“If it isn’t either a currency or digital gold than it isn’t anything apart from an interesting experiment that has provided us with a very useful introduction of blockchain to the world.” - James Mackintosh, WSJ
Over the past nine weeks we have explored a variety of specific topics related to money and cryptocurrencies. We started by looked at the nature and history of money, and we analyzed some of the characteristics and attributes of good vs bad money. We then took what we had learned about money in general and forayed that into cryptocurrency. We reviewed what cryptocurrency is, where it came from and what makes the blockchain technology it’s built upon so special. We then tackled two important crypto questions: Is Cryptocurrency Money? and Is Cryptocurrency A Bubble? In this tenth and final installment of our Decrypting Cryptocurrencies series, we address what we think may be the most important question of all…Is it really all about the blockchain?
One of the most frequent expressions we’ve heard in support of cryptocurrencies over the years is, “It’s all about the blockchain.” Indeed, as highlighted earlier in this series, the blockchain technology introduced to the world by Bitcoin truly is one of its special characteristics. That said, cryptocurrency in its current state is not a very good form of money, and its meteoric rise over the past several years has been marked, at least in part, by highly speculative investor behavior. The jury is very much still out on whether or not the cryptos will ultimately be proven viable as currencies, and if so which one of the 1,500+ in existence will be “crowned king”. In what might end up being a truly ironic twist, one potential outcome of this great cryptocurrency experiment is that the cryptos themselves might be cast aside while blockchain technology remains. In other words, it quite literally might be ALL about the blockchain.
Consistent with the opening quote from the Wall Street Journal’s James Mackintosh, this possibility is explored in a New York Times piece entitled Beyond the Bitcoin Bubble. Its author, Steven Johnson, states the following:
The true believers behind blockchain platforms like Ethereum argue that a network of distributed trust is one of those advances in software architecture that will prove, in the long run, to have historic significance. That promise has helped fuel the huge jump in cryptocurrency valuations. But in a way, the Bitcoin bubble may ultimately turn out to be a distraction from the true significance of the blockchain.
Our goal here is not to predict one way or another if any particular cryptocurrency will remain viable long-term. But one thing that seems clear to us is that regardless of the fate of the cryptos, blockchain technology is here to stay. We want to reiterate that we’re not cryptographers or technology gurus by any stretch, and we do not pretend to grasp the overwhelming complexity of how blockchain works on a granular, technical level. That said, our understanding of blockchain as “a groundbreaking record keeping architecture, inherently resilient to fraud or data corruption and completely independent of a trusted authority or central controller” allows us to see on a high level its broad potential in commercial use. These uses are just beginning to be explored, and we surely are only beginning to scratch the surface. The slide below contains a list of areas where we know blockchain technology is being experimented with already.
You may have noticed a recent commercial from IBM in which they give us a visual picture of how the “IBM Blockchain” is being implemented. There are a couple of interesting examples offered up in this ad. The first depicts a consumer being able to track a tomato from the moment it’s picked to the moment the spaghetti sauce is slid across the table to the little boy…literally farm to table! Another one follows a diamond from the moment it’s mined to the moment the ring is placed on the bride-to-be’s finger. Because of the IBM Blockchain, the happy groom has full confidence that the diamond has never fallen into the wrong hands (it’s not a “blood diamond”). Notice there is no mention of Bitcoin or any other cryptocurrency, although the technology Bitcoin introduced to the world is being featured front and center by one of the world’s largest corporations.
A final observation we’d like to point out is that many of the potential uses being contemplated for blockchain involve various aspects of the established systems of banking, finance and global commerce. This means that from a variety of different angles the technology is being used to improve the security and transparency of US Dollar (and other fiat currency) transactions all over the world. This reality is dripping with irony in that the very technology Bitcoin offered the world seems to be shoring up the systems it was intended to supplant.
We hope you have enjoyed this series as much as we have enjoyed writing it. While it was challenging, it was also incredibly fruitful for us. We learned so much, and we have definitely gained a deeper respect for the sophistication of many of the more reputable blockchain and cryptocurrency advocates. At the end of the day, we have our doubts about whether or not the cryptos have a long-term future in the “currency” business, but we wouldn’t say we have a high degree of conviction on that one way or another. Regardless, it seems blockchain technology is here to stay and will likely improve our lives in countless little unnoticeable ways, as well as some bigger more blatant ones. While no one knows what the future holds, based on everything we’ve learned we have a sneaking suspicion that in the final analysis it really will be all about the blockchain.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.