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Rambler Investment Fund: Crypto

Brief History of Crypto & the “Blockchain”

In late 1992, a small group of individuals from the San Francisco Bay Area with backgrounds in cryptography and computer programming, who would later be dubbed the “Cypherpunks”, began meeting on a monthly basis. To cut a long story short, the Cypherpunks collaborative projects would form the foundation of the blockchain network. There is much confusion around what exactly a blockchain network is.  To put it is simply, it is a continuously growing list of records called “blocks” which are linked and secured using cryptography. The blockchain, in essence, is nothing more than a distributed ledger that can record transactions between two parties. The significance of the blockchain is that it can record data and transactions with permanence, efficiency, autonomy, and decentralization. The various digital currencies or “cryptocurrencies” that would later be created operate on these blockchain networks and complete the system by adding a payment method. The demand of any digital currency is simply how many people are active on a given currency’s blockchain and who wish to use said currency as a form of payment.

In 2008, after the financial crisis, an autonomous cryptographer who goes by the alias “Satoshi Nakamoto” perfected the work of the Cypherpunks who were in contact with Satoshi via email and forum discussion. Nakamoto basically took all of the work that was public on the blockchain and digital currencies and made it functional and widespread. He, or she, published a white paper that detailed his/ her creation of the digital currency “Bitcoin” in ’08 and the rest is, as they say, history. Bitcoin, which was trading at 7 cents in June of 2010, is now trading at approx. $7,000 across countless online exchanges. Exchanges, such as Coinbase, facilitate the easy movement of Bitcoin and other digital currencies but any individual with a computer can download and access Bitcoin’s physical blockchain network. The individuals who do so are what we now refer to as “miners” or “stakers”. In downloading a copy of the BTC blockchain not only are you accessing the physical network, you are also allowing your computer to act as a small server that supports the overall network. The entirety of the blockchain computing power is thereby supported by a mass number of individual computers, hence the networks “decentralization”. There is no single data warehouse or computer that supports the network.

Okay, So That Was A Lot…

The whole concept of crypto and the blockchain network can be a lot to process but do NOT let that bog you down; fortunately we don’t really have to understand the technicalities of a given asset to make copious amounts of money off of it. For example, how many of us actually understand or know the computer/ network system that supports a given options exchange? It can’t hurt to understand the technical operations of such an exchange, but we don’t have to be an aficionado to actually trade the options themselves! The point here: Unless it is of interest to you, you needn’t bother with fully understanding the infinite complexities of the blockchain and crypto. You just have to know how to profit from its existence.

Why the Creation of Crypto Is Important

Satoshi did not release Bitcoin and its network in 2008 for no good reason; in fact the timing is clearly BRILLIANT (a quality that you will see again and again as you look more into the mysterious Satoshi Nakamato). With the financial crisis still looming, certain facts became apparent (at least to some). What became evident after ‘08 is that the central banking system had many deficiencies and that the governing bodies (financial and legislative) were acting irresponsibly. People, including the government and big banks, are allowed to make mistakes just like any human being but the problem is that we still haven’t learned our lesson. Big banks continue to use massive amounts of debt to fund their operations and the federal government ensures that the banks won’t fail via financial bailouts. To complicate matters, the government uses aggressive monetary policy to influence the state of the economy. In doing so, they are gambling with the prosperity of the American people. The idea that a small board of individuals can have total control over the monetary policy did not seem very democratic. As we have learned this semester, Fed Funds borrowing rates (i.e. interest rates) and macroeconomic policy lay the entire foundation of our country’s banking/ financial system. Cryptocurrencies, as realized by Nakamoto, have the ability to undermine and democratize the entire system. They have the ability to put the control back into the hands of the individual consumer.

Arguments Against Crypto

One of the main criticisms against crypto as an investment is that it lacks intrinsic value (i.e. it is merely an intangible asset that has no real value other than what people are willing to pay for it). Here’s an interesting thought: What is different about any fiat currency, such as the USD? Our currency is no longer backed by gold; therefore, it also has no intrinsic value and could be labeled as having no real value. As with Bitcoin and other digital currencies, the value is simply driven by the demand for said currency; how many people want to use it as a medium for exchange. The strongest argument (s) against BTC is that its prices are bubbly (although it could potentially grow into said prices but like any other asset it will probably have a correction at some point), it may not be widely used for another decade or longer (however the current pace of its acceptance contradicts this idea) and thirdly, that BTC will die out after losing its “first- mover” status (this is quite possible, but will not happen for some time and this is the reason why searching for alternative cryptos with long-term potential is always wise).

Applications of Crypto & Why It Could Be Lucrative

As mentioned previously, cryptocurrencies utilize a network that is: a) permanent (i.e. data once recorded cannot be altered or falsified) b) efficient c) anonymous and d) decentralized. I will not go into detail with each of crypto’s valuable characteristics but as you can see, it has many potential uses. This network’s ability to act as a safe and trustworthy ledger system for data can, and indeed already is, transforming number of industries. For example, the ledger system could be used to transform the storage of business data, voting systems, and online payment methods. A recent study has shown that 57% of big corporations are considering or actually investing in a blockchain technology of their own. Crypto is also useful in the sense that it can be used as a financial investment (like an equity or fixed income product) in itself, a prime example of this currently being the rapidly expanding Bitcoin market cap. Just this month, the CME announced definitively that it will be rolling out Bitcoin futures contracts in Q4 of this year (a positive reinforcement of continued adoption) Crypto can also be used to quickly and efficiently transfer wealth on a global scale with limited interference by governments and regulators. Basically, its applications are limitless but to prosper from crypto we have to know how to analyze which cryptocurrencies might be worth investing in.

So Which Cryptocurrencies Will Benefit?

The entire industry is young; anyone who tells you that a given crypto is going to be the one that changes the world is either lying or is seriously misled. There are several digital currencies that have serious potential but the future of the crypto industry is far from certain. As you might be catching on by now, big corporations and banks can build blockchain networks of their own, or copy/ replicate existing blockchain networks without actually using the digital currency that is tied to that network…sorry ‘Ethereum’. Therefore, while the blockchain network is a transformative technology (like the Internet) it is hard to place a bet on any given blockchain start-up or cryptocurrency. Similar to Apple or IBM, there will probably be companies centered around blockchain tech that will prosper from its widespread acceptance, but it is too early to say who that might be. This brings us to back to Bitcoin, which is currently undergoing an identity transformation that could still make it immensely profitable, even in light of these facts.

The Moment You Have All Been Waiting For…BITCOIN!

Bitcoin is interesting as an investment because it is currently moving away from its identity as a “currency”. Kind of counterintuitive yes, but what BTC is doing is essentially transforming into a sort of digital gold. I know countless investors in Bitcoin, none of which who are using it as a payment method.  Investors are using Bitcoin as a speculative investment, as a storage of wealth. Like gold, the idea that Bitcoin can be used as a hedge against inflation of traditional, fiat currencies and as a hedge against declining financial markets is what makes Bitcoin attractive. BTC has proved itself to be a counter-cyclical investment and a hedge on several occasions, a recent example being the price of BTC spiking 15% immediately following Brexit news. Basically, when the going gets tough, the tough buy Bitcoin. Fun fact about the potential scalability of Bitcoin, if it indeed continues its path as a digital gold: if Bitcoin took just 10% of the current gold market cap ($2.4 trillion) a single Bitcoin would be worth approx. $11, 429. Additionally, Bitcoin, as with gold, has a fixed supply. New Bitcoin will continue to be generated until there are 21 million in circulation (a feature that Satoshi created…there’s that brilliance shining through again). Currently there are approx. 16.6 million existing Bitcoin in circulation. 

The Take- Away

It is almost impossible to predict the future but here is how you pick a potential winner. Find a digital currency that will have a niche or use regardless of how and to what scale the blockchain might be adopted. For example, a little-known cryptocurrency called “Ripple” is currently the only crypto that is centered on business-to-business transactions. Due to the rate at which massive quantities of Ripple can be transferred, a multitude of big banks are already using the Ripple network to move other fiat currencies (i.e. the USD, Euro, etc.) A bank can simply buy Ripple with a traditional, paper currency and then transfer the Ripple in seconds to one of its other branches or partner locations. The Ripple is then converted back into USD or whatever currency the banks wants. In doing this, the banks avoid potential fees and costs associated with directly moving traditional currency and they can move assets faster. If Ripple continues to have a monopoly on this type of application (and civilization continues to have computers and access to the Internet) it will continue to have its competitive niche regardless of what might be going on the world. As with any analysis one might conduct on a potential investment, it is critical to seek out investments that have a competitive advantage or foothold; with crypto it is essential.

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