The next generation of the internet is upon us. With rapid developments such as e-commerce and other online activities ever growing, the internet of information is becoming an extremely empowering tool. Alongside this, the increasingly popular digital currencies known as cryptocurrencies, which rely heavily on consumer adoption for their value are on the rise. However, the underlying technology of these digital currencies such as Bitcoin is known as Blockchain.
What Is Blockchain?
When individuals use the internet to transfer files or data amongst one another, the original version is never sent across, but instead, a copy. This is meaningless for data transfers such as emails, pdf’s or photos. However, for certain assets that hold specific value for the holder, this is a problem. Consider financial assets such as stocks and bonds, as well as other generic assets such as IP, art, deeds, tradeable permits etc – the list goes on. If copies of these assets were to be made, this is a serious problem. Instead, these assets should directly be transferred from one agent to another.
As a consequence, this requires the intervention of intermediaries. These are the middlemen in society, these include banks, governments, credit card companies and so on – they establish trust in our economy. Commonly, the intermediaries provide the role of authentication, identification, clearing, settling and record keeping. However, due to the internet’s over saturation, cracks are appearing in this long-established framework.
The Framework Behind Blockchain
This entwined network is gathering vast amounts of information on the way individuals operate and how we live our lives, ultimately undermining our privacy. Such detailed information is, of course, extremely valuable, especially to those who can put it to the right use. Consider it an asset class synonymous to big data. Thus, imagine a world without the need of intermediaries but instead simultaneous transactions whereby all kinds of assets can be transferred across a single public domain ledger.
This idyllic scenario was foreseen by Satoshi Nakamoto, a Japanese computer scientist whom created a form of digital cash that used an underlying cryptocurrency called Bitcoin. Ultimately, as hypothesised, this allowed individuals to establish trust and transact with one another without the need of a third party. This is seen to be the spark to the flame that is reigniting the internet – the so called new era of the internet.
This new form of asset, Bitcoin, which is simply a form of cryptocurrency, runs on an underlying technology known as blockchain. The realm of digital assets is simply distributed across a global ledger, rather than stored in a centralised medium. This ledger uses advanced cryptography which is simply the art of programming using codes. Nevertheless, when transactions are fulfilled, this data is posted worldwide across this global ledger whereby “miners” then go to work on how best to solve these specific combinations.
These combinations are created from the last 10 minutes of transactions whereby a ‘block’ is created (assortment of transactional data). These miners compete every 10 minutes to validate and solve these blocks, those successful are then rewarded in Bitcoin. However, importantly each block is then connected to the previous block to create a chain of blocks which is then time-stamped, synonymous to a digital waxed seal.
A crucial aspect of the blockchain system is that if a hacker wished to hack a specific block, since they contain valuable information, the hacker would have to hack all previous blocks contained in the sequence. Moreover, this idea is supported by a TED Talks discussion wherein it was mentioned that this would have to be done not just on one computer but across millions of computers simultaneously using the highest levels of encryption – somewhat an insurmountable task. Blockchain cannot be hacked. And that is blockchain in a nutshell. Other digital currencies using this blockchain technology exist, with Ethereum being another prominent currency. In actual fact, as of July 2017 there are over 900 digital currencies in existence.
Now to understanding the impact these digital currencies can potentially have on not only the financial services industry but the whole world. Currently, when an individual pays for an item using their credit card, a signal is sent across a number of companies that register this change is value. Across the pipeline, each institution may take a cut up until the final settlement occurs. With blockchain, there would be no settlement as the change in value (payment) is the same activity as a change is the ledger (an account of all transactions). Since this transaction has been settled directly, this eradicates the need for financial intermediaries, which is slowly causing upheaval within the industry. Will the servicemen in the industry be able to embrace the technology or will they simply be replaced – only time will tell.
Other alternative applications to this technology exist outside the financial services industry context. Take the music industry for example: it is a well-known fact that musicians tend to be left with scraps by the end of the whole industry supply chain. The leeches include agents, record labels, promoters, retailers and so on. Think about if musicians would simply release their music on to a blockchain eco-system whereby any listeners would automatically reimburse the artist through this idea of simultaneous transactions. This rule applies for any creator of art – the promotion of fair compensation. Another important case exists with remittances. Blue collar workers are forced by institutions such as Western Union to forsake a certain cut of their highly earned wage bill, simply to send money to friends and family.
However, for these workers, this is a huge proportion of their wage bill. Don Tapscott states the level of remittances each year to be $60bn dollars. Think about the savings if these transactions were undertaken on this blockchain ecosystem. Taking all of the above into consideration leaves one clear conclusion – the blockchain revolution is has arrived. Eliminating the use of intermediaries and channelling our uncertainties towards a single level playing field will sequentially eradicate the distrust element – trustless transactions.
Aligning together using a single database, the blockchain ecosystem will radicalise the future ahead, both in terms of transparency and value creation. In the words of Bettina Warburg,
“we can create a decentralised database that has the same efficiency of a monopoly without actually creating that central authority.”
Lastly, the blockchain technology is in its early development stage and there is still a great deal to learn as how best to channel its usefulness.
Two New Blockchain ETFs, So What?
With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.
On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.
What are They?
BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.
However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”
So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.
Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company. That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.
For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.
Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed. The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.
Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
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Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
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