could not be fulfilled in the time spans they had said on stage at fintech events,” said Tim Swanson, founder of technology advisory Post Oak Labs.

Reuters reported last week JPMorgan was considering spinning off its marquee blockchain project Quorum. In July a partnership between settlement provider Euroclear and startup Paxos to develop a blockchain service was dissolved.

Still, other projects are moving forward.

 

Pozmanter said the DTCC is still examining another project with DA and that it is close to testing a blockchain-based trade information warehouse set to launch next year.

“We’re still bullish on the technology,” Pozmanter said.

The repo test with DA “met all its stated goals” and led to a new project that DTCC is examining, said DA spokeswoman Vera Newhouse.

SIX is working on a blockchain project with Nasdaq (NDAQ.O) and Australia’s stock exchange ASX Ltd (ASX.AX) said in December that DA will help replace its registry, settlement and clearing system, By  one of the most ambitious projects to receive a green light.

Source: By Anna Irrera &  John McCrank | Reuters

The Blockchain Economy: A beginner’s guide to institutional cryptoeconomics

The blockchain is a digital, decentralized, distributed ledger.

Most explanations for the importance of the blockchain start with Bitcoin and the history of money. But money is just the first use case of the blockchain. And it is unlikely to be the most important.

It might seem strange that a ledger — a dull and practical document associated mainly with accounting — would be described as a revolutionary technology. But the blockchain matters because ledgers matter.

Ledgers All The Way Down

Ledgers are everywhere. Ledgers do more than just record accounting transactions. A ledger consists simply of data structured by rules. Any time we need a consensus about facts, we use a ledger. Ledgers record the facts underpinning the modern economy.

Ledgers confirm ownership. Property title registers map who owns what and whether their land is subject to any caveats or encumbrances. Hernando de Soto has documented how the poor suffer when they own property that has not been confirmed in a ledger. The firm is a ledger, as a network of ownership, employment and production relationships with a single purpose. A club is a ledger, structuring who benefits and who does not.

Ledgers confirm identity. Businesses have identities recorded on government ledgers to track their existence and their status under tax law. The register of Births Deaths and Marriages records the existence of individuals at key moments, and uses that information to confirm identities when those individuals are interacting with the world.

Ledgers confirm status. Citizenship is a ledger, recording who has the rights and is subject to obligations due to national membership. The electoral roll is a ledger, allowing (and, in Australia, obliging) those who are on that roll a vote. Employment is a ledger, giving those employed a contractual claim on payment in return for work.

Ledgers confirm authority. Ledgers identify who can validly sit in parliament, who can access what bank account, who can work with children, who can enter restricted areas.

At their most fundamental level, ledgers map economic and social relationships.

Agreement about the facts and when they change — that is, a consensus about what is in the ledger, and a trust that the ledger is accurate — is one of the fundamental bases of market capitalism.

Ownership, Possession, And Ledgers

Let’s make a distinction here that is crucial but easy to miss: between ownership and possession.

Take passports. Each country asserts the right to control who crosses its borders, and each country maintains a ledger of which of its citizens have the right to travel. A passport is a physical item — call it a token — that refers back to this ledger.

In the pre-digital world, possession indicated ownership of that right. The Australian passport ledger consisted of index cards held in by the government of each state. Border agents presented with a passport could surmise that the traveler who held it was listed on a distant ledger as allowed to travel. Of course this left border control highly exposed to fraud.

https://cdn-images-1.medium.com/max/1600/0*o7jSV4im3ZVc0LcD.A Belgian passport held by the Australian National Archives, A435 1944/4/2579

Possession implies ownership, but possession is not ownership. Now modern passports allow the authorities to confirm ownership directly. Their digital features allow airlines and immigration authorities to query the national passport database and determine that a passenger is free to travel.

Passports are a relatively straightforward example of this distinction. But as Bitcoin has shown: money is a ledger, too.

Possession of a banknote token indicates ownership. In the nineteenth century the possessor — ‘bearer’ — of a banknote had a right to draw on the issuing bank the value of the note. These banknotes were direct liabilities for the issuing bank, and were recorded on the banks’ ledger. A regime of possession indicating ownership meant that banknotes were susceptible to be both stolen and forged.

In our era fiat currencies a five dollar bill cannot be returned to the central bank for gold. But the relationship remains — the value of the bill is dependent on a social consensus about the stability of the currency and government that issued it. Banknotes are not wealth, as Zimbabweans and Yugoslavians and Weimar Republic Germans have unfortunately learned. A bill is a call on a relationship in a (now synthetic) ledger and if that relationship collapses, so does the value of the bill.

Evolution Of The Ledger

For all its importance, ledger technology has been mostly unchanged … until now.

Ledgers appear at the dawn of written communication. Ledgers and writing developed simultaneously in the Ancient Near East to record production, trade, and debt. Clay tablets baked with cuneiform script detailed units of rations, taxes, workers and so forth. The first international ‘community’ was arranged through a structured network of alliances that functioned a lot like a distributed ledger.

https://cdn-images-1.medium.com/max/1000/0*-a0B-7Owzy1WZpDN.A fragment of a late Babylonian cuneiform ledger, held by the British Museum, 58278

The first major change to ledgers appeared in the fourteenth century with the invention of double entry bookkeeping. By recording both debits and credits, double entry bookkeeping conserved data across multiple (distributed) ledgers, and allowed for the reconciliation of information between ledgers.

The nineteenth century saw the next advance in ledger technology with the rise of large corporate firms and large bureaucracies. These centralized ledgers enabled dramatic increases in organizational size and scope, but relied entirely on trust in the centralized institutions.

In the late twentieth century ledgers moved from analog to digital ledgers. For example, in the 1970s the Australian passport ledger was digitized and centralized. A database allows for more complex distribution, calculation, analysis and tracking. A database is computable and searchable.

But a database still relies on trust; a digitized ledger is only as reliable as the organization that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger.

Blockchain And The Economic Institutions Of Capitalism

The economic structure of modern capitalism has evolved in order service these ledgers.

Oliver Williamson, the 2009 Nobel laureate in economics, argued that people produce and exchange in markets, firms, or governments depending on the relative transactions costs of each institution. Williamson’s transactions cost approach provides a key to understanding what institutions manage ledgers and why.

Governments maintain ledgers of authority, privilege, responsibility and access. Governments are the trusted entity that keeps databases of citizenship and the right to travel, taxation obligations, social security entitlements, and property ownership. Where a ledger requires coercion in order to be enforced, the government is required.

Firms also maintain ledgers: proprietary ledgers of employment and responsibility, of the ownership and deployment of physical and human capital, of suppliers and customers, of intellectual property and corporate privilege. A firm is often described as a ‘nexus of contracts’. But the value of the firm comes from the way that nexus is ordered and structured — the firm is in fact a ledger of contracts and capital.

Firms and governments can use blockchains to make their work more efficient and reliable. Multinational firms and networks of firms need to reconcile transactions on a global basis and blockchains can allow them to do so near-instantaneously. Governments can use the immutability of the blockchain to guarantee that property titles and identity records are accurate and untampered. Well-designed permissioning rules on blockchain applications can give citizens and consumers more control over their data.

But blockchains also compete against firms and governments. The blockchain is an institutional technology. It is a new way to maintain a ledger — that is, coordinate economic activity — distinct from firms and governments.

https://cdn-images-1.medium.com/max/1000/0*B2yBa82kJwOAfkvZ.The new economic institutions of capitalism

Blockchains can be used by firms, but they can also replace firms. A ledger of contracts and capital can now be decentralized and distributed in a way they could not before. Ledgers of identity, permission, privilege and entitlement can be maintained and enforced without the need for government backing.

Institutional Cryptoeconomics

This is what institutional cryptoeconomics studies: the institutional consequences of cryptographically secure and trustless ledgers.

Classical and neoclassical economists understand the purpose of economics as studying the production and distribution of scarce resources, and the factors which underpinned that production and distribution.

Institutional economics understands the economy as made of rules. Rules (like laws, languages, property rights, regulations, social norms, and ideologies) allow dispersed and opportunistic people to coordinate their activity together. Rules facilitate exchange — economic exchange but also social and political exchange as well.

What has come to be called cryptoeconomics focuses on the economic principles and theory underpinning the blockchain and alternative blockchain implementations. It looks at game theory and incentive design as they relate to blockchain mechanism design.

By contrast, institutional cryptoeconomics looks at the institutional economics of the blockchain and cryptoeconomy. Like its close cousin institutional economics, the economy is a system to coordinate exchange. But rather than looking at rules, institutional cryptoeconomics focuses on ledgers: data structured by rules.

Institutional cryptoeconomics is interested in the rules that govern ledgers, the social, political, and economic institutions that have developed to service those ledgers, and how the invention of the blockchain changes the patterns of ledgers throughout society.

The Economic Consequences Of The Blockchain

Institutional cryptoeconomics gives us the tools to understand what is happening in the blockchain revolution — and what we can’t predict.

Blockchains are an experimental technology. Where the blockchain can be used is an entrepreneurial question. Some ledgers will move onto the blockchain. Some entrepreneurs will try to move ledgers onto the blockchain and fail. Not everything is a blockchain use case. We probably haven’t yet seen the blockchain killer app yet. Nor can we predict what the combination of ledgers, cryptography, peer to peer networking will throw up in the future.

This process is going to be extremely disruptive. The global economy faces (what we expect will be) a lengthy period of uncertainty about how the facts that underpin it will be restructured, dismantled, and reorganized.

The best uses of the blockchain have to be ‘discovered’. Then they have to be implemented in a real world political and economic system that has deep, established institutions that already service ledgers. That second part will not be cost free.

Ledgers are so pervasive — and the possible applications of the blockchain so all-encompassing — that some of the most fundamental principles governing our society are up for grabs.

Institutional Creative Destruction

We’ve been through revolutions like this before.

It is common to compare the invention of Bitcoin and the blockchain with the internet. The blockchain is Internet 2.0 — or Internet 4.0. The internet is a powerful tool that has revolutionized the way we interact and do business. But if anything the comparison undersells the blockchain. The internet has allowed us to communicate and exchange better — more quickly, more efficiently.

But the blockchain allows us to exchange differently. A better metaphor for the blockchain is the invention of mechanical time.

Before mechanical time, human activity was temporally regulated by nature: the crow of the rooster in the morning, the slow descent into darkness at night. As the economic historian Douglas W. Allen argues, the problem was variability: “there was simply too much variance in the measurement of time … to have a useful meaning in many daily activities”.

https://cdn-images-1.medium.com/max/1000/0*6ZkgvAJSZ4OTzp9m.The 12th century Jayrun Water Clock

“The effect of the reduction in the variance of time measurement was felt everywhere”, Allen writes. Mechanical time opened up entirely new categories of economic organization that had until then been not just impossible, but unimaginable. Mechanical time allowed trade and exchange to be synchronized across great distances. It allowed for production and transport to be coordinated. It allowed for the day to be structured, for work to be compensated according to the amount of time worked — and for workers to know that they were being compensated fairly. Both employers and employees could look at a standard, independent instrument to verify that a contract had been performed.

Complete And Incomplete Smart Contracts

Oliver Williamson and Ronald Coase (who was also an economics Nobel prize winner, in 1991) put contracts at the heart of economic and business organization. Contracts are at the center of institutional cryptoeconomics. It is here that blockchains have the most revolutionary implications.

Smart contracts on the blockchain allows for contractual agreements to be automatically, autonomously, and securely executed. Smart contracts can eliminate an entire class of work that currently maintains, enforces and confirms that contracts are executed — accountants, auditors, lawyers, and indeed much of the legal system.

But the smart contracts are limited by what can be specified in the algorithm. Economists have focused on the distinction between complete and incomplete contracts.

A complete contract specifies what is to occur under every possible contingency. An incomplete contract allows the terms of the contract to be renegotiated in the case of unexpected events. Incomplete contracts provide one explanation for why some exchanges take place in firms, and why others take place in markets, and provides a further guide to questions surrounding vertical integration and the size of the firm.

Complete contracts are impossible to execute, while incomplete contracts are expensive. The blockchain, though smart contracts, lowers the information costs and transactions costs associated with many incomplete contracts and so expands the scale and scope of economic activity that can be undertaken. It allows markets to operate where before only large firms could operate, and it allows business and markets to operate where before only government could operate.

The precise details of how and when this will occur is a challenge and a problem for entrepreneurs to resolve. Currently, oracles provide a link between the algorithmic world of the blockchain and the real world, trusted entities that convert information into data that can be processed by a smart contract.

The real gains to be made in the blockchain revolution, we suggest, are in developing better and more powerful oracles — converting incomplete contracts to contracts that are sufficiently complete to be written algorithmically and executed on the blockchain.

The merchant revolution of the middle ages was made possible by the development of merchant courts — effectively trusted oracles — that allowed traders to enforce agreements privately. For blockchain, that revolution seems yet to come.

Whither Government?

The blockchain economy puts pressure on government processes in a whole host of ways, from taxation, to regulation, to service delivery.

Investigating these changes is an ongoing project of ours. But consider, for instance, how we regulate banks.

Prudential controls have evolved to ensure the safety and soundness of financial institutions that interact with the public. Typically these controls (for example, liquidity and capital requirements) have been justified by the fact that depositors and shareholders are unable to observe the bank’s ledger. The depositors and shareholders are unable to discipline the firm and its management.

Bank runs occur when depositors discover (or simply imagine) that their bank might not be able to cover their deposits, and they rush to withdraw their money.

https://cdn-images-1.medium.com/max/1000/0*SeqgN9FuH-Fnwttc.The bank run in Mary Poppins (1964)

One possible application of the blockchain would allow depositors and shareholders to continuously monitor the bank’s reserves and lendings, substantially eliminating the information asymmetries between them and the bank management.

In this world, market discipline would be possible. Public trust in the immutability of the blockchain would ensure no false bank runs occurred. The role of the regulator might be limited to certifying the blockchain was correctly and securely structured.

A more far reaching application would be a cryptobank — an autonomous blockchain application that borrows short and lends long, perhaps matching borrowers with lenders directly. A cryptobank structured algorithmically by smart contracts would have the same transparency properties as the bank with a public blockchain ledger but with other features that might completely neglect the need for regulators. For example, a cryptobank could be self-liquidating. At the moment the cryptobank began trading while insolvent, the underlying assets would be automatically disbursed to shareholders and depositors.

It is unclear what regulatory role government should have in this world.

Tyler Cowen and Alex Tabarrok have argued that much government regulation appears to be designed to resolve asymmetric information problems — problems that, in a world of information ubiquity, often do not exist any more. Blockchain applications significantly increase this information ubiquity, and make that information more transparent, permanent, and accessible.

Blockchains have their uses in what is being called ‘regtech’ — the application of technology to the traditional regulatory functions of auditing, compliance, and market surveillance. And we ought not to dismiss the possibility that there will be new economic problems that demand new consumer protections or market controls in the blockchain world.

Nevertheless, the restructuring and recreation of basic economic forms like banks will put pressure not just on how regulation is enforced, but what the regulation should do.

Whither Big Business?

The implications for big business are likely to be just as profound. Business size is often driven by the need to cover the costs of business hierarchy — in turn due to incomplete contracts and technological necessity of large scale financial investment. That business model has meant that shareholder capitalism is the dominant form of business organization. The ability to write more complete contracts on the blockchain means that entrepreneurs and innovators will be able to maintain ownership and control of their human capital and profit at the same time. The nexus between operating a successful business and access to financial capital has been weakening over time, but now might even be broken. The age of human capitalism is dawning.

Entrepreneurs will be able to write a valuable app and release it into the “wild” ready to be employed by anyone and everyone who needs that functionality. The entrepreneur in turn simply observe micro-payments accumulating in their wallet. A designer could release their design into the “wild” and final consumers could download that design to their 3D printer and have the product almost immediately. This business model could see more (localized) manufacturing occur than at present.

The ability of consumers to interact directly with producers or designers will limit the role that middlemen play in the economy. Logistics firms, however, will continue to prosper, but the advent of driverless transportation will see disruption to industry too.

Bear in mind, any disruption of business will also disrupt the company tax base. It may become difficult for government to tax business at all — so we might see greater pressure on sales (consumption) taxes and even poll taxes.

Conclusion

The blockchain and associated technological changes will massively disrupt current economic conditions. The industrial revolution ushered in a world where business models were predicated on hierarchy and financial capitalism. The blockchain revolution will see an economy dominated by human capitalism and greater individual autonomy.

How that unfolds is unclear at present. Entrepreneurs and innovators will resolve uncertainty, as always, through a process of trial and error. No doubt great fortunes will be made and lost before we know exactly how this disruption will unfold.

Our contribution is that we have a clearer understanding of a model that can be deployed to provide clarity to the disruption as and when it occurs.

Source: Medium.com

Gold, Bitcoin, And Metcalfe’s Law Today

Frank Holmes, CEO of US Global Investors, reported back from the LBMA/LPPM Precious Metals conference that took place in Barcelona last week. Holmes gave the key note address on Day 2 “Quant Investing: From Gold to Cryptocurrencies.”

According to a thrilled Holmes, his presentation was voted the best – no doubt helped by the topical subject matter – and he was the recipient of an ounce of gold. He went on to relate the views of the conference attendees regarding the relative performance of gold and cryptos should there be (heaven forbid but sadly topical) a conflict involving nuclear weapons.

“Speaking of gold and cryptocurrencies, the LBMA conducted several interesting polls on which of the two assets would benefit the most in certain scenarios. In one such poll, attendees overwhelmingly said the gold price would skyrocket in the event of a conflict involving nuclear weapons. Bitcoin, meanwhile, would plummet, according to participants—which makes some sense. As I pointed out before, trading bitcoin and other cryptos is dependent on electricity and WiFi, both of which could easily be knocked out by a nuclear strike. Gold, however, would still be available to convert into cash.”

Unsurprisngly, the conference attendees gold voted gold as the superior store of value – a view which echoed the recent Goldman Sachs primer on precious metals. Goldman asked whether cryptos are the new gold and concluded “We think not, gold wins out over cryptocurrencies in a majority of the key characteristics of money…(precious metals) are still the best long-term store of value out of the known elements.

However, there is obviously a difference between a superior store of value and shorter-term upside…and Holmes is far from bearish on bitcoin and other virtual currencies.

One of his observations is, alas, only too relevant for many gold investors that “Because they’re decentralized and therefore less prone to manipulation by governments and banks – unlike paper money and even gold – I think they could also have a place in portfolios. He goes on to aim a couple of blows on Bitcoin’s biggest recent detractors “Even those who criticize cryptocurrencies the loudest seem to agree. JPMorgan Chase CEO Jaime Dimon, if you remember, called bitcoin ‘stupid’ and a ‘fraud,’ and yet his firm is a member of the pro-blockchain Enterprise Ethereum Alliance (EEA). Russian president Vladimir Putin publicly said cryptocurrencies had ‘serious risks,’ and yet he just called for the development of a new digital currency, the ‘cryptoruble,’ which will be used as legal tender throughout the federation.”

It was Holmes observation on Bitcoin and Metcalfe’s Law that we particularly enjoyed …

Most people are probably (at least vaguely) familiar with Metcalfe’s Law on the economics of network effects. Wikipedia notes “Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). First formulated in this form by George Gilder in 1993, and attributed to Robert Metcalfe in regard to Ethernet, Metcalfe’s law was originally presented, c. 1980, not in terms of users, but rather of ‘compatible communicating devices’ (for example, fax machines, telephones, etc.). Only later with the globalization of the Internet did this law carry over to users and networks as its original intent was to describe Ethernet purchases and connections.[The law is also very much related to economics and business management, especially with competitive companies looking to merge with one another.”

This was Holmes’ take:

“Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes.

Robert Metcalfe, distinguished electrical engineer, was speaking specifically about Ethernet, but it also applies to cryptos. Bitcoin might look like a bubble on a simple price chart, but when we place it on a logarithmic scale, we see that a peak has not been reached yet.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/22/20171023_bt.png

Holmes is not the first to link Bitcoin with Metcalfe’s Law. For example, the Journal of Electronic Commerce Research published a study earlier this year. As TrustNodes reported

“The study measured the value of the network based on the price of relevant digital currencies and compared it to the number of unique addresses that engage in transactions on the network each day, according to the abstract. The results show that ‘the networks were fairly well modeled by Metcalfe’s Law, which identifies the value of a network as proportional to the square of the number of its nodes, or end users,’ the study says…The application of Metcalfe’s law towards transaction numbers specifically has long been suggested, with a fairly strong correlation between the price of digital currencies and their transaction numbers observed over many years. Ethereum, for example, was barely handling 20,000 transactions at the beginning of the year. Now it manages nearly 300,000 a day. Likewise, price has risen some 10x during the same time period. The reason for this relationship is fairly intuitive. As more projects build on ethereum, more users find it useful as there are more things they can do with it, which in turn makes ethereum more useful for new projects as it allows them to tap into more users. The same can be said about merchants. As more of them accept eth for payments, more think Ethereum can be useful for everyday things, which means more merchants want to accept it to tap into the increased number of users, so forming a virtuous cycle. Metcalfe’s law of network effects can be applied to developers too, or investors, including speculators. The more that use it, the more useful it becomes, with the reverse applying too. The fewer individuals that use it or the more that stop using it, the less useful it becomes.”

If that was his killer chart, however, this was perhaps his killer comment.

Bitcoin adoption could multiply the more people become aware of how much of their wealth is controlled by governments and the big banks.

This was among the hallway chatter I overheard at the Precious Metals Conference, with one person commenting that what’s said in private during International Monetary Fund (IMF) meetings is far more important than what’s said officially. We have a similar view of the G20, whose mission was once to keep global trade strong. Since at least 2008, though, the G20 has been all about synchronized taxation to grow not the economy but the role government plays in our lives. Trading virtual currencies is one significant way to get around that.

Source: ZeroHedge

7 Thoughts On Blockchain, Cryptocurrency & Decentralization

Everyone’s ADD, including me. I get attracted by shiny objects. I first noticed Bitcoin as a shiny object in mid-2013. I went down the rabbit hole far enough for The Wall Street Journal to call me “Wall Street’s Bitcoin expert” while they live blogged a Bitcoin conference call I hosted. I invested in ChangeTip. I bought and sold BitcoinWallet.com. Unfortunately, by late-2014, nine months in to a severe Bitcoin price decline, my focus wandered to new shiny objects.

Fast forward to 2017, and my mind wandered to a new shiny object, ICOs. Once again, I got the four smartest people I could find on the topic, and held a conference call on June 29th during which I had my crypto epiphany.

Crypto is now so shiny, so luminous, I can’t divert my eyes. I’m living and breathing crypto 24/7. Reading every thoughtful post I can find. Meeting anyone thoughtful on the topic. Holding more crypto conference calls. And writing and writing on crypto, because that’s the best way to learn.

After 3 months going down the rabbit hole a second time, here’s what I learned…

1. I’m A One Eyed Man In The Land of Other One Eyed People

We’re still so early, that much about what people are saying and writing about crypto is more theory than fact. Lots of people (including me) compare the the crypto bubble to the Internet bubble. But the parallels between the development of crypto and the development Internet are everywhere I look. Take this snippet from Wikipedia’s “History of the Internet’’:

“With so many different network methods, something was needed to unify them. Robert E. Kahn of DARPA and ARPANET recruited Vinton Cerf of Stanford to work with him on the problem. By 1973, they had worked out a fundamental reformulation, where the differences between network protocols were hidden by using a common internetwork protocol…..”

As a non-techie, that sounds exactly like a paragraph I read yesterday on Medium. But an important difference about the evolution of crypto and the evolution of the internet is how public crypto’s early evolution is. There were maybe a few thousand people who cared about what Cerf was doing in the early days of the Internet. So it was done out of the public’s eye. It wasn’t until 1994, 21 years after Cerf’s 1973 solution, that Netscape introduced it’s browser, and most people learned about the internet.

Crypto is evolving in its early days in a public way, so it’s messy, and theoretical, and dense. So if you feel like you don’t really understand crypto, join the crowd. Neither of us would have understood much if we sat in the room with Vint Cerf in 1973.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_crytpo1.gif

Another sign that it’s early is that foundational parts of crypto theory like Joel Manegro’s Fat Protocol post , which has been repeated ad infinitum, is being questioned and rethought by Teemu Paivinen, Jake Brukhman and others (h/t Yannick Roux).

2. Bitcoin Is A Confidence Game, Utility Tokens Are Awesome But Legally Challenging, Security Tokens Are Going To Be Huge

The chart below provides a simple way to think about the three types of cryptocurrencies.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_crytpo2.gif

On the currency side, while Bitcoin is a crypto leader in payments, it’s rise in it’s value has little to do with the currency applications of Bitcoin, and all to do with it being a store of value. Therefore, Bitcoin is simply a confidence game  as are ALL store of values. As with other assets, the higher Bitcoin’s value goes, the more confident investors become, which is another factor driving bubbles. After being used as a store of value for thousands of years, it’s easier to believe in gold as a store of value (hence the rocks have a total market cap/are storing over $7 trillion in value vs. $75 billion for Bitcoin today). I believe Bitcoin will continue to gain share of value storage. I’m a HODLer.

Utility Tokens like Civic which provide a digital good in return for the token (in Civic’s case they provide businesses and individuals the tools to control and protect identities) are an exciting new way to fuel ecosystems. However, in the SAFT White Paper published by Cooley and Protocol Labs last week, a whole section is titled “Pre-functional Utility Token Sales Are More Likely to Pass the Howey Test”, which is another way of saying the SEC is likely to deem them a security. Hence they propose the SAFT as an instrument to address this risk.

The third type of token are Security Tokens, which are similar to shares, as they convey ownership interests. The cool thing about Security Tokens is that they’re liquid (assuming there’s someone who wants to buy them and security laws are addressed), and companies can access a global investor base when raising capital/doing an ICO. While most of the ICOs to date have been Utility Tokens, because of the massive advantages that Security Tokens have over traditional capital raising, I think the total market cap of all security tokens will be much larger than the total market cap of all utility tokens.

3. Blockchain Technology Is Going To Be A Disruptive Force Across Industries

This post in Blockchain Hub gives a great detailed overview of the three types of blockchains? – ?public blockchains (like Bitcoin and Ethereum), federated blockchains (like R3 and EWF), and private blockchains (e.g. platforms like Multichain).

This post by CB Insights highlights 30 industries that blockchain could transform, and the companies leading the disruption.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_crypto3_0.jpg

4. DECENTRALIZATION Is Potentially The Most Disruptive Force

Blockchains, cryptocurrencies, together with other smart contracts are enabling Decentralization, which is the REALLY disruptive thing.  The chart below is widely known in crypto. It’s often disparaged as too simplistic to be meaningful, but I find it helpful.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_cyrpto5.png

Governments and businesses have largely functioned via centralization. Someone or some organization sits in the middle, making the rules, and taking a toll (either taxes or fees) for providing a function. We can now leverage technology, take out the middleman, and enable highly functional decentralized entities (like bitcoin).

Take life insurance. I believe, in the future, through smart contracts and the blockchain, decentralized structures will provide life insurance, saving buyers of life insurance the $10’s of billions of tolls (sales commissions, profits, …) that insurance companies takes for sitting in the middle.

ICOs are funding a growing list of real-world decentralized companies. Augur is building a decentralized prediction market. PROPS is a decentralized economy for digital video. OpenBazaar is a decentralized peer-to-peer marketplace. Aragon is a decentralized provider of tools to enable more efficient decentralized companies.

Decentralization is the lens through which I now look at everything. It’s the most important thing I’ve learned about over the last three months.

It seems to make sense that, all else being equal, the industries most at risk for disruption from decentralization are where the middlemen charge the highest tolls. Below is a list from Forbes of the 10 industries with the highest net margins in 2016:

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_cyrpto6.png

Even though investment managers are getting disrupted by ETFs and robo -advisors, they’re still churning out nice margins. Certainly my own industry (venture capital) is at risk:

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_cyrpto7.png

But I don’t think VCs aren’t going away anytime soon, particularly VCs that focus on crypto and invest in ICOs. In addition, ICO investors see name VCs as a positive signal (e.g. Filecoin). So VCs may be diminished, but the good ones will adapt and innovate.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_crytpo4.gif

To learn more about decentralization, read Vitalik’s “The Meaning of Decentralization” which goes in to the the three different dimensions of decentralization:

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/20/20171022_cyrpto8.png

5. It’s A Bubble….So What

The biggest sign that it’s not a bubble, is that almost everyone says it’s a bubble. By way of background, I’m a VC and former Wall Street equity analyst, and I think it’s a bubble because I see ICOs trading at 50X-100X+ what I think they would be valued at if they were funded by VCs or traded publicly. And history says it’s not different this time. Here’s a great book on the last 800 years of people saying “it’s different” this time to justify lofty valuations.

I say “so what” because I believe in Amara’s Law: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. This is part of the reason we get bubbles. We get overexcited about a new technology and we drive up prices beyond any reasonable valuation. Bubble’s go on for years. The internet bubble lasted 5+ years.

But the more important part of Amara’s law is that we underestimate the effect of a technology in the long run. The internet is more impactful, and a greater wealth creator than anyone imagined. The internet brought us $3 trillion of wealth just in FAMGA. What’s the value to be created from crypto, blockchain, and decentralization? Today, the cryptocurrency market cap is around $150 billion. Could that figure go down 78% like the NASDAQ did in the 30 months after it peaked on March 10th, 2000? Sure. And that would be painful. But I’m playing the long game. It was a good strategy with the internet, and it should be a good strategy today with crypto.

6. Governance Is The Biggest Risk To Bitcoin

Regulatory risk is obviously significant on a country-by-country basis, or within the U.S. on a state-by-state basis re all cryptocurrency. We’ve seen what happened in China. Korea and other countries are also clamping down. In the U.S. the SEC DAO Report was a big step forward for ICOs given the incredible amount of detail and guidance the SEC gave in the report, without it being an enforcement action. Crypto’s next on the SEC agenda on October 12th. But at the end of the day, governments are going to do what’s in their best interests.

While there is significant regulatory risk, I believe governance is the greatest risk to Bitcoin and other decentralized entities. Bitcoin is essentially governed by exit (h/t Ari Paul). While there’s a consensus mechanism, if people don’t like the consensus, they have three choices. They can 1)suck it up, 2) they can sell their bitcoins and leave, or 3) they can take the open source code and fork it. Forking comes with both technical risk and community risk. The Segwit2X debate, which could result in a hard fork November 18, is just the latest example of Bitcoin’s risk from governance by exit. The Balkanization of Bitcoin won’t be a good thing for the community.

7. Don’t Hate The Haters. Love The HODL’ers

After Jamie Dimon saidBitcoin is a fraud”, my Twitter stream was filled with Dimon haters. I read what he said, which brought nothing new to the conversation other than his opinion, and moved on. Maybe Dimon doesn’t even believe what he’s saying. Maybe he’s just talking up his own book. I don’t know, I don’t care, and I won’t spend time defending the industry from haters or dissecting the reasons the haters hate (unless they’re bringing something new to the conversation).

I want to spend my time preaching to the choir. I want to spend my time learning from, helping, and investing in the believers. As an industry, we have a lot of work ahead of us to achieve the massive world-changing potential of blockchain, cryptocurrency, and decentralization. I’m getting to it.

By Lou Kerner | Source: ZeroHedge

Russia Adopts Blockchain In Response To US Sanctions

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Russia’s largest exchange group has announced plans to trade cryptocurrencies on the Moscow Exchange.

The central depository for the Moscow Exchange, National Settlement Depository (NSD), announced that it is developing a platform to provide accounting services for digital assets like cryptocurrencies.

The platform looks to be build a unit of account, very important in the volatile crypto-space, for people to value their assets in and have access to through a wallet platform.

In short, the Moscow Exchange is taking a page out of Dan Larimer’s BitShares and its OpenLedger exchange to provide trading and accounting and banking services all validated and accessible through the blockchain.

In essence, by the end of 2018, cryptos will be trading on the Moscow Exchange and integrated into the banking system to stand beside stocks, bonds and other derivative assets.

CEO Eddie Astanin:

“Our goal is to create a secure and user-friendly accounting infrastructure for digital assets. We consider the platform would not only provide technological and legal protection of all parties involved, but also extend variety of post-trade services for investors, custodians and new institutions emerging in this sector of economy.”

Building Blockchains off the Putin/Buterin Meeting

This is yet another example of Russia’s rapid response to the changing environment of cryptos.  Vladimir Putin’s meeting with Ethereum designer, Vitalik Buterin, in May at the St. Petersburg International Economic Forum must have been truly eye-opening for Putin.

Since then I can almost not keep up with the news flow coming out of Russia relative to the widespread adoption of the blockchain to rapidly modernize those areas of its economy that need it in order to compete over the next generation or two.

Putin, ever the long-game strategist, must have had a ‘eureka’ moment talking with Buterin about Ethereum for people close to the Kremlin to be reacting this quickly.

And the news this morning that Buterin is working on the fix for Ethereum’s scaling issues is welcome news on this front as well.

Blockchains as Sanctions Defense

But this goes deeper than just banking modernization, which is a priority for the Russian government.  These moves into crypto are direct responses to the new sanctions placed on Russia by the U.S.

These are moves to make Russia a diversified destination for capital fleeing the chaos of the Western political breakdown that we are watching unfold before our eyes in real time.

There has been a lot of smoke about Russia (and China) backing their national currencies with Gold. And, while as a gold bug, I appreciate this sentiment I also understand that Russia couldn’t do that in this environment without creating insane capital flow issues in the current environment.

The better plan is to loosen central bank policy, issue some ruble-denominated debt (or yuan) while building up the crypto infrastructure to absorb those capital flows without creating dislocations within the ruble market.

This creates a more natural and organic flow of capital into the country without it causing social upheaval. Like the announcement of Russian Miner Coin, his move by the NSD is just another building block in the foundation of a more resilient Russian financial system to better coordinate the flow of capital and smooth the development of the chain of production.

This, in turn, limits the effects of U.S. sanctions. Once the market comes to the conclusion that Russia treats capital better than the U.S. does, the current trickle will become a torrent. And Russia has to be ready to handle this.

Diversifying into the blockchain is one of those important avenues.

Source: Coindesk

 

 

Goldman $3915 Bitcoin Target

Having ‘nailed’ the price action recently in Bitcoin (calling the recent pull back, extension beyond $3,000, with a target of $3,915), Goldman notes that it’s getting harder for institutional investors to ignore the rise of cryptocurrencies.

Last month Goldman’s chief technician, Sheba Jafari, issued their forecast of where bitcoin is headed next. Recall, that as we first reported three weeks ago, Jafari said that “due to popular demand, it’s worth taking a quick look at Bitcoin here” and warned that “the market has come close (enough?) to reaching its extended (2.618) target for a 3rd of V-waves from the inception low at 3,134.” She concluded that she was “wary of a near-term top ahead of 3,134” and urged clients to “consider re-establishing bullish exposure between 2,330 and no lower than 1,915.”

She was right: on the very day the note came out, both bitcoin and ethereum hit their all time highs and shortly after suffered their biggest drop in over two years.

So what does Jafari thinks will happen next? According to the Goldman technician, Bitcoin is now “in wave IV of a sequence that started at the late-’10/early-’11 lows. Wave III came close enough to reaching its 2.618 extended target at 3,135. Wave IV has already retraced between 23.6% and 38.2% of the move since Jan. ‘15 to 2,330/ 1,915.”

What does this mean for the uninitiated? In short, while bitcoin remains in Wave IV, it could go up… or down. She explains:

It’s worth keeping in mind that fourth waves tend to be messy/complex. This means that it could remain sideways/overlapping for a little while longer. At this point, it’s important to look for either an ABC pattern or a more triangular ABCDE. The former would target somewhere close to 1,856; providing a much cleaner setup from which to consider getting back into the uptrend. The latter would hold within a 2,076/3,000 range for an extended period of time.

However, at that point the next major breakout higher would take place, one which would take bitcoin as high as $3,915.

Either way, eventually expecting one more leg higher; a 5th wave. From current levels, [Bitcoin] has a minimum target that goes out to 3,212 (if equal to the length of wave I). There’s potential to extend as far as 3,915 (if 1.618 times the length of wave I). It just might take time to get there.

Goldman’s analyst concludes with the following summary: “[Bitcoin] could consolidate sideways for a while longer. Shouldn’t go much further than 1,857. Eventually targeting at least 3,212.

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And now, Goldman offers an FAQ for the institutional investor…

The debate has shifted from the legitimacy of the ‘fiat of the internet’ to how fast new entrants are raising funds. The hype cycle is in full effect with Bitcoin, the first, largest and most widely recognized cryptocurrency up almost 200% YTD (v 11% for the S&P 500) and a host of other emerging ‘alt coins’ growing in scope and presence (witness the growth of Ethereum).

Whether or not you believe in the merit of investing in cryptocurrencies (you know who you are) real dollars are at work here and warrant watching especially in light of the growing world of initial coin offerings (ICOs) and fundraising that now exceeds Internet Angel and Seed investing.

FAQs:

1. Two Sides To The Coin: Is Cryptocurrency a “Currency” or “Commodity”?

Answer: It depends who you ask. The complexity exists because coins have attributes of a currency (e.g. presented and trusted by some medium of exchange) and commodity (e.g. limited resource). The classification of cryptocurrencies varies by country, government and even application. In the U.S., the IRS has ruled that virtual currency does not have legal tender status in any jurisdiction. For tax purposes, the IRS treats virtual currency as property. 

2. How Big Is The Cryptocurrency Market?

Answer: Nearly $120 billion. Bitcoin remains the largest and accounts for nearly 50% of the total market cap (Exhibit 5).

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/08/08/20170808_crypto1.jpg

There are currently over 800 cryptocurrencies out there, though just 9 have a market cap in excess of $1 billion.

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While its growth has been impressive, the aggregate market cap of cryptocurrencies equates to less than 2% of the value of all the mined gold in the world.

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3. What Is Ethereum? 

Answer: A Platform 1st, a Cryptocurrency 2nd. Ethereum differs primarily from Bitcoin in the latter is set up to be an alternative to ‘real money’ while the former is more of a platform set up to run any decentralized application and automatically execute “smart contracts” when certain conditions are met. Ethereum offers a digital currency like Bitcoin – called Ether – but this is just one component of its smart contract execution and primarily used to facilitate and reward using the network. However, the rise of Ethereum has not come without setbacks, including the ~$60 million hack of “The DAO”, a venture capital like organization with the mission of “investing” in Ethereum-related start-ups and projects (and is no longer operational today).

4. How Does One Trade Cryptocurrencies in the United States?

Answer: Digital Exchanges, Block Trades and (soon to be) Options. Individual investors can trade virtual coins on various online exchanges. Institutional traders have largely stayed out of the cryptocurrency market due to its relatively small size, structure of mandates and volatility, but block trading exists to facilitate the execution of larger orders. In addition, Bitcoin options exist and are traded on offshore exchanges. Futures and options may also be coming to the US soon. On August 2, 2017, the CBOE entered an agreement with Gemini Trust Co to allow cash-settled Bitcoin futures on CBOE Futures Exchange in 4Q-17 or early 2018.

5. What is an Initial Coin Offering (ICO)?

Answer: Fundraiser through token sales. The amount of money funding ICOs has grown exponentially and the speed at which money is raised via a white paper and internet browser has sounded the alarm bells from parties including the SEC and the People’s Bank of China. According to Coin Schedule, ICOs have raised $1.25 billion this year, outpacing global Angel & Seed stage Internet VC funding in recent months.

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The Tezos blockchain raised a record breaking $232 million worth of Bitcoin and Ether through an ICO completed last month. The next closest? Bancor’s ICO which raised $150 million in mid-June. And the speed of ICOs is an added benefit: Gnosis raised more than $12 million in under 15 minutes.

Source: ZeroHedge

The Math Of Bitcoin And Why It’s Not Yet In A Bubble [video]

I have read many articles lately claiming that Bitcoin is in a bubble.  Some proclaim it similar to the famous Great Tulip bubble of 1637… but that comparison is only for those who do not understand the significance of what is happening currently with blockchain technology.  If you are new to Bitcoin and blockchain technology, I would suggest that it’s highly important for you to take the time to research the basics of how it works and why it’s different – simply Google “how does Bitcoin work.”

The main argument of those who proclaim it to be in a bubble is that the people buying it at these prices are not buying it for its original purpose – which they believe to be enabling transactions.  Yes, it is being used for transactions, much more than 100,000 businesses now take Bitcoin for transactions.  But instead naysayers believe that others are buying it as an “investment” and thus will surely be burned.

For me, and I believe most who understand what is happening, we are not buying it for either of those reasons.  We own it because we see it acting as a “store of value,” where nothing else priced in dollars is.  With interest rates artificially low (manipulated by central banks), a normal person cannot earn even near the pace of actual inflation with any type of traditional savings account.  Bonds are artificially in a bubble, stocks are artificially in a bubble, real estate is in yet another bubble, everywhere one who understands bubble dynamics looks they see a bubble (but not Bitcoin, people are trading in their worth less and less dollars for them).  The bubble is the dollar – the world’s “reserve” and “petro” dollar is being drowned by central banks all over the globe, not just our own “FED.”

And thus there is no store of value to be found.  This is a terribly ugly situation for people who believe in hard work and saving to get ahead; to someday retire comfortably.  Retirees on fixed incomes simply cannot, and will not be able to keep up as the impossible math of dollar debt continues on its vertical ascent.

We would love to love gold and silver, but those too, are manipulated by central banks who own the majority of it.  They manipulate and derivative the markets to artificially keep devaluation of the dollar hidden.

Control of the dollar is centralized with the banks, that’s why we refer to them as “central” banks.  All the power and control resides with them; as private individuals were wrongly, and illegally, given the power to “coin” money with the Federal Reserve Act of 1913.

What makes Bitcoin a better store of value?

1.  It is decentralized.  This is huge!  It means that it is not under the control of central banks, and thus cannot be manipulated directly by them.  This is THE MOST IMPORTANT aspect, it is a game changer as it changes the WHO is behind it – something that gold and silver do not do because central banks have printed “money” to buy the majority of it.

Caution – Central banks may be able to indirectly manipulate blockchain currencies in the future if they create ETFs and other derivatives based upon them.  This, however, will not change the underlying store of value, and when it happens I would encourage you not to own the derivative, but to instead buy Bitcoin directly, again because it’s not in control of the central banks, is decentralized versus their centralized everything which makes them vulnerable.  Yes – Central Banks can print dollars and use them to buy Bitcoin, but that will only drive the price up and cause others to enter as well.  In the end they cannot manipulate what they don’t control.

Even if central banks were to “ban” exchanges in one country, all one will have to do is join an exchange overseas.  This has the central banks trumped, it cannot be stopped.

To better understand the power of decentralization, please take the time to watch the video at the end of this post, or (click on this link).

2.  Unlike tulips, dollars, or even precious metals, Bitcoin is strictly limited in its supply.  This is where the math comes in.  Bitcoin was founded in 2008 and there will ultimately be only 21 million Bitcoin ever mined.  Today we are approaching the 80% mark, the remaining 20% will take years to mine, and the “mining” gets more difficult and slow as we go.

This is a hard feature built into the coding.  It’s what makes Bitcoin a store of value – the more money that comes in, the more each Bitcoin is worth.  As I type, that is $2,774.00 per Bitcoin according to Coinbase where you can go to open an account, much like a brokerage account (there are currently 7.3 million Coinbase users).  Of course you can buy Bitcoin in any increment, you don’t have to buy them in whole units.

People all over the world can buy, own, and transact in Bitcoin.  There are now 7.3 billion people on the planet, so if all 21 million Bitcoin were distributed evenly to every person on the planet, each person would have only .0028767 of one bitcoin!

Another way of stating that math is that only 1 person out of every 347.6 people can possibly ever own a whole Bitcoin.

Today the market cap of Bitcoin is $45.17 Billion.  The more money that comes in, the higher the market cap, the higher the price of Bitcoin.

Many analysts start to compare Bitcoin’s market cap with that of large companies like Apple, whose current market cap is 18 times that of Bitcoin’s at $810 Billion.

But here’s the deal.  Bitcoin is not a company, it is a form of money.  Unlike dollars, there will not be an endless supply.  In fact, if you took the entire M2 money supply of the United States, currently $13.5 trillion, and put it all into Bitcoin instead, then each Bitcoin would be worth $642,857.  But Bitcoin is not just traded in dollars – it’s traded in every currency in the world.  And right now global M2 money supply is calculated as roughly $72 trillion, or $3.4 million per Bitcoin.

It’s true that other blockchain currencies are springing up like daisies, or tulips.  But their market caps combined are just now rivaling that of Bitcoin’s.  So, yes, they will be “diluting” bitcoin’s math.  Not all crypto currencies have hard limits to their supply, and that will mean that they will always be worth less.  Right now Ethereum is in second place with a market cap of about $24 billion compared to Bitcoin’s $45 billion.  Litecoin is another cryptocurrency designed to be “silver” compared to Bitcoin’s “gold.”  There will only be 84 million Litecoins ever mined, exactly 4 times the amount of Bitcoins.  However, Litecoins are currently trading for roughly 1/100th the price of Bitcoin, I would expect the math to eventually catch up as more people become aware of Litecoin’s also limited supply.

3.  Bitcoin is a better store of value because it is secure.  Decentralization and encryption make it secure.  It can be stored in electronic cyber “vaults” where you keep a hard copy of the encryption cypher.  This means that your exchange can be hacked, your computer hacked, but your bitcoin don’t actually reside in either!  They reside on someone else’s computer somewhere – and only you have the code to get to it.  Thus they cannot be confiscated by a government, a banker, or a hacker.

I liken this to the pursuit of freedom versus the pursuit of security.  When you pursue freedom, you get security at very little cost.  That’s what decentralization does.  Bitcoin is the pursuit of freedom – whereas centralized systems, such as central banking, or even socialism, are the pursuit of security and the abandonment of freedom.

Pursue freedom!

4.  Bitcoin transactions are stored on a public ledger, all confirmed transactions are included in the blockchain.  Again, decentralized bookkeeping is less vulnerable and more secure than centralized legers.  This is where Ethereum, another blockchain currency, shines.  Ethereum is built upon an encrypted ledger and can be used for many purposes, not just as a currency.

One use is that these encrypted ledgers will enable safe and secure online voting one day soon.

Someday Bitcoin will, in fact, be in a bubble.  But that day is not now, not even close.  The great thing about all cryptocurrencies is that they can and do exist alongside of whatever “money” we use for our transactions.  They also exist alongside of gold/silver, and may in fact be drawing money that otherwise would be seeking a store of value there.

So I say, let competition reign!  I will use dollars for transactions because I have to (for now), but I will use cryptocurrencies, gold, and silver to park my dollars so that the central banks cannot destroy their value.  And that in a nutshell is why Bitcoin is NOT in a bubble, and won’t be for quite some time.

That said, do expect many sharp pullbacks along the way.  Remember that NOTHING moves in a straight line, EVERYTHING moves in waves.  You need to pullback to fuel the next push higher – this is true with all waves.   The chart shape is definitely showing parabolic growth, but I expect that when looked at across many more years this will simply be a part of building a base.

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So how will we know that a true bubble has formed?  For me I know that cryptocurrencies are the future and that they will trade alongside sovereign currencies and will eventually replace them.  I will NOT own any cryptocurrency created or “managed” by a bank.  Until the market cap of Bitcoin rivals that of the United States, I will not be convinced that growth has stalled.  There are, of course, other signs we can look for.

As a review, here are HYMAN MINSKY’S SEVEN BUBBLE STAGES:

The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:

Stage One – Disturbance:

Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet (Bitcoin). It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.

Stage Two – Expansion/Prices Start to Increase:

Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.

*I THINK THIS IS WHERE BITCOIN IS NOW

Stage Three – Euphoria/Easy Credit:

Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel (central banks creating it still like mad). Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there (not yet with Bitcoin). Without cheap and easy credit, the outsiders can’t participate.

The rise in cheap and easy credit is often associated with financial innovation. Many times, a new way of financing is developed that does not reflect the risk involved. In 1929, stock prices were propelled into the stratosphere with the ability to trade via a margin account. Housing prices today skyrocketed as interest-only, variable rate, and reverse amortization mortgages emerged as a viable means for financing overpriced real estate purchases. The latest financing strategy is 40, or even 50 year mortgages.

Stage Four – Over-trading/Prices Reach a Peak:

As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.

(I believe stage 4 is still in the distant future for Bitcoin)

Stage Five – Market Reversal/Insider Profit Taking:

Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”

This stage can be cruel, as the very people who shouldn’t be buying are. They are the ones who will be hurt the most. The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector.  Those who did not enter the market are caught in a dilemma. They know that they have missed the beginning of the bubble. They are bombarded daily with stories of easy riches and friends who are amassing great wealth. The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.

Stage Six – Financial Crisis/Panic:

A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end.

(This is where I believe Stocks, Bonds, Real Estate, Auto prices, Student loans, etc. are today; although it is wise to remember that the best performing markets in terms of percentage rise are the ones where hyperinflation is occurring – Zimbabwe, Nigeria, and today Venezuela.  An interesting thought is that we may see cryptocurrencies appear to be inflating while real assets move to another round of deflation – dollars seek safety/store of value)

Stage seven – Revulsion/Lender of Last Resort:

Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.

(When this happens to stocks, I expect Bitcoin and other cryptos to benefit).

By Nathan Martin | Economic Edge Blog

Ethereum Forecast To Surpass Bitcoin By 2018

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Back on  February 27, when bitcoin was trading in the mid-teens, we wrote Step aside bitcoin, there is a new blockchain kid in town.”

In recent days, the world’s second most popular digital currency, Ethereum, has been surging (despite its embarrassing hack last June when some $59 million worth of “ethers” were stolen forcing the blockchain to implement a hard fork to undo the damage), prompting many to wonder if some big announcement was imminent. It appears that yet again someone “leaked” because on Monday, an alliance of some of the world’s most advanced financial and tech companies including JPMorgan Chase, Microsoft, Intel and more than two dozen other companies teamed up to develop standards and technology to make it easier for enterprises to use blockchain code Ethereum – not bitcoin – in the latest push by large firms to move toward the holy grail of a post-central bank world in which every transaction is duly tracked: a distributed ledger systems.

Commenting on the sharp – for the time – rise in ETH price (which had moved from $13 to $15), we said “the move may be just the beginning if most corporations adopt Ethereum as the distributed ledger standard: Accenture released a report last month arguing that blockchain technology could save the 10 largest banks $8 billion to $12 billion a year in infrastructure costs — or 30 percent of their total costs in that area.” Since then most corporations have indeed adopted Ethereum as the distributed ledger standard.

* * *

Three months later, and with Ethereum 15x higher at $230, Bloomberg today writes: “Step aside, bitcoin. There’s another digital token in town that’s winning over the hearts and wallets of cryptocurrency enthusiasts across the globe.”

It’s not just the lede that is familiar, it’s everything else too, especially the forecast.

The value of ether – the digital currency linked to the ethereum blockchain – could surpass that of bitcoin by the end of 2018, according to Olaf Carlson-Wee, chief executive officer of cryptocurrency hedge fund Polychain Capital who was interviewed by Bloomberg.

What we’ve seen in ethereum is a much richer, organic developer ecosystem develop very, very quickly, which is what has driven ethereum’s price growth, which has actually been much more aggressive than bitcoin,” said Carlson-Wee, in an interview on Bloomberg Television Tuesday.

As we previously reported, while Ethereum suffered an embarrassing hack last summer resulting in the theft in millions of ether, the cryptocurrency has drawn the interest of industries from finance to health care because its blockchain does far more than let bitcoin users send value from one person to another. “Its advocates think it could be a universally accessible machine for running businesses, as the technology allows people to do more complex actions in a shared and decentralized manner.

Which is why ethereum is gaining increasingly more converts. Carlson-Wee wasn’t the first to forecast a bright future for ethereum. Fred Wilson, co-founder and managing partner at Union Square Ventures, laid out an even more ambitious timeline for the cryptocurrency in an interview earlier this month.

“The market cap of ethereum will bypass the market cap of bitcoin by the end of the year,” said Wilson, who is also chairman of the board at Etsy.

In fact, if one looks at the relative market share of various cryptocurrencues, and extrapolates current trends, ethereum could surpass bitcoin in just a few months.

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Bitcoin currently dominates a little less than half of the digital currency market, down from almost 90 percent three months ago, according to Coinmarketcap.com data. Meanwhile, ethereum has quadrupled its share, which now represents more than a quarter of the pie.

Indicatively, as of this moment, the market cap of Bitcoin is $37 billion, 75% higher than Ethereum. If the optimsitic forecasts are accurate, Ethereum, which is currently offered at $230, will cost roughly $400 next time we look at  it, if not more. What is more interesting is that while bitcoin hit an all time high of approximately $2900 one week ago, it has failed to recapture the highs, even as ethereum has continued surging ever higher, perhaps a sign of a broad momentum shift from the legacy “cryptocoin” to the “up and comer.”

“We’re absolutely still in the infrastructure building phase,” Carlson-Wee said. “But I do think within one to two years, we’ll start to see the first viral applications that are user facing.”

In any case, for readers interested in putting money into either extremely volatile crypto, be prepared, in fact assume, a complete loss of your investment as chasing such speculative manias rarely has a happy ending. Then again, trying to time the peak of any bubble is a fool’s endeavor. Just look at the S&P.

Bitcoin’s growth has started to catch up to its fundamentals, which is likely what has been driving its astronomical gain as of late, he said. Others have attributed the surge to speculation, as well as increased interest in Asia and adoption by established companies.

Impressive performance aside, more than $150 has been knocked off bitcoin’s price since late last week amid concerns about transaction speed, safety and a possible price bubble.

Source: ZeroHedge

Bitcoin for Dummies — What Is It, and How Does It Work?

https://s15-us2.ixquick.com/cgi-bin/serveimage?url=http%3A%2F%2Ft1.gstatic.com%2Fimages%3Fq%3Dtbn%3AANd9GcRMCd_GXEMKjkXEHr4gy73dZHkGe6R_iRHCqa2N-eAOmfl4129Gfg&sp=44a211d30ef62402d875b5e9aafa3f9e&anticache=277451You might have been hearing about Bitcoin more frequently in the past few years. Recently it made a lot of news because of the ransomware attacks that affected countries around the world by demanding Bitcoin ransom to release embargoed documents on computers. So what the heck is Bitcoin, and how does it work?

First, let’s get this out of the way: bitcoin is money. It’s money as much as the dollar or euro or yen is money. And it’s fully interconvertible with these or any other currencies. Bitcoin is different than these national currencies in many key ways, however, because Bitcoin is a type of digital money that basically runs itself without any government intervention and minimal regulation.

Bitcoin is both the network for using the currency as well as the currency itself. It’s usually denoted Bitcoin (big B) when talking about the network and bitcoin (small b) when talking about the actual currency. For example, I have about four bitcoin in my online wallet, and I use the Bitcoin network to send payments.

How do you get bitcoin? There are two ways: Either you buy bitcoin, or you mine bitcoin. Buying bitcoin is quite easy. There are many online exchanges that will sell you bitcoin in exchange for whatever currency you normally use (dollars, etc.). I use Coinbase to buy my bitcoin, and it’s the most mainstream and scrutinized of the current exchanges. It was founded by Wall Street types in order to help Bitcoin become more mainstream. There are many others you can use, such as Kraken or CoinMama.

You can also buy bitcoin in person at various bitcoin ATMs around the world. There are now about 1,200 such ATMs in 60 countries around the world, and they’re growing rapidly. Here’s a site that allows you to find the nearest ATM.

Last, you can buy bitcoin through real people by using localbitcoins.com to find people in your area who will sell you bitcoin without going through an online exchange at all.

The second way to get bitcoin is by ”mining” them. You mine bitcoin using fast computers specially built for doing this. These specialized machines crunch numbers to discover the right codes. Every 10 minutes, the Bitcoin network releases a new block of bitcoin and the party or parties who discovered the right codes gets that block of coins (currently 12.5 coins per block). Bitmain is one of the bigger mining machine manufacturers and their newest model, the T9, sells for about one bitcoin.

This number crunching for “mining” is why bitcoin is referred to as a “crypto currency”: it’s all about using very large numbers that take massive computing power to preserve the integrity of the system and avoid hacking. The Bitcoin system basically turns electricity into money.

Security concerns?

So far, Bitcoin has never been hacked. There’s a common misconception that it has. Many companies that buy and sell bitcoin — bitcoin exchanges — have been hacked. Most famously, MtGox, one of the earliest exchanges, was hacked in 2013 and people lost a lot of money. But even then the Bitcoin network wasn’t hacked. Only the exchange was hacked.

That said, security is very important for those buying and selling bitcoin because the code itself is the currency. It’s a string of numbers and letters called a “hash key.” If someone has your hash keys, they have your bitcoin. There’s nothing extra beyond the hash key.

Your bitcoin are kept generally in an online wallet at an exchange like Coinbase or Xapo. Here’s a site that compares the security of the various means for storing bitcoin. Coinbase wins that comparison currently for online wallets and the Ledger Nano wins for hardware wallets.

You can also keep your bitcoin in an online “vault,” which adds extra layers of security for bitcoin that you don’t plan to use for a while. For example, it takes a couple of days to withdraw bitcoin from the Coinbase vault, and various types of authentication are required before the transaction is complete.

For those who want to take matters more into their own hands and avoid having to trust an online wallet or vault, you can keep your bitcoin in a physical hard drive, or you can even just write your codes by hand on paper and keep them in your physical wallet in your pocket.

Personally, I use a variety of online wallets and vaults in order to prevent any single mishap or hack from hitting me too hard. I can’t be bothered with keeping the codes offline but maybe I will one day as an extra layer of security.

How much is Bitcoin worth?

The price of one bitcoin has grown from nothing in 2009 when the Bitcoin network was created to more than $1,800 in May. If you had invested $1,000 in bitcoin in 2010, you would be sitting on more than $12 million now. How has it gone up so much? Well, because increasing numbers of investors have decided to place their confidence in the system.

We can look at the stats to get a good feel for how fast Bitcoin has grown. Blockchain.info keeps detailed stats.

» The number of bitcoin in circulation has grown from zero in the beginning of 2009 to almost 16.5 million now, with only about 4.5 million more to mine (but this will take about a century to complete because mining becomes intentionally more and more difficult).

» The Bitcoin price grew from nothing to almost $1,200 at the end of 2013, plummeted to around $200 in 2014, and rose again to more than $1,800 in May.

» Bitcoin’s market capitalization has gyrated similarly, but is now about $30 billion, up from zero in 2009 and $12 billion at the end of 2016, and is enjoying a strong upward trend in 2017.

» All crypto currencies combined now have a market cap over $60 billion, including Ripple, Ethereum, Litcoin and many others, many of which are also on very strong upward trajectories.

» The number of Bitcoin wallet users (required to buy and conduct business using bitcoin) has grown from zero in 2009 to more than 7 million by mid-2016 and 14 million now.

» Bitcoin daily transactions have grown from nothing in 2009 to 210,000 in mid-2016 and more than 350,000 by May.

So we’re seeing the Bitcoin system roughly doubling in size each year, and there’s little reason to believe that this rate of growth will slow down at this point. If anything, it’s likely to increase.

What does “deflationary” currency mean?

Bitcoin is different than regular money in that there’s a limit to how many can be created: just 21 million. Ever. The idea behind this limit is that the value of this currency can’t be inflated away by policymakers. The dollar loses about 2 percent in value each year because of planned inflation, and this provides a strong incentive to invest rather than save — and that’s literally why the Federal Reserve has a target inflation rate of 2 to 3 percent.

Bitcoin is the opposite: It’s designed to always increase in value, so simply buying and holding may be a very good investment strategy. This is why Bitcoin is described as a “deflationary” currency rather than an inflationary currency.

There’s also a limit on how small each Bitcoin can be divided: into 100 million parts. This tiny part of a bitcoin is called a satoshi, in honor of its mysterious and anonymous creator Satoshi Nakamoto.

What is the blockchain?

The magic ingredient in Bitcoin is the distribution of trust in a vast electronic network. This distribution moots the need for the “centralization of trust” that is the function of central banks like the Federal Reserve. Central banks issue money, control interest rates and act as a lender of last resort in “fiat currency” systems like in the United States. The distribution of trust to the network performs these roles in the Bitcoin ecosystem. This trust network is called the “blockchain,” and it is the heart of Bitcoin.

The blockchain is an electronic record (ledger) of all bitcoin transactions that is stored on every node of the ever-increasing network of the Bitcoin ecosystem. Because it is completely distributed and constantly updated in real time, using very difficult cryptographic keys that require massive amounts of computing power, the blockchain can’t be shut down by any outside force. This fully decentralized system renders Bitcoin as a system practically immune from hackers. As mentioned above, individual bitcoin exchanges can and have been hacked, but Bitcoin itself has never been hacked.

The beauty of the blockchain and Bitcoin ecosystem is that it allows any person or people using it to avoid the centralized (and often abusive) power of central banks and of national governments entirely. ABN Amro bank chief said it well in 2015: “What the Internet has done for information and the way we communicate, the blockchain will do for value and the way we look at trust. The financial world is going to flip upside-down.”

We are witnessing that upside-down flip right now in real time. This is why we’ve seen literally $30 billion in new money come into the Bitcoin and other crypto currency space in the past six months alone.

Obviously, the decentralized nature and independence from government influence has appealed to libertarians and techno-optimists since Bitcoin’s creation. Bitcoin long has had a bad rep because it’s been used by various versions of the Silk Road website to buy and sell drugs and other illegal items. But there’s far more to Bitcoin than illegal drugs.

Bitcoin is now accepted by thousands of companies and vendors around the world. Japan recently recognized Bitcoin as a legitimate currency, and this means that more than 260,000 stores in Japan soon will start accepting Bitcoin.

We are very likely seeing the beginning of a very large wave of growth for Bitcoin and other crypto currencies like Ethereum.

Investing in Bitcoin

How should you invest in Bitcoin? I’ve always advised people that you shouldn’t invest anything in Bitcoin that you don’t mind losing. That’s generally still good advice because this currency and the technology behind it are still very new. They could just disappear for a variety of reasons.

But the highly positive trends in terms of wallet growth, acceptance by businesses and governments, as well as market cap and price, discussed above have led me recently to change my mind a little and suggest that Bitcoin should in fact be a part of any smart investor’s portfolio.

It shouldn’t be a large part, but it should definitely be a part of it. With returns like we’ve seen on Bitcoin in the past eight years, it’s reasonable to accept some risk.

Will Bitcoin change the world?

The last thing I’ll look at is the revolutionary potential for Bitcoin and other cryptocurrencies in terms of how they may change the world. I wrote a piece in 2015 looking at how Bitcoin may stop China from replacing the United States on the world stage. This would be a good thing and could happen if enough Chinese simply start to prefer using bitcoin instead of yuan to conduct business. If China can’t control its currency it can’t control the world.

I also looked in a piece last year at whether Bitcoin is likely to be the future of money more generally. I concluded then and still believe that Bitcoin (or maybe some other coin built on the blockchain) will probably either grow in the next couple of decades to become a global currency or shrink down such that it becomes just an interesting historical footnote.

What happens if Bitcoin or something like it does replace national fiat currencies around the world? First, it makes it much harder for nations to raise massive amounts of money through printing or borrowing. This means that deficit spending will shrink or even go away. And, according to at least some Bitcoin libertarian optimists, this would also stop nations from waging war as much because they’d have to finance such wars as they go, with real money, rather than using deficit spending. A more peaceful world would indeed be a nice consequence of the Bitcoin revolution.

In closing, Bitcoin is a potentially transformative new type of currency that promises to create a more borderless and peaceful world, and an increasing flow of information and goods. It also may well lead to many unpredictable effects that we’ll simply have to sit back and watch as they unfold.

By Tom Hunt | Noozhawk

How Block Chain Will Revolutionize More Than Money

In proof we trust

Blockchain technology will revolutionize far more than money: it will change your life. Here’s how it actually works,

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The impact of record-keeping on the course of history cannot be overstated. For example, the act of preserving Judaism and Christianity in written form enabled both to outlive the plethora of other contemporary religions, which were preserved only orally. William the Conqueror’s Domesday Book, compiled in 1086, was still being used to settle land disputes as late as the 1960s. Today there is a new system of digital record-keeping. Its impact could be equally large. It is called the blockchain.

Imagine an enormous digital record. Anyone with internet access can look at the information within: it is open for all to see. Nobody is in charge of this record. It is not maintained by a person, a company or a government department, but by 8,000-9,000 computers at different locations around the world in a distributed network. Participation is quite voluntary. The computers’ owners choose to add their machines to the network because, in exchange for their computer’s services, they sometimes receive payment. You can add your computer to the network, if you so wish.

All the information in the record is permanent – it cannot be changed – and each of the computers keeps a copy of the record to ensure this. If you wanted to hack the system, you would have to hack every computer on the network – and this has so far proved impossible, despite many trying, including the US National Security Agency’s finest. The collective power of all these computers is greater than the world’s top 500 supercomputers combined.

New information is added to the record every few minutes, but it can be added only when all the computers signal their approval, which they do as soon as they have satisfactory proof that the information to be added is correct. Everybody knows how the system works, but nobody can change how it works. It is fully automated. Human decision-making or behavior doesn’t enter into it.

If a company or a government department were in charge of the record, it would be vulnerable – if the company went bust or the government department shut down, for example. But with a distributed record there is no single point of vulnerability. It is decentralized. At times, some computers might go awry, but that doesn’t matter. The copies on all the other computers and their unanimous approval for new information to be added will mean the record itself is safe.

This is possibly the most significant and detailed record in all history, an open-source structure of permanent memory, which grows organically. It is known as the block chain. It is the breakthrough tech behind the digital cash system, Bitcoin, but its impact will soon be far wider than just alternative money.

Many struggle to understand what is so special about Bitcoin. We all have accounts online with pounds, dollars, euros or some other national currency. That money is completely digital, it doesn’t exist in the real world – it is just numbers in a digital ledger somewhere. Only about 3 per cent of national currency actually exists in physical form; the rest is digital. I have supermarket rewards points and air miles as well. These don’t exist physically either, but they are still tokens to be exchanged for some kind of good or service, albeit with a limited scope; so they’re money too. Why has the world got so excited about Bitcoin?

To understand this, it is important to distinguish between money and cash.

If I’m standing in a shop and I give the shopkeeper 50 pence for a bar of chocolate, that is a cash transaction. The money passes straight from me to him and it involves nobody else: it is direct and frictionless. But if I buy that bar of chocolate with a credit card, the transaction involves a payment processor of some kind (often more than one). There is, in other words, a middle man.

The same goes for those pounds, dollars or euros I have in the accounts online. I have to go through a middle man if I want to spend them – perhaps a bank, PayPal or a credit-card company. If I want to spend those supermarket rewards points or those air miles, there is the supermarket or airline to go through.

Since the early 1980s, computer coders had been trying to find a way of digitally replicating the cash transaction – that direct, frictionless, A-to-B transaction – but nobody could find a way. The problem was known as the problem of ‘double-spending’. If I send you an email, a photo or a video – any form of computer code – you can, if you want, copy and paste that code and send it to one or a hundred or a million different people. But if you can do that with money, the money quickly becomes useless. Nobody could find a way around it without using a middle man of some kind to verify and process transactions, at which point it is no longer cash. By the mid 2000s, coders had all but given up on the idea. It was deemed unsolvable. Then, in late 2008, quietly announced on an out-of-the-way mailing list, along came Bitcoin.

On a dollar bill you will see the words: ‘In God we trust.’ Bitcoin aficionados are fond of saying: ‘In proof we trust’

By late 2009, coders were waking up to the fact that its inventor, Satoshi Nakamoto, had cracked the problem of double spending. The solution was the block chain, the automated record with nobody in charge. It replaces the middle man. Rather than a bank process a transaction, transactions are processed by those 8,000-9,000 computers distributed across the Bitcoin network in the collective tradition of open-source collaboration. When those computers have their cryptographic and mathematical proof (a process that takes very little time), they approve the transaction and it is then complete. The payment information – the time, the amount, the wallet addresses – is added to the database; or, to use correct terminology, another block of data is added to the chain of information – hence the name block chain. It is, simply, a chain of information blocks.

Money requires trust – trust in central banks, commercial banks, other large institutions, trust in the paper itself. On a dollar bill you will see the words: ‘In God we trust.’ Bitcoin aficionados are fond of saying: ‘In proof we trust.’ The block chain, which works transparently by automation and mathematical and cryptographic proof, has removed the need for that trust. It has enabled people to pay digital cash directly from one person to another, as easily as you might send a text or an email, with no need for a middle man.

So the best way to understand Bitcoin is, simply: cash for the internet. It is not going to replace the US dollar or anything like that, as some of the diehard advocates will tell you, but it does have many uses. And, on a practical level, it works.

Testament to this is the rise of the online black market. Perhaps £1 million-worth of illegal goods and services are traded through dark marketplaces every day and the means of payment is Bitcoin. Bitcoin has facilitated this rapid rise. (I should stress that even though every Bitcoin transaction, no matter how small, is recorded on the blockchain, the identity of the person making that transaction can be hidden if desired – hence its appeal). In the financial grand scheme of things, £1 million a day is not very much, but the fact that ordinary people on the black market are using Bitcoin on a practical, day-to-day basis as a way of paying for goods and services demonstrates that the tech works. I’m not endorsing black markets, but it’s worth noting that they are often the first to embrace a new tech. They were the first to turn the internet to profit, for example. Without deep pools of debt or venture capital to fall back on, black markets have to make new tech work quickly and practically.

But Bitcoin’s potential use goes far beyond dark markets. Consider why we might want to use cash in the physical world. You use it for small payments – a bar of chocolate or a newspaper from your corner shop, for example. There is the same need online. I might want to read an article in The Times. I don’t want to take out an annual subscription – but I do want to read that article. Wouldn’t it be nice to have a system where I could make a micropayment to read that article? It is not worth a payment processor’s time to process a payment that small, but with internet cash, you don’t need a processor. You can pay cash and it costs nothing to process – it is direct. This potential use could usher in a new era of paid content. No longer will online content-providers have to be so squeezed, and give out so much material for nothing in the hope of somehow recouping later, now that the tech is there to make and receive payment for small amounts in exchange for content.

We also use cash for quick payments, direct payments and tipping. You are walking past a busker, for example, and you throw him a coin. Soon you will able to tip an online content-provider for his or her YouTube video, song or blog entry, again as easily and quickly as you click ‘like’ on the screen. Even if I pay my restaurant bill with a card, I’ll often tip the waiter in cash. That way I know the waiter will receive the money rather than some unscrupulous employer. I like to pay cash in markets, where a lot of small businesses start out because a cash payment goes directly to the business owner without middle men shaving off their percentages. The same principle of quick, cheap, direct payment will apply online. Cheap processing costs are essential for low-margin businesses. Internet cash will have a use there, too. It also has potential use in the remittance business, which is currently dominated by the likes of Western Union. For those working oversees who want to send money home, remittance and foreign exchange charges can often amount to as much as 20 per cent of the amount transferred. With Bitcoin that cost can be removed.

Some of us also use cash for payments we want kept private. Private does not necessarily mean illegal. You might be buying a present for your wedding anniversary and don’t want your spouse to know. You might be making a donation to a cause or charity and want anonymity. You might be doing something naughty: many of those who had their Ashley Madison details leaked would have preferred to have been able to pay for their membership with cash – and thus have preserved their anonymity.

More significantly, cash is vital to the 3.5 billion people – half of the world’s population – who are ‘un-banked’, shut out of the financial system and so excluded from e-commerce. With Bitcoin, the only barrier to entry is internet access.

Bitcoin is currently experiencing some governance and scalability issues. Even so, the tech works, and coders are now developing ways to use block chain tech for purposes beyond an alternative money system. From 2017, you will start to see some of the early applications creeping into your electronic lives.

One application is in decentralized messaging. Just as you can send cash to somebody else with no intermediary using Bitcoin, so can you send messages – without Gmail, iMessage, WhatsApp, or whoever the provider is, having access to what’s being said. The same goes for social media. What you say will be between you and your friends or followers. Twitter or Facebook will have no access to it. The implications for privacy are enormous, raising a range of issues in the ongoing government surveillance discussion.

We’ll see decentralized storage and cloud computing as well, considerably reducing the risk of storing data with a single provider. A company called Trustonic is working on a new block chain-based mobile phone operating system to compete with Android and Mac OS.

Just as the block chain records where a bitcoin is at any given moment, and thus who owns it, so can block chain be used to record the ownership of any asset and then to trade ownership of that asset. This has huge implications for the way stocks, bonds and futures, indeed all financial assets, are registered and traded. Registrars, stock markets, investment banks – disruption lies ahead for all of them. Their monopolies are all under threat from block chain technology.

Land and property ownership can also be recorded and traded on a block chain. Honduras, where ownership disputes over beachfront property are commonplace, is already developing ways to record its land registries on a block chain. In the UK, as much as 50 per cent of land is still unregistered, according to the investigative reporter Kevin Cahill’s book Who Owns Britain? (2001). The ownership of vehicles, tickets, diamonds, gold – just about anything – can be recorded and traded using block chain technology – even the contents of your music and film libraries (though copyright law may inhibit that). Block chain tokens will be as good as any deed of ownership – and will be significantly cheaper to provide.

The Peruvian economist Hernando de Soto Polar has won many prizes for his work on ownership. His central thesis is that lack of clear property title is what has held back so many in the Third World for so long. Who owns what needs to be clear, recognized  and protected – otherwise there will be no investment and development will be limited. But if ownership is clear, people can trade, exchange and prosper. The block chain will, its keenest advocates hope, go some way to addressing that.

Smart contracts could disrupt the legal profession and make it affordable to all, just as the internet has done with music and publishing

Once ownership is clear, then contract rights and property rights follow. This brings us to the next wave of development in block chain tech: automated contracts, or to use the jargon, ‘smart contracts’, a term coined by the US programmer Nick Szabo. We are moving beyond ownership into contracts that simultaneously represent ownership of a property and the conditions that come with that ownership. It is all very well knowing that a bond, say, is owned by a certain person, but that bond may come with certain conditions – it might generate interest, it might need to be repaid by a certain time, it might incur penalties, if certain criteria are not met. These conditions could be encoded in a block chain and all the corresponding actions automated.

Whether it is the initial agreement, the arbitration of a dispute or its execution, every stage of a contract has, historically, been evaluated and acted on by people. A smart contract automates the rules, checks the conditions and then acts on them, minimizing human involvement – and thus cost. Even complicated business arrangements can be coded and packaged as a smart contract for a fraction of the cost of drafting, disputing or executing a traditional contract.

One of the criticisms of the current legal system is that only the very rich or those on legal aid can afford it: everyone else is excluded. Smart contracts have the potential to disrupt the legal profession and make it affordable to all, just as the internet has done with both music and publishing.

This all has enormous implications for the way we do business. It is possible that block chain tech will do the work of bankers, lawyers, administrators and registrars to a much higher standard for a fraction of the price.

As well as ownership, block chain tech can prove authenticity. From notarization – the authentication of documents – to certification, the applications are multi fold. It is of particular use to manufacturers, particularly of designer goods and top-end electrical goods, where the value is the brand. We will know that this is a genuine Louis Vuitton bag, because it was recorded on the block chain at the time of its manufacture.

Block chain tech will also have a role to play in the authentication of you. At the moment, we use a system of usernames and passwords to prove identity online. It is clunky and vulnerable to fraud. We won’t be using that for much longer. One company is even looking at a block chain tech system to replace current car- and home-locking systems. Once inside your home, block chain tech will find use in the internet of things, linking your home network to the cloud and the electrical devices around your home.

From identity, it is a small step to reputation. Think of the importance of a TripAdvisor or eBay rating, or a positive Amazon review. Online reputation has become essential to a seller’s business model and has brought about a wholesale improvement in standards. Thanks to TripAdvisor, what was an ordinary hotel will now treat you like a king or queen in order to ensure you give it five stars. The service you get from an Uber driver is likely to be much better than that of an ordinary cabbie, because he or she wants a good rating.

There will be no suspect recounts in Florida! The block chain will also usher in the possibility of more direct democracy

The feedback system has been fundamental to the success of the online black market, too. Bad sellers get bad ratings. Good sellers get good ones. Buyers go to the sellers with good ratings. The black market is no longer the rip-off shop without recourse it once was. The feedback system has made the role of trading standards authorities, consumer protection groups and other business regulators redundant. They look clunky, slow and out of date.

Once your online reputation can be stored on the block chain (ie not held by one company such as TripAdvisor, but decentralized) everyone will want a good one. The need to preserve and protect reputation will mean, simply, that people behave better. Sony is looking at ways to harness this whereby your education reputation is put on the block chain – the grades you got at school, your university degree, your work experience, your qualifications, your resumé, the endorsements you receive from people you’ve done business with. LinkedIn is probably doing something similar. There is an obvious use for this in medical records too, but also in criminal records – not just for individuals, but for companies. If, say, a mining company has a bad reputation for polluting the environment, it might be less likely to win a commission for a project, or to get permission to build it.

We are also seeing the development of new voting apps. The implications of this are enormous. Elections and referenda are expensive undertakings – the campaigning, the staff, the counting of the ballot papers. But you will soon be able to vote from your mobile phone in a way that is 10 times more secure than the current US or UK systems, at a fraction of the cost and fraud-free. What’s more, you will be able to audit your vote to make sure it is counted, while preserving your anonymity. Not even a corrupt government will be able to manipulate such a system, once it is in place. There will be no suspect recounts in Florida! The block chain will also usher in the possibility of more direct democracy: once the cost and possibility of fraud are eliminated, there are fewer excuses for not going back to the electorate on key issues.

Few have seen this coming, but this new technology is about to change the way we interact online. The revolution will not be televised, it will be cryptographically time-stamped on the block chain. And the block chain, originally devised to solve the conundrum of digital cash, could prove to be something much more significant: a digital Domesday Book for the 21st century, and so much more.

by Dominic Frisby | Aeon

Swift Is Hacked Again. The Bitcoin/Blockchain Fat Lady Sings.

Summary

  • With the second hack of Swift, the day of firewalls and permission systems are suddenly numbered.
  • This time it wasn’t hacked data — it was the banks’ money that was hacked.
  • Bank security is rapidly deteriorating.
  • It is time to adopt some kind of distributed ledger.

I see the bad moon arising. I see trouble on the way. I see earthquakes and lightnin’. I see bad times today.

— Creedence Clearwater Revival

The SWIFT payment system failed again this week. The tone of Swift’s announcement intimated the end of life on the planet earth as we know it. Swift’s description of the system’s attackers was apocalyptic, and did nothing to minimize the skills of the attackers, adding that the funds seized might be, of course, reinvested to give the hackers a kind of turboboost of evil. My sources tell me the culprit is Brainiac from the planet Zod.

Of course there is nothing funny about this situation, even if Swift’s “chicken little” corporate reaction was pretty funny. The real lesson of this event is deadly earnest and, I believe, fully anticipated by most specialists in the security of our financial system. This event, though, was the Fat Lady’s Song. The banks, exchanges, clearers like Swift, DDTC, and so on, are going to have to share something with the public that insiders already know.

The party is over for the old, permissioned, firewall based, electronic fortress, concept of trust-in-payments systems. And the alternative is very far from obvious.

The buzzwords, the sweethearts of the fintech movement, are systems known as distributed ledgers. Two words are about to become part of everyone’s vocabulary: Bitcoin and blockchain. There are multitudes of manifestations of these two intimately related electronic phenomena. If you are new to the subject of Bitcoin and blockchain, the learning curve is steep.

The significance of the second Swift failure is this. Trust-based systems, such as those upon which the current payments systems operate, are becoming more expensive to protect at a rapidly increasing rate. The horse race between hackers and firewall builders is being won by hackers in spite of the rapidly increasing spending on internet security.

And these most recent hacks took bank’s money, not customer money. That is a game changer.

Since God invented dirt, the banks have been soooo regretful about the lengthy delays and inefficiencies inherent in our transactions system. They’re so sorry, they tell us, about the three days you wait between transactions and payments. And they really regret all those fees that you pay and inconveniences you experience with foreign exchange transactions.

What bunk. The banks, as a whole, make hundreds of billions a year on these inefficiencies.

The point of the article is this. Now that the bank’s own money is being stolen, the financial world will be singing from one hymnal. The time of distributed ledgers is here. There is no longer a question that distributed ledgers will replace our current method of securing transactions. The firewall system no longer has a constituency after the Swift debacle.

What are the implications for investors? First, there is nothing yet you can invest in directly. It is possible to purchase a thing called a crypto-currency. The most prominent of these is called Bitcoin. However, unless you spend the necessary months of research to grasp the underlying determinants of the value of Bitcoin, I have an emphatic one-word recommendation. Don’t. This investment is incredibly risky, and those who provide confident forecasts of its future value are deluded or worse.

The future of transactions reminds me a little of the invasion of Europe by Genghis Khan. In the distributed ledger business, Genghis Khan is Bitcoin. There is no corporate presence sponsoring Bitcoin. It is open source. The key significance of Bitcoin/blockchain is that this particular distributed ledger is, at the moment, prohibitively expensive to hack. Its disadvantages include a lack of governance. Advocates will rightly argue that a lack of governance has its benefits – obvious to anyone who considers the problems with having a government – but there are also disputes in the Bitcoin community and no clear way to resolve them.

Genghis Kahn’s competition, the Pope and Kings of distributed ledgers, are the usual suspects – primarily the big banks. But also the big accounting firms and the major IT firms are involved. I wonder if the Pope and the Kings were afraid to speak the name of Genghis Kahn. One thing is for sure, the Big Business side of the distributed ledger debate is afraid to speak the name Bitcoin. Honest.

Almost universally, if the equity capital of a distributed ledger advocate exceeds one billion market value, the advocate will never use the word Bitcoin in a discussion of distributed ledgers. Blockchain is the magic term they use. I find this annoying since the developers of Bitcoin coined the term blockchain and would have copyrighted it if they had not been open-source kind of guys who don’t do that sort of thing.

It is much, much, too early to tell how this combat is going to sort itself out. There is a shortage of practical uses of the technology from any source. The number of practical uses at the moment is zero. But the word “inevitable” is no longer too strong.

Investment recommendations? I’ve got a few. My very long term bet is that the big banks (Bank of America (NYSE:BAC), Bank of New York Mellon (NYSE:BK), Bank of America , Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and JP Morgan Chase (NYSE:JPM), among others) will be the big losers. Likewise, the big accounting firms. All have invested billions. For them, pocket change, but pocket change invested pointlessly.

An exception: I find of particular interest Goldman’s entry into retail banking with a strong aversion to brick and mortar branches. These both are wise decisions. I have a buy on Goldman — and its awareness of, and willingness to place bets upon, the outcome of fintech is one reason I think Goldman’s long term strength is assured. In the distributed ledger future, branches disappear.

The distributed ledger contest will ultimately boil down to a contest between the major IT firms (IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL)) (read: Pope and Kings) on one hand, and the loose governance of Bitcoin (The Great Kahn) on the other hand.

Do not, however, look here for a standard analysis of funds invested and rates of return. This is a game that will have one winner, and the game is winner-take-all. A thinking IT firm like IBM realizes that this is a contest it must enter. This is positive for the future of IBM’s stock, but I am a long way from knowing where IBM is going to jump, or whether I approve of their plan — which is, at the moment, very diffuse.

This is also not a time to look at the fintech component of IBM’s blockchain-oriented financials. It is far too early and the financials, nearly irrelevant. In this mega-contest for the future of distributed ledgers, it is not so much about dollars invested as intellectual resources expended and risks taken.

It is perhaps prudent at the moment for Big Blue to have a finger in every pie. But when a fully informed decision can be made, the winner of this contest will be the player with the most information and best instincts. And the earliest to make the right commitment. Then we can ask old fashioned questions like: What are the implications for IBM’s financials?

On the big firm side, IBM in particular has two things working for them. They are tight with the big banks and accounting firms on the one hand, yet comfortable in the world of open source on the other. I see them with a development role in devising the apps the banks and accountants will be ultimately reduced to offering in the transactions world. Those will be some monster apps, but Apps is Apps. They’re not where the big bucks are. The big distributed ledger itself is the real prize. IBM, or another big IT firm, will need to ramp up quickly to seize it.

IBM and its ilk will also be potentially better able to make decisions than the loosely structured management of Bitcoin/blockchain. But IBM should learn to say the word “Bitcoin.” The term was totally missing from their initial press release. It’s a clear sign of fear or hubris. And I don’t think IBM has a reason to fear, as its banking customers and the accounting firms do.

What of the Bitcoin community? For all of their pretensions of computer power/economics-based decision-making ala the internet, the Bitcoin community is not the free-wheeling fun-loving band it makes itself out to be. Bitcoin-land has a management problem of its own. There is indeed a hierarchy of Bitcoin/blockchain management, albeit informal. And this management has disputes. A very important current dispute is whether and how the blockchain will grow. This is no small matter. Because if Bitcoin will matter a year from now, it needs to grow like Topsy, and now.

Who will win the battle for the One Big Global Distributed Ledger? Too soon to call, but the stakes are enormous.

by Kurt Drew | Seeking Alpha