Blockchain In a Zombie Apocalypse
With a strong focus on investing in game changing trends, whether in private or public markets, it’s not surprising that the technology underpinning the Bitcoin digital currency has been more interesting to us than a gaggle of suntanned string bikinis.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
At the same time I received lots of detractors of the blockchain technology emailing me. As far as I can tell, they fit into two main groups.
The first group don’t understand what it is, how it works, or its potential applications, have no inclination to educate themselves accordingly, and are generally fearful of anything not yet in existence.
They would have been found criticizing the internet before it went mainstream, saying things such as “it’s a tool to control the masses” by some never-been-seen (but we know they exist, really) group of old men in cardigans, huddled in a smoky room sipping Chivas and plotting the world’s fate.
The second group, freshly indoctrinated by morons such as Al Gore, are to be found harking for the “old days”.
By their logic we’re all better off without technology, our homes should be made from sea shells, hemp, and egg boxes, our diets should consist of crickets, alfalfa and free range caterpillars, and our cars run on “friendly” electricity harnessed by happy thoughts.
What they forget about, though, is the fact that charging the electric car they just bought likely involves a power socket which sources its power from a nearby coal fired power station. How’s that for “green”? It’s not lost on me that this group will send me these thoughts via the internet, on a device which they’re suggesting none of us should have.
It was therefore with glee that I received dozens of intelligent comments and questions to these articles from people genuinely interested and attempting to learn more, even if skeptical, an entirely healthy attribute. One reader in particular posed some very valid questions which I want to share with you today.
Please note that I don’t pretend to have all of the answers on this particular topic and am really grateful and fortunate to have at my proverbial finger tips an exceptional team and a network of experts who know more about this than I.
So here goes the email:
First, I don’t understand what a “blockchain” is.
Secondly, I am concerned that this technology is totally dependent upon a human constructed machine, and a supply of electricity. What would happen to your “assets”, so carefully digitized, if electricity was somehow terminated throughout the world? (yes, I am sure you are laughing at this speculation)
Thirdly, I remember that “Bitcoins” have been easily stolen or lost in the past, and legal action has been difficult. This doesn’t give me much confidence in this technology.
To make it clear, I am not necessarily arguing against this technology. I can see it being extremely useful, but at this point in time, I am still more comfortable holding a hundred dollar bill in my hand.
Let me deal with them one by one.
1) What is the Blockchain?
The first question requires a much longer explanation but at its core the “blockchain” is a public ledger of transactions. The transactions are collected in “blocks” and found in a random process called “mining”. As transactions transfer ownership, each of these blocks represent an update of the user’s balance on the network.
The technology is complex and not immediately easy to understand. There are lots of resources on the web providing granular explanations and I’d encourage anyone interested in this space to really dig in to understand the technology and the implications; it is going to completely revolutionize entire industries and 5 years from now it’s likely that you’ll be consuming products and applications which are just being developed today.
That is fine if you want to be a bystander to the investment opportunities but if, like us, you’re not then now is the time to begin in earnest.
Blockchain – 2) Concern with the technology dependent on a human-constructed machine and electricity
You’re partly correct in saying that we’re reliant on a human constructed machine but what’s critical to understand is that the blockchain works like the internet in a sense that it’s a network of machines. The failure of one or even millions of machines will not affect the operation of the system. It is decentralized and this provides it with many times the efficiency, safety and incorruptibility of any centralized system.
To your point on the reliance on electricity. Absolutely! It’s a very real fact that we’re reliant on a technology which, while it uses the internet which is decentralized, is reliant on electricity which is largely centralized. Centralization creates single points of failure not to mention inefficiency, corruption and abuse.
Two things come to mind when answering this question. The first is that in the modern world we’re already completely tied to the availability of power, and the second involves a deeper discussion around what is happening in the power industry which itself is due for disruption.
Like it or not, today our assets are largely tied to machines, computers and electricity. Take, for example, your home. Who says you own it? A title register says so, and increasingly that title register is kept in electronic format on one or more databases. Your money held with a particular bank. Same thing. Try withdrawing your money from a bank when there is a power failure. Good luck. Try paying for gas with your credit card when the power is out.
What about your brokerage account, your business records?
Bitcoin and the blockchain, like any technology driven software system, are completely fragile in a non-digital world. Bitcoin, the blockchain, and any system remotely like it (including SWIFT) are dependent on a functioning global network, reliable power sources, cell phone towers, satellites and the infrastructure surrounding it all.
I don’t believe the answer is to act like the Neanderthals we evolved from, dig holes in the ground and store grandma’s pearl necklace. The answer lies in a better system.
The second thing that is important is that the power industry itself is due for massive disruption. I discussed this in an article on the electricity market and solar power.
In particular, the cost of solar as just one alternative will very quickly become a viable option for individuals and communities. The panels can be put up by homeowners requiring no centralized service.
This is an example of a decentralization of power (pun intended) moving from the large to the small. The same phenomenon we’ve been experiencing for the last 50 years but one which is gathering momentum and happening with greater speed.
Blockchain – 3) Bitcoins have been stolen in the past and legal action was difficult
All true. I suspect that you’re referring to the failure of Mt. Gox.
Risk can never be 100% eliminated and we’re not about to change human behaviour which will include both the best and worst of humankind. As long as humans crawl the Earth we’ll get bad actors, fraudsters, amazing wonderful people, geniuses and everything in between.
A few things are worth considering and understanding when thinking about fraud and security.
Firstly, by securing Bitcoin or any asset in a private wallet or in one of the many secure storage facilities, you can massively reduce this risk. The ability to do this is incidentally far easier than it currently is for you and I to take our fiat currency out of the bank and store it in a home safe.
Secondly, regulatory oversight is increasing in this space as it matures. Expect this to continue. For example, today Coinbase, a US based company, is many times larger than Mt. Gox ever was, has obtained all necessary regulatory approvals and licensing, including money transfer agent license and are licensed as a bank.
This means that you can hold fiat currency on the platform and exchange it for Bitcoin. The regulatory oversight of the “typical” bank used is much the same except the underlying system affords far greater levels of security and control to the individual (you and I).
As a point of disclosure: Partners at Seraph, who are also owners of this site, are early stage investors in Coinbase and other companies not mentioned here which involve this technology. There. Bias disclosed.
“This kind of divide is evident in my day to day interactions. I can have a meaningful conversation with those who really do know what is happening and how crypto-blockchain computing is going to change the landscape almost overnight. For those that haven’t had this realization, it is a long road to deprogramming their old ways of thinking. They are still in the Matrix.” – Jonathan Baha’i, President at Data Security Node Inc.