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.