E Blockchain Primer

photo of outer space

image source

Most people have added at least two new words to their vocabulary in the last decade – Bitcoin and blockchain, even if their understanding of these terms is far from complete. Perhaps they have been also exposed to the terms “distributed ledger technology” and “cryptocurrency” - with a comparable lack of understanding. Yet all these terms will command increasing attention as investing in future technology will require understanding of these terms, and familiarity with the diversity of these emergent technologies.

These terms represent the language of new investment opportunities, similarly to the formerly new investment terms of more than a decade ago, such as integrated circuits, internet, email, on-line account, Google, and Amazon. This new technology is developing now, and there already are some investment opportunities at this time, but multiple more opportunities will develop over the next decade – just as they did when computing and internet continued to develop over time.

A clunky brick-sized telephone of the 1980s eventually gave rise to a “smartphone” and the attendant gargantuan investment returns on Apple, and other related technology stocks. Similarly, yet unknown and undeveloped opportunities will profit those who understand the blockchain technology and its evolution and use. This article is to provide a general understanding of various emerging technologies which may introduce useful services to consumers that can evolve into attractive investment products.

Bitcoin

It is Satoshi Nakamoto who is credited with developing and releasing the cryptocurrency Bitcoin in 2009. It is not known who this person is precisely, whether it is a pseudonym, or how many persons wrote the computer code which included the concept of a blockchain as a means for replacing the centralized accounting ledger within a bank with multiple decentralized computer ledgers distributed across the internet as computer data. This data is stored in publicly accessible computer nodes and verifiable by consensus among these nodes. As this data was limited in size and sealed off, it was identified as a block and as the sequence of additional blocks were added, this became the blockchain. The release of Bitcoin, which when accepted as payment by its community of users, functions as a means of exchange – currency or money.

These coins initially had little value – initially, under a penny. But by 2015 the price of Bitcoin had already risen to over $200 per coin. As more people studied the attributes of Bitcoin and became adherents, the price of Bitcoin kept rising. An attractive feature of Bitcoin was that by programmed limitation, there could never exist more than 21 million coins. When compared to the persistent issue of more fiat currency which loses purchasing value persistently, Bitcoin became increasingly seen over time as a store of value. And, currently, a single coin has grown to a value over $18,000. Thus early believers or adopters of Bitcoin are now millionaires, as the total value of all Bitcoins globally is now about $340 billion.

Early innovations

Alert to such amazing opportunities for riches, various programmers or groups copied the free, open-source computer code, modified and improved it to provide certain tweaks, and multiple new crypto coins came into existence. Very few people of the general public were ready for these electronically transmissible currencies, and neither was government nor the Federal Reserve Bank which is the nation’s issuer or our fiat paper currency. More troublesome to regulators was the fact that one could send or receive such “currency” anonymously and almost instantaneously around the globe. To regulators, it seemed as a perfect cover for illicit trade, whereby the purchase and sale of goods and their payment could escape traditional taxation and accounting records.

While Bitcoin has remained the leading global cryptocurrency, as the first innovator, its computer platform left opportunities to improve the ease, speed, safety, expense of conducting transactions, and ability to handle a very large number of transactions at once (scalability) to newer developers. From an investment perspective we can look at such electronic coin platforms as a service for storing assets. Some such computer platforms are designed specifically for peer to peer transfers, while others are designed for person to merchant transfers, and still others designed for bank or institutional or international transfers. Another cryptocurrency application is the transfer of funds such that the transaction is untraceable – just as it is for cash today.

Even as computer code can travel the globe in fractions of a second, and ignore geographical country-made borders, local identification helps build the community of users so necessary to adoption and success of a program. Accordingly, while there exist cryptocurrency computer platforms that are able to serve the world with their blockchain network programs, yet these have been written and originated in a specific country and its early adopters usually stem from a geographical region. Every economically developed nation has teams of programmers developing or maintaining blockchain-inspired systems. Geopolitics and competition, and lack of trust among nations will not accommodate one blockchain platform to be singularly used by the world’s inhabitants, thus there will be multiple systems on every continent, and many investment opportunities around the globe.

Bitcoin and other early coins experienced abnormal price volatility to the extent that it could not be used as a reliable means of payment, which nullified its other inherent advantages. For example, Bitcoin’s price declined from approximately $20,000 in 2016 to under $4,000 in 2019. To solve this weakness, innovators designed a “stable coin” whose price would not be volatile and usually would remain fixed to the price of the U.S. dollar, or some other currency. Of course one may need to consider that the dollar itself is changing in value beyond desirable bounds with its volatility increasing. One could also observe that the Bitcoin cash price did not decline until a derivatives market was set up – which perhaps gave rise to price manipulation.

1 2 3 4
View single page >> |

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.