The topic of Bitcoin is now starting to pop up in conversations with clients as well as my neighbors and family members. Bitcoin is the “topic de jour” (Just watch 5 minutes of business news and you will know what I mean.) The discussion over Bitcoin is only going to intensify and deepen as we head into 2018 and beyond. It is, I believe, at the center of one of the most revolutionary technological advances since the internet itself came into existence.
Before we discuss the technology, let me offer an overview of Bitcoin. In its simplest form, Bitcoin is a digital currency. It is a way to transfer payment electronically. But it is also used as a store of wealth. It is affected by the same supply/demand forces as every other currency and asset in the world which has led to the dramatic price swings reported in the press. It is easy to purchase, sell and transfer. Think of Bitcoin as “digital gold.”
Bitcoin exists because of a complex and fascinating technology made possible by the internet called “Block Chain”. What makes Block Chain difficult to understand is that no one person, country or institution oversees it. Confused? You are not alone.
Block Chain, to continue with the gold analogy, is like the earth. Out of the Block Chain comes the Bitcoin. Instead of using picks and shovels to “mine” Bitcoin computers are used. The amount of computing power necessary to “mine” Bitcoin is immense. In fact, the amount of energy currently devoted to running the computers that are mining Bitcoin is the same as what whole countries use to power their electrical grid. Like gold, there is only a limited supply of Bitcoin available to “mine.” The scarcity of Bitcoin is one of the factors contributing to the mania surrounding owing it.
Bitcoin is ethereal by its very nature. It is not something you can touch or control. It is outside the direct control of governments and institutions and it can be exchanged across borders and held in a digitally encrypted state that makes it uniquely safer than holding gold.
To better appreciate how Bitcoin is more attractive to many people around the world consider this scenario. If you are a person living in a politically unstable and dangerous part of the world, putting your wealth in gold has its advantages. A major disadvantage is its weight and the difficulties faced when storing and protecting it. Enter Bitcoin. Bitcoin is encrypted, electronic and can be transferred across borders without any difficulty at all. It can be converted into any fiat currency of any country or simply held in Bitcoin.
To understand why I make such a grand statement about the future of Bitcoin, one must contemplate the power of the underlying technology that permits it to exist. The Block Chain technology that allows Bitcoin to exist will also lead to many creative uses. Anything that benefits from a decentralization will benefit from Block Chain. In other words, anything that benefits from not being “stored” in a database where it can be “hacked” will benefit.
Bitcoin cannot be “hacked” in the same way your credit card number might be hacked. In that case, your credit card info is held in a database which thieves can break into. The Block Chain prevents Bitcoin from being hacked in that way.So, anything that benefits from this kind of decentralized and encrypted environment can use the Block Chain to do so. In the future, expect legal documents, currencies, etc. to have Block Chain technology incorporated into their use.
We frequently reference our view that the market alternates between 17-year cycles of growth and stagnation. We are in the very early stages of the current growth cycle which began one year ago. In each of the preceding growth cycles an engine of growth existed. For instance, in the growth cycle that spanned the period 1880-1897 was propelled by the transcontinental railroad, the 1914-1930 cycle was propelled by the automobile, the 1948-1964 cycle was propelled by the interstate and the 1982-1999 cycle was propelled by the internet.
In every cycle, the engine for growth was a “new” technology that brought people together and allowed for the expansion of commerce. We have been scratching our heads wondering what the global-based engine of growth would be for this cycle. Might it be health care-related or transportation-related? Maybe. My sense is that Block Chain technology might just be the engine we have been looking for. It connects everyone around the world and will clearly lead to business expanding because of it. So, we will be paying very close attention to the adoption of Block Chain technology and the investment opportunities that come from it.
As for investing in Bitcoin? While we fully anticipate making investments into companies that utilize Block Chain technology, we will never make it a holding within the accounts we manage for clients. So, tread lightly if you choose to buy it on your own. Expect dramatic swings in price and breath-taking plummets in value.
Kessler Investment Group, LLC