The Big Picture

“To infinity and beyond!” – Buzz Lightyear from Toy Story

The movie Toy Story was Pixar’s first major film release in 1995 and began a string of successes for Pixar. Pixar was also a serious disruptor that ended traditional cartooning. Historically, disruptors or innovators have had an interesting effect on markets and investors. While innovation is mostly positive, it has also spurred some of the wildest speculations in market history. While fortunes are made, many are lost as well.

Early on in the story Buzz learns that he is not a Space Ranger protecting the universe. He is only a toy and cannot fly. This doesn’t stop him from trying, only to fall back to the earth with a hard hitting dose of reality.

To infinity, or the moon, and beyond. “Moon” refers to a crypto potentially rising significantly in price. Much of the excitement revolves around the hysteric hopes on crypto coins rising materially in price allowing participants (some say gamblers) to cash in.

Cryptocurrency is a disruptor, it is innovative, and highly speculative. Will cryptocurrency also experience a spectacular fall and dose of reality? Many already have, and this is ongoing. 

Have a Plan and a Process!

From the Trenches

“It’s the future bro!” – Bitcoin investor at Miami Bitcoin conference

Sure, but likely a bit grandiose (pun intended)

Since I first began discussing crypto the number of “coins” has nearly quadrupled to over 4000. The speculation around crypto assets has grown stronger and more hazardous. Just like Buzz from Toy Story and his unfortunate hard dose of reality when gravity pulled him back to earth, many crypto assets have experienced the same fate and likely many still to come. Does this mean there is no value in digital assets? Not the case.

Is it “the future bro?” 

All innovations have an impact on the future, from the telegraph, to the automobile, to the internet. Do they solve all problems? Absolutely not. In fact, innovations may create new unforeseen problems along with the solutions provided. Unforeseen issues caused by the telegraph were fears of message transmission skewing the truth, the car pollution, the internet many social issues such as addictions and depressed youths. Is this to say the positives did not outweigh the negatives? Of course that is not the case either. Bro!

The Currency Question

In the simplest of terms, crypto currency is a decentralized digital asset meant to work as a medium of exchange. Breaking this down further; decentralized meaning there is no authority controlling or regulating; digital meaning exists in digital form, or intangible; asset meaning something holding value.

A currency is simply a system of money in use. Legal tender is money or notes that must be legally accepted for goods, services, or debts, being backed by a sovereign country.

Are cryptocurrencies an actual currency? Not quite, but they are being proposed as a potential alternative to sovereign currencies, such as the dollar. Currency must be widely in use and accepted, which cryptocurrencies are not yet at present. There is also the question of ultimate legality of their use. Or regulation, which is something that crypto proponents would like to avoid at all cost! Hence the point of decentralized. This presents one of the toughest questions of all. Especially regarding criminal activity or terrorism. Lastly with over 4000 cryptos in existence, it is very highly likely most will end up worthless!

There remain many issues to work through on whether cryptocurrencies will ultimately be a viable currency in use. At present, we are not nearly in the realm to call cryptos a currency.

The Asset Question

What gives an asset value? What value do digital assets bring?

An asset is valuable because it is useful, provides utility, a cashflow return or yield, or provides an economic value.

Dollars are not a long-term asset!

Over the short-term dollars may hold value and even appreciate. Over the long term, inflation erodes the value. Now that is out of the way…

The proposed value of digital assets is the scarcity as well as the value of the technology. Scarcity is an easy enough concept. Real Estate is scarce, therefore valuable. Especially in desirable locations. The best example of a scarce asset with considerable value is gold. Gold has a long history as a store of value. Will a crypto asset such as Bitcoin retain value due to the fact only so much Bitcoin will be created? That is one of the attributes of Bitcoin. Only 21 million will be created. Therefore it will have scarcity. We will see whether it proves a good store of value as this takes time to ascertain.

Blockchain is the technology behind crypto assets. It is a database or ledger that is decentralized, or “open”, being stored on a network of computers all around the world. The benefit is the security of the chain. While one network may be hacked, it is very difficult (potentially impossible) to hack all in an attempt to tamper with the database. Blockchain technology has significant potential and the total uses are not yet fully known.

Bottom Line: Crypto asset’s value is highly speculative and its future as a currency remain uncertain. As for blockchain, the potential is quite significant.

The Weeds

“Blockchain is moving beyond cryptocurrency, and it’s worth paying attention – especially since successful prototypes show the blockchain, also known as distributed ledger technology, will be transformative.” 

– Julie Sweet

Blockchain is the thing.

All of the hubbub here is really (and should be) about the technology called blockchain. Blockchain is simply a type of database in which data is stored in a chain format or ledger. Once data is entered into a block, it is irreversible. The block is then stored on a network of computers for all users to verify. It is open, or public. The chain then continues with blocks added and verified by the entire network.

What applications can blockchain be useful for?

There is significant potential for blockchain applications:

  • Transactions that can be verified on an open format. This is the primary focus for most crypto assets at the moment. An open ledger presents many benefits.
  • Personal identity and security. This is a significant application. If an individual had a secure identity backed by encrypted blockchain technology, we may potentially reduce and eliminate identity theft and fraud.
  • Medical data and information sharing. Ease of transmission for needed parties of private medical data.
  • Supply chain & Logistics. Improving the coordination and efficiency of supply management in a more open and transparent method.
  • Voting. There have been claims of vote miscalculation and machine errors. An open and secure ledger may provide a very transparent voting system.
Bottom Line: Blockchain is an interesting technology and the potential is significant.