Decentralized crypto currencies are here to stay and will revolutionize the way we live. The naysayers typically bring up topics such as quantum computers (solved with a fork), 51% attack problems (would be self-defeating as value would go to zero after spending on compute power) and government regulation (which was unsuccessful with BitTorrent for the music industry). Instead of exchanging value with middle-men (banks and money exchanges) we’ll be able to exchange value directly, quickly and without the need for expensive fees. While scalability is an issue, this is no different than scaling the internet back when it was difficult to near-impossible to send pictures. With enough developers solutions are found. Now that we’ve made a bunch of aggressive comments we’ll jump into the fun point of going through how to get involved. We have a personal finance book coming out in January of 2018 that will explain how we would invest in the space.
Why Does it Matter? In a sentence, the use of crypto currencies will allow us to communicate instantaneously without the use of middle men. No longer will you need to send $100 to a friend in London and pay a $5-30 transfer fee (this will be a mere penny in the future). The deletion of a middle man is profound as it allows you to trust anyone in the world. Imagine being able to buy and sell products online to people anywhere around the world with 1) minimal transaction fees, 2) knowing both the sender and receiver will not be burned and 3) the transaction being done instantly. That’s essentially the most common value proposition of crypto currencies.
The second part, which we won’t go into in detail allows you to offer the same value as a fill function. Meaning, if certain triggers are hit the “value” or crypto currency is released. If Floyd Mayweather wins a fight and you bet on him, the funds for your bet are then released (counter party risk is deleted as it is an automated escrow release). While a simple escrow release is an “if then” feature, there is nothing preventing a fill function from being performed on 1) cars with gasoline, 2) supply chains that need new product, 3) the medical industry to make sure all the right drugs are on deck… so on and so forth. Instead of an inefficient human making this decision, it will automatically signal the order to be “filled” releasing the funds for the transaction… Before people suggest that this is science fiction we would recommend googling around for examples of this (fill and auto send responses)… *They already exist*. Scale of course is still a major issue.
What is the Implication? Well for one, a lot of the value that Banks had goes away. Crypto currencies are a *dis-intermediation technology*. In our book, Efficiency, we specifically recommended avoiding certain parts of the investment banking food chain (ECM in particular will not be a good place to build a career). Take a step back and imagine all the intermediaries who simply accumulate fees for providing “trust”. Since trust will now be ubiquitous the value in those intermediaries go away. Don’t even think about investing in things such as Money Gram or a Western Union long-term!
Now before this sounds like it is simply “bad” and there will be no jobs… the good news is you’re now scalable! Forget about middle men taking chunks out of your value to society, the money will go directly to you. Any business that saw profit erosion due to transaction fees will now see margin expansion. You as an individual (yes everyone reading this!) now get to be *free*. You’re now free for your overlords which allows you to take full responsibility for all of your value (this includes your money, so if you lose your keys you have no one to blame but yourself). More responsibility, means more rewards.
Sovereign Individuals: The third most important topic is the idea of becoming a sovereign individual. If your money and worth is now tied to the Internet and you’re in charge of your money… the government will now need to compete for your residency. After all, if your worth or money is now seamless and portable around the globe, you’ll be free to live in any country of your choice. We doubt this level of freedom will be seen in our life time but it could certainly happen (need to be optimistic). Hint Hint: if you run an e-commerce site be smart and start accepting crypto. You can also read the book the Sovereign Individual from Amazon for a few bucks.
The Bad Parts: Now that we’ve given out the big highlights there are a *ton* of problems with the technology today. We don’t even know where to begin but we’ll go ahead and start: 1) the transaction fees need to come down to make it more scalable, 2) transactions cannot be reversed at this time making it difficult if a single error is made… your coins can also be stolen with no intermediary to help you, 3) the speed of the transactions need to be improved dramatically, 4) privacy is a long-term issue with no apparent solution, 5) an alarming number of scam companies are using ICOs to raise money which will eventually lead to a collapse and damage the built in trust and 6) there is significant debate amongst the development teams (on each blockchain) in terms of what the best solutions are for all of the problems listed above.
Example of a Scaling Debate: Since the bad parts are broad will give an example. When Bitcoin forked into Bitcoin Cash and Bitcoin… the sides were split on the best way to scale Bitcoin. In short, Bitcoin is going to be scaled off chain through the lightning network (essentially creating a channel offchain to allow for micro transactions) while Bitcoin cash suggested that the block size was the major issue and by increasing the block size, everything can now remain “on chain”. Before the trolls jump in, the key items for Bitcoin Cash are: 1) larger block size, 2) replay attack protection and 3) changing rate of block reward which is why there are more BCH than BTC in circulation today. We’ll keep our predictions for the book, but as you can see scaling Bitcoin (improving transaction costs) is not an easy solution and the debate ended up splitting the Bitcoin community. (for fun… a hard fork is when you have two separate chains, versus soft forks which are software updates on the same chain without a split)
How To Get Involved
As stated we’ll keep most our predictions for the personal finance book, that said we’ll outline several ways to get involved if you’re interested in investing some money into crypto currencies today.
Buy on an Exchange: Most novices begin investing by logging into an exchange and purchasing crypto currencies with cash linked to their checking accounts. Examples of exchanges include Bittrex, Coinbase and Kraken. These coins are then stored on the exchange where they can be kept or sold back to the market at spot prices (+ a typical transaction fee).
Storing Your Coins: The individuals involved in crypto currencies for the long-term do not store their coins on an exchange. Look no further than Mount Gox which caused a collapse in the price of Bitcoin as the exchange was hacked. The *blockchain* was not hacked. The *exchange* was hacked. This would be equivalent to giving the pin for your ATM card to a random person (easy to steal at that point). Instead of leaving this potential risk on the table the two more common storage methods are a hardware wallet or a paper wallet. To cut to the chase if you’d like to use a hardware wallet you’re best off with a trezor or nano Ledger S. If you’re going to store on a paper wallet, be sure to keep the paper in pristine condition and store in a fire & water resistant safe.
Become a Miner: If you’re looking to remain entirely anonymous and never go through exchanges, you can also mine the crypto currencies. There are many different crypto currencies and if you find one that you’re interested in… go ahead and build or purchase a miner. Just remember, the electrical costs in a first world country make a lot of these ideas unprofitable.
Where to Do Research
In just a couple of pages we’ve outlined why people should care, why it will matter and how to store all of your *coins*. Now for fun we’ll give a peek into what we’ll cover when we come out with our investing book. Here are the coins the typical person should understand:
Bitcoin/Bitcoin Cash: To avoid the trolls, we’re putting them both into one paragraph. Understanding the coin(s), the scaling debate and how the software code works is the first step into crypto currencies. Think of it as the gateway drug. Without understanding the value of Bitcoin and understanding why decentralized, open source software code is valuable… the average person will be in a world of hurt.
Ethereum: The second most known crypto currency developed for smart contracts. Ethereum offers a significantly different value proposition, the code is run differently and the network is separate from Bitcoin. This is a Turing Complete virtual machine which allows for “smart contracts” (recall the fill and send application highlighted earlier in this post).
Litecoin: Essentially a similar coin to Bitcoin but with small technological differences.
Monero: Another coin similar to Bitcoin with more privacy. A “vanishing” coin that makes it impossible to track at this point (unclear if this will be the case for decades in the future). It doesn’t take long to understand the value of 100% anonymity given the illegal drug market.
NEO: Essentially an Ethereum competitor that allows for a variety of programs to be run, compared to Ethereum which is run with Solidity. Solidity is a contract-oriented, high-level language whose syntax is similar to that of JavaScript and it is designed to target the Ethereum Virtual Machine.
Hopefully we’ve already stirred the pot a bit and look forward to seeing how many people understand the space at this point. It should be incredibly clear as to why we left Wall Street at this point (disintermediation technology is not going to help banks).
