crypto currencies: flash in the pan or the future...
TRANSCRIPT
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TheBlockChain:Characteristics
¨ Decentralizedverification:Thevalidationofatransactionissourcedtomembers,calledminersinthecryptocurrencyworld.Validationusuallyinvolvestryingdifferentalgorithms(hashes)tofindtheuniqueonethatmatchesthetransactionblock,andthesuccessfulminerisrewarded,currentlywiththecryptocurrency.
¨ Completeandopenrecords:Everytransaction,oncevalidated,isconvertedintoablockofdatathatisrecordedintheblockchainledger,whichisaccessibletoeveryoneinthenetwork.Ifyouareworriedaboutprivacy,thetransactionrecordsdonotincludepersonaldatabuttaketheformofencrypteddata(hashes).
¨ Incorruptible:Ablockchain,oncerecordedandshared,cannotbechangedsincethosechangesarevisibletoeveryoneinthenetworkandarequicklytaggedasfraudulent.Thus,theledger,oncecreated,becomesalmostincorruptible.
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TheFutureofBlockchain
¨ Ineffect,ablockchainisadigitalintermediationprocesswheretransactionsarecheckedbymembersofthenetwork,andrecorded,andoncethatisdone,cannotbealteredfraudulently.
¨ Theblockchaintechnologyisaboutfarmorethancryptocurrencies.Itcanbeusedtorecordtransactionsinanyasset,fromsecuritiesinfinancialmarketstophysicalassetslikehouses,anddosoinawaythatreplacestheexistingintermediarieswithdecentralizedmodels.
¨ Banksandstockexchanges,whichmakethebulkoftheirmoneyfromintermediation,notonlyseeblockchainsasathreattotheirexistencebuthavebeenearlyinvestorsinthetechnology,hopingtoco-optittotheirownneeds.
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Currency101:ThePurposesofMoney
¨ Unitofaccount:Akeyroleforacurrencyistooperateasaunitofaccount,allowingyoutovaluenotjustassetsandliabilities,butalsogoodsandservices.Tobeeffectiveasaunitofaccount,acurrencyhastobefungible(oneunitofthecurrencyisidenticaltoanyotherunit),divisibleandcountable.
¨ Mediumofexchange:Currenciesexisttomaketransactionspossible,andthisisbestaccomplishedifthecurrencyinquestioniseasilyaccessibleandtransportable,andisacceptedbybuyersandsellersaslegaltender.Thelatterwilloccuronlyifpeopletrustthatthecurrencywillmaintainitsvalueandiftransactionscostsarelow.
¨ Storeofvalue:Totheextentthatyouholdsomeorallofyourwealthinacurrency,youwanttofeelsecureaboutleavingitinthatcurrency,knowingthatitwillnotloseitsbuyingpowerwhilestored.
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GoodversusBadCurrencies
¨ Forms:Currenciescantakeoneofthreeforms,aphysicalasset(gold,silver,diamonds,shells),afiatcurrency(usuallytakingtheformofpaperandcoins,backedbyagovernment)andcryptoordigitalcurrencies.
¨ TheSurvivor:Gold'slongtenureasacurrencycanbeattributedtoitsstrengthasastoreofvalue,arisingfromitsnaturalscarcityanddurability,thoughitfallsshortoffiatcurrencies,intermsofconvenienceandacceptance,bothasaunitofaccountandasmediumofexchanges.
¨ TheFiatCurrencies:Fiatcurrenciesarebackedbysovereigngovernmentsandconsequentlycanvaryinqualityascurrencies,dependinguponthetrustthatwehaveintheissuinggovernments.
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Howdocryptocurrenciesmeasureup?
¨ Asunitsofaccount,thereisnoreasontodoubtthattheycanfunction,sincetheyarefungible,divisibleandcountable.
¨ Theweakestlinkincryptocurrencieshasbeentheirfailuretomakedeeperinroadsasmediumsofexchangeorasstoresofvalue.
¨ UsingBitcoin,toillustrate,itisdisappointingthat sofewretailersstillacceptitaspaymentforgoodsandservices.Eventhemuchhypedsuccesses,suchas Overstock andMicrosoftacceptingBitcoinisillusory,sincetheydosoonlimiteditems,and onlywithanintermediarywhoconvertsthebitcoinintoUSdollarsforthem.
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Whytheslowacceptance?
¨ Inertia:Fiatcurrencieshaveahadalongrun,anditisnotsurprisingthatformanypeople,currencyisphysicalandtakestheformofgovernmentissuedpaperandcoins.
¨ Pricevolatility:Cryptocurrencieshaveseenandcontinuetoseewildswingsinprices,notabadcharacteristicinatradedassetbutdefinitelynotagoodoneinacurrency.
¨ Competingcryptocurrencies:Thecryptocurrencygameisstillyoungandthecompetingplayerseachclaimtohavefoundthe"magicbullet"foreventualacceptance.Astechnologiesandtastesevolve,youwillseeathinningoftheherd,wherebuyersandsellerswillpick winners,perhapsfromthecurrentlistormaybesomethingnew.
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ExplainingtheDisconnect
¨ Marketsareforwardlooking:MarketareforwardlookingandthattheriseinthepricesofBitcoinandEtherreflectsmarketexpectationsthattheywillsucceedascurrencies,ifnotrightaway,inthenearfuture.
¨ Speculativeasset:Inthevaluegame,youtrytoattachavaluetoanassetbaseduponfundamentals,andinthepricinggame,itismoodandmomentumthatdrivetheprocess.Cryptocurrencymarketsarepurepricinggames,wherefundamentalshavebeenlongsinceforgotten
¨ Lossoftrustincentralizedauthorities(governments&centralbanks):Goldhasheldaspecialplaceinthecurrencycontinuum,oftenbeingtheassetoflastresortforpeoplewhohavelostfaithinfiatcurrencies.Forsomepeople(especiallyyoungerandmoretechnologicallyinclined),bitcoinandetherareplayingthesamerole.
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GoldversusCryptoCurrencies
¨ Timetested?Goldhashelditsvaluethroughthecenturiesandisaphysicalasset.Forbetterorworse,itisunlikelythatwewilldecideafewyearsfromnowthatgoldisworthless.
¨ TheCurrencyTest:Acryptocurrencythatfewpeopleuseascurrencyultimatelywillnotbeabletosustainitself,asshinerandnewerversionsofitpopup.Ironically,iftradersinbitcoinandetherwanttheirinvestmentsinthecryptocurrenciestoholdtheirvalue,thecurrencieshavetobecomelessexcitingandlucrativeasinvestments,andbecomemoreacceptedascurrencies.
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Keytestsforsuccessincryptocurrencies..
¨ Transaction,nottrading,talk:Fromcreatorsandproponentsofthecurrency,youwillhearlesstalkabouthowmuchmoneyyouwouldmakebybuyingandsellingthecurrencyandmoreonitsefficacyintransactions.
¨ Transaction,nottrading,features: Thedesignofthecryptocurrencywillfocusoncreatingfeaturesthatmakeitattractiveasacurrency(fortransactions),notasinvestments.
¨ Trustinsomething:Tobeeffectiveasacurrency,youdoneedtobeabletotrustinsomethingandperhapsacceptcompromisesonprivacyandcentralizedauthority(atleastonsomedimensionsofthecurrency).
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TheCapEffect:AnAcidTest
¨ Bitcoinandetherminershavebeenwillingtoputintheefforttovalidatetransactionsbecausetheyarerewardedwithissuesofthecurrency,feasiblenowbecausethereisslackinthecurrency(thecurrentnumberisbelowthecap).
¨ Asthecapbecomesabindingconstraint,therewardsfromminershavetocomefromtransactionscostsandseriousthoughthastogointocurrencydesigntokeepthesecostslow.
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A“Fair”priceforCryptoCurrencies
¨ Afairexchangeratebetweentwofiatcurrencieswillbeonthat equalizestheirpurchasingpower,anold,imperfectandpowerfultheorem.
¨ Ifyouarepaying$2,775forabitcoinonAugust1,2017,iswhetheryoucan(orevenwillbeableto)but$2,775worthofgoodsandserviceswiththatbitcoin.¤ Ifyoubelievethatbitcoinwilleventuallygetwideacceptanceasadigitalcurrency,youmaybeabletojustifythatprice,especiallybecausethereisahardcaponbitcoin
¤ Ifyoudon'tbelievethatbitcoinwilleveracquirewideacceptanceintransactions,itistimethatyouwerehonestwithyourselfandrecognizedthatisjustalucrative,butdangerous,pricinggamewithnogoodending.
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DigitalCurrencies
¨ Notthereyet:Cryptocurrencies,withbitcoinandetherleadingthepack,havesucceededinfinancialmarketsbyattractinginvestors,andinthepublicdiscoursebygarneringattention,buttheyhavenotsucceeded(yet)ascurrencies.
¨ Buttheyarecoming:Therewillbeoneormoredigitalcurrenciescompetingwithfiatcurrenciesfortransactions,soonerratherthanlater.Iamhardpressedtofindawinneronthecurrentlist,rightnow,butthatcouldchangeifthefocusshiftsfromtradingtotransactions.
¨ Winnercouldbeanewentrant:Ifthatdoesnothappen,wewillhavetowaitforafreshentrantandthemostenduringpartofthisphaseinmarketsmaybetheblockchainandnotthecurrenciesthemselves.