I LOST 30,000$ OF BITCOIN- How many articles do you see of someone losing their bitcoins or of making millions in ICO's? In fact bitcoin has become the number one search on google supplanting the kardashians (if i misspelled it's because i don't want to google them). The TV show Big Bang Theory recently aired an episode where the characters mined bitcoin early days and are now millionaires only to discover they lost their bitcoin. This got me thinking naturally about bubbles and the predictable cycle in which they move.
Turning on one's phone can be seamless as your device makes phone calls, receives email, plays music and surfs the web. This technology provides a powerful tool as we go about our lives without thinking what goes into to this device. In fact the phone, like the internet, is many technologies coming together built on years of work and advances. These technologies go through cycles and the Gartman Hype cycle I believe is an excellent way of looking at the stages of theses advances.
So where are we in this cycle for blockchain and cryptos? Lets start with digital currencies because the innovation of bitcoin is backed by the introduction of blockchain technology. I believe there is a viable argument that the Hype cycle does not fully apply to to Crypto currencies even though it's origin is technology based. Bitcoin's, in particular, adoption will be propelled by the interest for an anti-fiat currency and storage currency that can also be a substitute for gold. And while the hype has been dramatic as realized by surging prices in a short period of time, this is very understandable in today's world where information spreads at the speed of light. This is not to say we are not looking at some volatile times in bitcoin and alts and the chart above does not apply. The question remains what coins survive, how high that bitcoin bubble goes and post correction where does it level off as digital currencies become commonplace for commerce.
Blockchain on the other hand is a pure tech play that will be instrumental across many business as smart contracts become the norm. If we look to apply the Gartman Hype cycle to blockchain across many industries we are in the R&D stage to startup part of the curve. However across finance and with the backing of large banks the cycle has advanced to the second stage of the cycle. Behemoths like IBM have set up a "blockchain solution division" as more companies have started to be proactive in the belief of the inefficiencies that will be eliminated.
Where ever we are in this cycle can certainly be debated, but one thing is certain, It's happening and it's happening fast.
" Valuation is part science and part art" is a quote that is often espoused in many different iterations. Essentially, it’s about finding a relative value or a method used from a related asset. Because there is no perfect tool, it is often a matter of applying several methods to provide clarity. So how does one decide what a bitcoin is worth today and more importantly what it will be worth in the future. It appears that there are two aspects of a crypto currency that appeal to people worldwide along with investors. First, cryptos are a decentralized mechanism that acts similar to the cash economy. The second feature is that many people feel digital currencies provide many of the qualities of gold as a storage currency and would act as a long-term hedge.
One of the valuation methods that has been applied is Metcalfe's law, which was originally used for telecommunications companies and has also been used to value Facebook, Google and Amazon pre-revenue. The perceived value is derived from user growth which we know is exponential. Thomas Lee from FundStrat has developed a model from this theorem that cites the square of number of users multiplied by the average transaction which he believes explains 94% of Bitcoins previous movements.
Another way to look at crypto currencies is to understand its role as a storage currency and as a transaction protocol, free of sovereign control in a decentralized model. Bitcoin has a total of @ 17mm mined tokens from a theoretical total of 21mm, not accounting for forks like bitcoin cash and gold, which arguably has a separate function. There are credible reports that 4mm tokens have been lost forever which would skew the supply/demand dynamics further. Could bitcoin become a proxy to the gold market which has a 7.5 trillion dollar value? If this digital currency accounts for a portion of the gold market, lets just say 10%, the increased market cap for bitcoin could conservatively push its value 7x higher.
Whether bitcoin or a digitial currency ever becomes a mainstream way of commerce certainly is open for discussion. However it's legacy, blockchain, will prove to be the most enduring acheivment of this technology. Blockchain is already being heavily invested in as Wall Street embraces this disruptive technology.
So what is blockchain and why should we care. First and foremost blockchain is a distributed ledger which allows open, transparent and secure way of booking information. In essence you are proving a full audit trail in real time for a transaction or commodity as it changes hands. By creating a token, one is creating a digital bearer bond or a finger print to each transaction on the block.
Banking certainly seems an obvious complement to this technology. Transactions can be booked and cleared in realtime with compliance and risk management built in. The affect of this will allow the freeing up balance sheets and capital. Banking however is not the only application and the scope to which this technology can be applied is scary. Establishing a public key allows one to support the provenance, buying, selling, trading , insuring and tracking of virtualy everything. Think of fine wine, jewels and antiques as they change hands through a transparent trail which creates authenticity. Any commodity, electronic part or consumer product will be followed in real time rendering serial numbers and SKU's as absolete. Perhaps title insurance becomes a document of the past and the mortgage and loan process can be optimized through decentralized sharing and authenticiation in what is know as smart contracts.
I have touched upon just a few of the applications in which blockchain will have an impact. What is interesting and profoundly important is the efficiency and security that blockchain brings by being decentralized. I also fully recognize that the technology can seem daunting and complex. However, like any technology, it is only as good as the function it provides and blockchain is a powerful tool.
