Month: October 2017

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 25 , 2017

 

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

This week in  IntelDigest, we present the last installment of our 4-issue essay on Cryptocurrencies;  we use the shorthand designation, Cryptos, to refer to these digital currencies.

In earlier issues this month, we covered the underlying technology for most digital currencies, known as  Blockchain. We have outlined the workings of the Blockchain technology … a decentralized “distributed ledger” system … and some of its game-changing potential.  The development of Cryptocurrencies is the first and most obvious use of the technology;  and, Bitcoin is its first “killer app.”

Bitcoin is the “proof of concept” that Blockchain technology works as intended.  The success of Bitcoin has proven that it is possible for independent and fragmented entities (referred to as “miners” or “nodes”) to process/enable the exchange of value between strangers, with no need for an intermediary. And, do so in a transparent, verifiable, and open manner.

In this issue, we discuss the process of speculating in digital currencies, and the safest Cryptos on which to risk your money.  Cryptos now number over 1,000, but 99% are pure speculations.

The most “reputable” are Bitcoin and Ethereum.

Ascension of Bitcoin

The advantage of Bitcoin is that it was the “first adopter” of the Blockchain technology.  It is an amalgam of decades of innovation in applied cryptography, which began with the military in the 1970s and was continued by independent computer programmers in the 1990s.  It is the template for most of the Cryptos which followed.

Bitcoin marked the birth of  Cryptocurrencies in 2009, soon after the bottom dropped out of the global economy.  Is it any wonder that people were seeking an alternative financial system to the one which had left so many broke and dispirited?

Bitcoin is the first of the Cryptocurrencies, and, arguably, the most stable.  It has established a market value, which is volatile;  over the course of this calendar year, Bitcoin has climbed from just under $1,000 per bitcoin to almost $6,000 per bitcoin.  Bitcoin can be purchased in fractions of bitcoins.

Ethereum

While Bitcoin was focused on creating a store of value and a currency, Ethereum takes the Blockchain further.  Sure, Ethereum is another form of currency.  However, the avowed purpose of Ethereum is the creation of “smart contracts” and the construction of decentralized applications on the Blockchain.

Property and contract law are the fundamental building blocks of commercial society.  Smart contracts would enable enforcement in a decentralized manner, which would be faster, easier, and less costly than the traditional legal system.

Once set into a blockchain, smart contracts would become immutable and unstoppable.  Anything “signed” onto the blockchain becomes global and permanent.  Data and programs can be auditable by anyone.

In this way, it would become impossible to renege on a “contract” or a decision once it’s coded and set into motion on the blockchain.  And, anyone can audit the blockchain and prove the existence and terms of a transaction.

One of the co-creators of Ethereum is Vitalik Buterin, a Canadian programmer of Russian extraction.  His vision of smart contracts:

“Ethereum can be used to codify, decentralize, secure and trade just about anything:  voting, domain names, financial exchanges, crowdfunding, company governance, contracts and agreements of most kind, intellectual property, and even smart property thanks to hardware integration.”

So, Ethereum, which trades for just under $300 per coin, would appear to have a high ceiling and a much more utilitarian future than other Cryptos.

 

If you have an interest in speculating in these, or other, Cryptos, please seek out more information before committing your money.  Do NOT forget that Cryptos … at this time … are more speculation than they are investment.  And, there is no simple vehicle, like a mutual fund, which trades digital currencies.

 

The Process

The first step in speculating in Cryptocurrencies is to set up an account with an Exchange.  We will mention a few here. An Exchange may be just a secure platform for buying and selling Cryptos, or it could be a regulated financial institution … similar to banks and stock brokerages … which can set up your account in Dollars, link to your bank account, then purchase Cryptos for your account.

The largest digital currency exchange is Coinbase, which is a secure platform for buying and selling Cryptos.  It is easy to set up, but has the highest fees.  It is also limited to Bitcoin, Ethereum, and Litecoin.

Gemini has lower fees than Coinbase;  it, too, currently handles only the most recognized currencies.  Gemini is regulated as a trust company in New York State.

Two other exchanges are Kraken and Bittrex, which can handle more cryptocurrencies, but are more difficult to use. Example: you may be able to find a Crypto which you prefer on Bittrex.  But, you can only buy on Bittrex using Cryptocurrencies.  So, you would have to have an account on Gemini or Coinbase, which can convert your Dollars into Bitcoin or Ethereum.  Then, transfer your bitcoin or ether to Bittrex in order to buy another Crypto.

 

Your Wallet

Having purchased an amount of Crypto, you then have to store your “coins” in a Wallet.  You can keep your currencies stored on the Exchange, which is easy but not very secure. The more secure method … one where you keep control over your asset … is to transfer your Wallet to one or more encrypted hard drives (or thumb drives) which you can secure.

Keys

Think of your Wallet as your bank account.  Now you need the Keys to transfer assets into and out of your wallet.  Each wallet has a unique address associated with it.  Here’s what a public wallet address looks like:

1PUA99Fyco1hQRpwwmstfDP2xmvZMyAiK8

This is a public address;  you don’t have to keep it secret. Anyone can send coins to that address if you provide it to them.

To open the wallet, however, you need a private key, or password.  A private key is, preferably, a very long password which determines your ownership of the cryptocurrencies in the wallet.

You would need to keep your private key (password) secure. And, you should back up your wallet onto two other encrypted drives.

Alternative Crypto Investment Vehicles

At this time, the only investment funds which invest in Cryptocurrencies have high fees and are limited to high-income “accredited” investors:  Metastable, Crypto20, The Token Fund, and HOLD 10 Private Index Fund from Bitwise.

We will update you on developments in this industry as Cryptos gain greater credibility and acceptance in the marketplace and among regulators.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 18 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

This week and next week in  IntelDigest, we move on to Part Two of our essay on  Cryptocurrencies;  we use the shorthand designation, Cryptos, to refer to these digital currencies.

In earlier issues this month, we covered the underlying technology for most digital currencies, known as Blockchain. We have outlined the workings of the Blockchain technology … a decentralized “distributed ledger” system … and some of its game-changing potential.  The development of Cryptocurrencies is the first and most obvious use of the technology;  and, Bitcoin is its first “killer app.”

Ascension of Bitcoin

One view of all  Cryptocurrencies  is that they are “Peer-to-Peer Money,” meaning that they represent value which can be transferred directly between Buyer and Seller without intervention of a government entity.  As these currencies are not created or controlled by any government, they cannot be manipulated by central banks in any country.

In the past, a transaction required a bank or other institution as an intermediary.  The intermediary would verify the transaction, which would add a level of trust and credibility to the transaction.  But, Cryptos have the potential to disrupt and revolutionize the old system, which removes the middleman entirely.  Instead, digital transactions are made peer-to-peer.

From one viewpoint, Cryptos act to democratize finance.  No central authority, such as a government or central bank, issues Bitcoin or any other Cryptos.  One can transfer Bitcoins across borders in an instant.  Only a limited number of Bitcoins can ever be issued.  The price of Bitcoin is set by the marketplace.

Bitcoin upends conventional forms of money, while disrupting the authority of governments and financial institutions over all things monetary.

Is Bitcoin Money?

The definition of money comes from Aristotle in the 4th Century B.C., who stated that the five characteristics of good money are:  Durability, Divisibility, Convenience, Consistency, and a Store of Value in and of itself.  On that basis, he determined that Gold and Silver were best suited for use as “money.”

How does Bitcoin fare in such an analysis?

Cryptos, including Bitcoin, are durable, as long as computers are still in use and operational.  They are not as solid as physical metals, but they pass the durability test, barring a complete collapse of civilization.

Cryptos are definitely and almost infinitely divisible, with greater accuracy than physical metals.

Cryptos have the potential to be very convenient, as one can use a variety of devises, from the smallest smartphone to the largest computer, to process transactions.  At this time, only a small percentage of the world population uses Cryptos.  But, that changes every day.  Convenience will only increase with every user … individual and business … which adopts and accepts the use of Cryptos in commerce and investing.

Cryptos also pass the consistency test.  For example, every Bitcoin is exactly like every other.

Is Bitcoin a store of value in and of itself?  It certainly has established value … volatile as it is has been to date … so that it is the equal of many fiat currencies around the world. Bitcoin is designed to have a limited, predetermined supply; the number of Bitcoins is restricted by computer code.  In this way, Bitcoin is more like Gold, and the exact opposite of fiat currencies (such as the U.S. Dollar), which can be devalued by central banks as easily as printing more bills.

Bitcoin, as the first and foremost of the Cryptos, has proven to be easily transferable, and gaining in usability on a daily basis as more merchants accept Bitcoin for goods and services. Bitcoin can be easily traded across the globe and outside any banking system.

So, this is the use value of Bitcoin.  It allows one to transfer something that is accepted as money outside of the banking system, and outside of fiat money currencies.

Global Acceptance

At this time, only about 25 million out of the 7 billion people on the planet own Cryptos;  however, the utility of Cryptos should make them very popular, both in the developed world (which embraces technology) and in the Third World (where smartphones are more and more ubiquitous).

In many Third World countries, the fiat currencies issued by governments are unreliable within the country, and worthless outside.  That is why billions of people have heretofore preferred U.S. Dollars.

Considering the utility, easy transferability, and privacy which owners of Cryptos enjoy, Bitcoin has the potential to be very big in the Third World, and gain very fast acceptance around the world.  Other Cryptos will likely follow close on its heels.

Valuation

With increased acceptance, the likelihood grows for higher Bitcoin valuations.  At this time, Cryptos are like the Wild West, and should be considered more of a speculation than an investment.  However, many people have made extremely large gains by speculating in Bitcoin and its newer cousins.

Cryptos are the first application of Blockchain technology, and will have staying power because they compare well to government fiat currencies.  The existence of Cryptos and their advantages calls attention to problems in world monetary systems.  The likely result will be Cryptos and Gold rising, while many fiat currencies, including the U.S. Dollar, fall.

Those who have stepped forward to speculate on Cryptos already equate Cryptos to more established currencies.  They weigh the value of  Bitcoin vs Dollar vs Gold.  Which is likely to move higher in the coming years?  Which will suffer a greater impact when inflation returns?  If Bitcoin (and Gold) has a limited supply, but the government can print trillions of Dollars whenever it wants to, which is the more valuable asset?

As the Crypto industry becomes more stable and mature, and gains wider credibility and acceptance, Cryptos will become ripe for investment.

Next Week in IntelDigest

We will discuss the specifics of speculating in digital currencies:  what is a Crypto Exchange account, how and where to open accounts to effect transfers, how to establish a “wallet” to keep control of your currencies.  We will discuss the safest bets among the 1,000+ digital currencies now in the marketplace.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 11 , 2017

 

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

This week in  IntelDigest, we continue Part One of our essay on Cryptocurrencies;  we use the shorthand designation, Cryptos, to refer to these digital currencies.  As we reported last week, the underlying technology for most digital currencies is known as  Blockchain.

Although purchasing any digital currencies, such as Bitcoin, should be considered very speculative at this time, Blockchain technology has great and widespread promise for the future, so we consider this technology as suitable for investment.

We continue the discourse on Blockchain in this issue;  next week, we will go on to Part Two to discuss digital currencies.

What is Blockchain?

Simply put,  Blockchain is a form of “distributed ledger” system … a decentralized database which records each transaction.  Records of transactions and payment details are spread across a massive public database.  The process is transparent, and transactions are verifiable.  There is no centralized database;  rather, the records appear on thousands (or millions) of databases.  As a result, no one can hack or change the records because they are “backed up” in multiple locations.

 

Ascension of Blockchain Technology

When Blockchain burst onto the scene just a few years ago, the immediate question was:  Will this new technology upend traditional financial institutions, such as multinational banks, credit card and merchant payment networks, and money-transfer companies?  The answer is:  Yes, it has that potential.  As a result, many of these “legacy” institutions are exploring ways to leverage the Blockchain.

They are attracted by the potential for lower processing costs and stronger security for a range of transactions, from equities trading and securities clearing/settlement procedures to cross-border payments.

 

High-Profile Adopters

The biggest names in finance are not ready to overtly commit to the Blockchain and Cryptocurrencies, but their actions speak volumes.  Several of the largest institutions … including Bank of America and Goldman Sachs … have filed patent applications in the space.

Even members of the “Old Guard” understand that companies must innovate in the 21st Century if they want to succeed.

The number of merchants and credit card companies which enable Bitcoin transactions grows on a weekly basis … this now includes American Express!

Central banks around the world are making initial infrastructure investments to support cryptocurrency payments.  Considering that central banks are most threatened by the emergence of decentralized cryptocurrencies, it is telling that even they are willing to adopt … and profit from … a technology with such a potential for disruption.

 

Uses of Blockchain

The developer of Blockchain, Nicolas Cary, espouses his belief that this technology can improve society through global, transparent digital payments and IoT applications (the Internet of Things).  Cary is the co-founder of Blockchain.info.

Blockchain technology has the potential to alter the nature of every transaction in the world, by eliminating the middleman in many business relationships.  Cary describes Blockchain as a “… live spreadsheet available for all the world to see.”  This “distributed ledger” includes all information on a transaction, available equally to all parties in the transaction, and fully encrypted.

Blockchain offers transparency, security, and a permanent, unalterable record.  This allows the parties to transactions to deal directly with each other, without middlemen, in an environment of trust.

Consider the process of buying a house.  If real estate transactions were moved to a Blockchain, Buyer and Seller could complete the transaction without brokers or lawyers or a title company.  Using Blockchain would save a large portion of transaction costs, which currently amount to 8-11% of a typical transaction.

Viability of Blockchain

Cary estimates that the size of the entire Blockchain universe today is roughly $160 Billion, equivalent to the market capitalization of Cisco Systems (CSCO).  And, Blockchain is still in its infancy.

One can compare Blockchain and Cryptocurrencies to the Internet in its infancy.  The World Wide Web was the Coolest New Thing in the 1990s, and has grown into an industry worth many Trillions of Dollars.  A few companies are, individually, worth more than One-half-of-$Trillion each … Amazon, Apple, Facebook, Google (Alphabet), Microsoft … and are in a race to see which can reach One Trillion Dollars first.

There is currently over $150 Trillion in money in the world.  If Cryptocurrencies can grab even a small percentage of that market in the next few years, then Cryptos will be a multi-Trillion Dollar market by 2020.

 

Challenges

The challenges facing Blockchain and Cryptos begin with:

* Development of the Blockchain application

* Adoption by the legacy financial institutions

* Government intervention

Recently, the Chinese government closed a Bitcoin trading platform;  the new Cyber Unit of the U.S. Security and Exchange Commission (SEC) charged two Bitcoin-based initial coin offerings (ICOs) with fraud;  and, the U.S. Office of the Comptroller of the Currency recommended regulation of Bitcoin companies, exchanges and trading platforms.

Meanwhile, other jurisdictions … such as Hong Kong, Singapore, Dubai and Luxembourg … have embraced Cryptos as the wave of the future.

The Best Case Scenario … taking the long view … is that decentralized Cryptocurrencies offer a viable alternative and competitor to fiat currencies (established by government decree, such as the Dollar, Euro, et al) and commodity currencies (such as Gold).  And, governments adopt Blockchain technology, for efficiency and keeping up with innovation;  as a result, public money … and public expenditures … become more transparent and easily auditable by any citizen.

 

Next Week in IntelDigest

Blockchain is the wave of the future.  We will discuss the economic opportunities in Blockchain next week, as well as the prospects and dangers of speculation in Cryptocurrencies, which now number almost 1,000 and have attracted investments of up to $200 Billion!

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

OCTOBER 4 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We turn to the hot topic of  Cryptocurrencies  in the next few issues of  IntelDigest.  We will divide the subject into two parts, distinguishing the “investable” segment of this new concept from the “speculative.”

Everyone has heard of Bitcoin by now, but many do not yet understand how Bitcoin works.  Hopefully, we can clear up the matter somewhat.  Today, we will discuss the underlying technology, known as  Blockchain.  This is a technology which has great and widespread promise for the future, which is why we refer to it as “investable.”

Many believe that the  Blockchain  technology could be the most important technological development since the invention of the Internet.  Blockchain  has the potential to change the manner of transmitting documents, the method of selling and recording real estate, registering the transfer of stocks and bonds, and tracking business inventory.  In other words,  Blockchain  could be a “Game Changer” in many ways.

In the coming weeks, we’ll write about the various digital currencies, including Bitcoin, which are created through Blockchain  technology;   we will use the shorthand name, Cryptos, to refer to the currencies.  This is truly the “Wild, Wild West” … investment in  Cryptos  is extremely speculative.  However, those who have the stomach for taking a wild ride can make a good deal of money through speculation.

What is Blockchain?

Simply put,  Blockchain  is a form of “distributed ledger” system … a decentralized database which records each transaction.  Records of transactions and payment details are spread across a massive public database.  The process is transparent, and transactions are verifiable.  There is no centralized database;  rather, the records appear on thousands (or millions) of databases.  As a result, no one can hack or change the records because they are “backed up” in multiple locations.

The Blockchain and Cryptocurrencies

A cryptocurrency (Crypto) is a digital currency which operates outside the control of any government or central bank.  This means that a Crypto cannot be manipulated by central banks, such as our Federal Reserve or other central banks around the world.

Historically (at least, in modern history, since the development of banking systems), all financial transactions took place through an intermediary, such as a bank.  The bank would verify the transaction, adding a certain level of trust.

Cryptocurrencies would completely revolutionize the traditional systems, cutting out the middleman entirely. Digital transactions are made peer to peer, without the middleman.

Blockchain  is the backbone of all cryptocurrency transactions.  Within the Blockchain, transaction records and payment details are spread across a massive public database open to all Crypto “Miners” in the network.  “Miners” are people and organizations which operate powerful supercomputers, each competing to confirm and authenticate each transaction in the network.

A Miner is paid if its computer program validates the transaction first;  in these early days of Cryptos, Miners have been paid primarily in Bitcoins.  Verified transactions are added to the Blockchain database.  Then, the next round of money transfers can be authenticated by Miners.  This process is ongoing.

The process is transparent and immediately verifiable.  The computer programs of the Miners confirm transactions and reset every 10 minutes.  Each 10-minute group is called a block.  Each proceeding block is also verified by the mining software and then linked to the last block … creating a chain.

As there is no centralized location where transactions occur, the process has the advantage of airtight security.  Everyone involved in creating a unit of Crypto holds a copy of the Blockchain.  Essentially, the Blockchain has copies in thousands of locations.  A hacker could not change a record when it is reflected and “backed up” on multiple servers.

Ascension of Blockchain Technology

When  Blockchain  burst onto the scene just a few years ago, the immediate question was:  Will this new technology upend traditional financial institutions, such as multinational banks, credit card and merchant payment networks, and money-transfer companies?  The answer is:  Yes, it has that potential.  As a result, many of these “legacy” institutions are exploring ways to leverage the  Blockchain.

They are attracted by the potential for lower processing costs and stronger security for a range of transactions, from equities trading and securities clearing/settlement procedures to cross-border payments.

According to a recent Morgan Stanley Research report, these initial efforts by the legacy institutions to test the viability of the  Blockchain  as a settlement and payment alternative constitute the first critical step toward adopting the technology, which will be followed by broader socialization within the industry, and regulatory scrutiny.

The Structure of the Blockchain

The value to financial institutions of the  Blockchain technology is in its structure.  The core benefit is the decentralized ledger technology, which logs transactions outside of existing centralized technological infrastructure. By creating a shared permanent record of every transaction between multiple parties,  Blockchain  creates an ever-expanding transaction record that is irrefutable in its accuracy and reliability.

Blockchain  also has the potential to improve efficiency.  By using the technology to streamline multiparty reconciliations during settlement and clearing, financial institutions could see lower costs and fewer failed transactions.

Drawn by these potential cost and capital efficiencies, interest among financial organizations has risen sharply.

According to Betsy Graseck, the Global Head of Banks and Diversified Finance Research at Morgan Stanley, “… several consortiums led by incumbents with high market share have emerged to test proof-of-concept Blockchain technologies, particularly in international payments and securities clearing and settlement.”

Significant Hurdles Remain

Even if these tests are successful, some obstacles remain, including the cost of development and deployment.  The key question, according to Ms. Graseck at Morgan Stanley, is:  “Will the benefits exceed the costs and risks of implementation, particularly relative to simpler alternatives, such as updating legacy infrastructure?”

Other concerns involve the sheer volume of the computer records, and interoperability between  Blockchain  protocols and legacy systems.  The need for computing power, bandwidth, and storage will grow exponentially.  And, programming interfaces will have to be developed or adapted to ensure that all of the various Blockchains can talk to each other

Next Week, in IntelDigest

Despite the obstacles, the  Blockchain  is the wave of the future.  We will continue with the discussion of the Blockchain  next week, then move on to Cryptocurrencies, which now number almost 1,000 and have attracted investments of up to $200 Billion!