Casting a view on Crypto.
Updated: Jun 27, 2021
I've been back and forth about wanting to open up the can of worms that is cryptocurrency here on the Bonker Beat. But as a life-long fisherman, I know once you commit and open up a can of worms, the best thing you can do at that point is throw em' on a hook, send out a couple casts, and hope you get a bite. Allow this blog post to serve as a wide net for broad information as it relates to cryptocurrencies. I think it is important that you at least take a nibble into understanding the potential relevance this technology will have in our lifetime. I'll do my best to keep it brief, and high level, and not get stuck in the weeds of the details. Alright enough of the fishing references, let's get back to the Beat. (Crypto + Fishing references? You never know what you're gonna get on the Bonker Beat)
Now for fairness and transparency before we get started, I do not consider myself to be a "cryptocurrency expert" by any means, and I only really first started studying the potential of cryptocurrency as an asset class around 8 months ago. It is also worth noting before I attempt to explain to you what cryptocurrency is, that I myself own a number of different cryptocurrencies including Bitcoin, Ethereum, Litecoin, and Cardano, among others. Remember I am not a financial advisor, and the intent of this blog post will be to educate and inform you on the potential opportunity that cryptocurrencies can offer.
What is Cryptocurrency?
Cryptocurrency is a digital form of currency that is maintained and validated by a decentralized system, rather than a centralized authority or entity. To break that down more simply, crypto is NOT backed by a central authority, like a government-body, such as the USD is. When you buy crypto currency, the value and operating function of the currency is a reflection of the entire community in its "eco-system" if you will. The reason crypto aims to decentralize is so that the currency can operate completely independently of one central power manipulating the value and circulation of the currency, which many argue government-backed currencies do. (Although, we are definitely seeing some market manipulation by Mt. Elon Musk- I digress, he is another blog post all together.)
Current Value of Cryptocurrency Market:
The total value of the cryptocurrency market currently fluctuates around $2 trillion. Roughly 1/2 of the crypto market comes from Bitcoin, the largest and most recognized crypto. Currently, Bitcoin acts as the "name brand" digital token. Currently Bitcoin trades at around $50,000 USD per token.
So what makes someone willing to pay 50 G's for a digital currency that they can't physically see or hold? This is a good question, and one that took me a very long time to wrap my mind around. I believe the two most important elements to Bitcoin that make it valuable are:
1.) It acts as a digital store of value
2.) It has the element of scarcity
The case for a "Store of Value":
An important characteristic of cryptocurrency as an investment is that it has little correlation in performance to the US stock market. Since investors are trained to diversify their assets in order to limit the amount of risk to their total portfolio, they often look to add a small % of assets that act independent of the US stock market. Historically, one way investors have been able to achieve this diversification has been buying materials such as gold or silver, among other "real" assets like real estate. As cryptocurrency becomes more adopted and recognized as an asset, investors have become more comfortable allocating some of their total portfolio to it, similarly to how they view materials like gold and silver. Well respected Financial Advisory firms across Wall Street such as Charles Schwab, JP Morgan, and others, have come out publicly over the last year and begun to allow their clients to invest in crypto. The recognition of these professional investors and firms have allowed for the crypto market to gain much-needed validation.
So remember, Bitcoin currently has a total current value of roughly $1 trillion. If we start to see investors view Bitcoin as a "digital gold" per say, how does that valuation look compared to gold and other precious metals?
Currently, Gold has a market cap of roughly $11 trillion. This means that Bitcoin is currently valued at less than 1/10 of gold. If Bitcoin were to even reach HALF of the value of gold, it would reach a value of roughly $250,000 per coin. I believe this to be the most important bull case for Bitcoin, and why investors are so excited about this asset.
However, there is still large concern over the current valuation, due to the energy usage to create and "mine" Bitcoin, as well as the fact that it has had a meteoric rise in valuation over the last year. (+385% in the last year) Check out the chart below showing the price of Bitcoin in that time:
The Element of Scarcity:
Without getting too deep into the weeds of the origins of Bitcoin and the history of it, I will provide you with the necessary information to understand why Bitcoin has an element of scarcity.
Bitcoin was first founded in January of 2009, by an anonymous creator by the name of Satoshi Nakamoto. It was at the inception of Bitcoin that all coins were minted. Meaning there is no more Bitcoin going to be created now, or at any point in the future. The total supply of Bitcoin is 21 Million coins- 18.6M of which have already been "discovered" or "mined" by crypto miners. (Similarly again to gold, there is only a finite amount of Bitcoin in existence. There are "miners" like that of gold miners, that use complex computer coding language in order to "unlock" additional bitcoin found in the digital infrastructure.
The final and important note I will also add on the element of scarcity with Bitcoin, is that as Bitcoin is mined over time, the more difficult it is to acquire in quantity. This correlation is often referred to as "Bitcoin Halving". The rate that Bitcoin is mined cuts in half about every four years, as displayed in the graphic below. If you would like to understand this concept in more detail, check out this link on Investopedia for further explanation.
Alright if you're still with me through the sub-par fishing references, the Bitcoin explanations, market cap evaluations, history lessons, and mining dynamics, congratulations. I am glad you are here. Because I am honestly more excited about the potential of other cryptocurrencies such as Ethereum than Bitcoin. (Sorry to all my Bitcoin libertarians out there that may be upset with this take.)
Before I can dive into Ethereum, I must first explain blockchain technology. Blockchain technology enables and allows for all cryptocurrencies to exist. Coinbase, a popular crypto-exchange, describes blockchain technology as a "list of transactions that anyone can view and verify". Imagine blockchain technology as an open ledger or book, that provides complete accuracy and transparency regarding the information and nature of any transaction. I will provide some really helpful videos and articles that do a great job of describing this tech way better than I can below- But what is important to understand is that this technology aims to completely decentralize the nature of all transactions. It hopes to completely remove the middle man. A quote from the video below that I find to be helpful- "Block Chain is to Crypto as the Internet is to Email". Without blockchain technology, we would not be able to have cryptocurrency.
Ethereum & Smart Contracts:
The second largest cryptocurrency in circulation is known as Ethereum (ETH). ETH currently trades at around $3,500 a coin, and has a total market cap of $400 billion. I believe that the power of Ethereum tech could be some of the most transformational we have seen since the advent of the internet.
One of the reasons there is so much buzz around ETH is the application it can have for supply chain processes and business operations. ETH utilizes "smart contracts" which are a list of commands that can be written into the coding in order for a transaction to occur. The technology can assess the validity of a transaction, and immediately send currency once the exact contract requirements have been met. If you have some time, this video does an exceptional job of explaining Ethereum and smart contracts:
But, if you would rather your friendly neighborhood blogger Gordy over here explain, I'll give it a go.
Let's take an example of a way that blockchain technology can enhance the way we currently do business using Ethereum.
Sticking with the fishing theme from the start of the blog, lets say I decide to hang it up here at the Bonker Beat, retire from the blogging game, and open up a Fishing Bait and Tackle Shop somewhere on the coast. I know, I know, it would be an absolute bombshell news story, and I'm sure it would take a week or two for your Twitter timelines to stop covering the event. But The Bonker Beat LLC is now in the business of selling fishing equipment to fisherman out on the coast line, and I need to buy live bait from a wholesaler to stock my store.
Hypothetically, if both the seller of the live bait and my store decided to do our transaction on the Ethereum network, we could write out a smart contract that would automatically transfer ETH tokens from my account to the wholesalers, as soon as the bait was delivered and sent to my store. The network will have a list of specific "contracts" that must be met in order for my funds to be released to the person I am buying from. Once all of the contracts have been met, the platform will automatically and immediately send the money to the seller from my account.
What I find to be absolutely electric about this technology is that it enables for complete accuracy in transactions. It is essentially as efficient as humanly possible. In my smart contract, I can write a set of orders that must be completed before my money is sent to the person I am buying from. These orders can literally be,
Seller provides 100 cases of live worm bait
Seller has sealed and confirmed quantity and quality of inventory
100 Cases of live worm bait has left sellers warehouse
100 Cases of live worm bait has arrived at Bonker Beat tackle shop
Using geographic-tracking technology, the smart contract could hypothetically link the location of the bait on its way to my shop, and as soon as the geo-tracking senses it has arrived, it would trigger the smart contract to be agreed to, and the money would be automatically sent directly to the seller.
This is a very small and silly example, but think about the power of this technology in the application of some of the ways we currently do business across the globe. Think of how many transactions occur every day all over the world, in which a product does not arrive on time, but was paid for already. Or how many times a company buys materials for a product it sells, however the materials are not the correct size or composition. Using smart contracts and Ethereum technology, there can be a self-governing, automated process that allows for complete accuracy and transparency. This type of operational enhancement can completely alter the way companies conduct business.
The adoption of this technology would also dramatically increase the value of the Ether token, which powers the Ethereum network. It is important to understand, that if a business or person wants to adapt a specific smart contract, it will need to utilize the ETH platform to create the contract requested. As more people use the Ethereum network for their specific needs, the more ETH tokens must be utilized, driving up the demand and lowering the supply of the digital token. This would then cause the price of Ethereum to rise, which has been the case over the last year, as ETH as rallied over 1,600%. Ethereum poses a similar concern to Bitcoin in that this amount of price action in such a short amount of time can leave the currency susceptible to a large crash in its price. It is important to recognize that since so much of this technology is still in a speculative phase, the nature of the investing patterns are extremely volatile, which causes massive upswings and downswings in price. Take a look at the price of ETH over the last year:
My view on Crypto:
The crypto market is one that requires much more research and understanding than just the reading of this blog to comprehend. However as complex and volatile as it may be, I believe that it is an asset class that is here to stay; and it is important for investors to begin to familiarize themselves with its potential. When new technology is presented, it is often met with a high degree of push-back and friction. Disruption very rarely is embraced across the board with open arms. Believe it or not, when the internet wa