In a recent article comparing Bitcoin to Ethereum, I proposed Buterin’s involvement in Ethereum would continue to adversely affect the digital currency.
Sure enough, on Monday, a rumor of Buterin’s death on 4Chan, an often controversial online imageboard, saw $4.0 billion dollars drop off Ethereum’s market cap in a day.
This probably would have been more of a news story if cryptocurrencies hadn’t already been in a serious correction.
By the middle of June 2016, global cryptocurrency had mined itself a $117 billion-dollar market, but the highly publicized system ‘failures’ as the industry implemented its vision, gave investors pause.
This developed into a correction, but when Monday’s meltdown was compounded by Coinbase and GDAX putting a halt to trades, the bottom fell out, and by Tuesday, the market had shed $25.0 billion in value, even Bitcoin felt the bite.
Now that the dust has settled, digital currencies are on the mend, but prices remain below what they were before the fall.
Why didn’t prices just rebound to previous levels?
Most of what we hear about blockchain technology revolves around cryptocurrency, but that’s just one application of the platform.
This distributed database technology allows developers to insert executable code into the block as well as data, making smart contracts possible.
Complex acquisition/sales/service/share agreements that once required monitoring and maintenance by a team of accountants, can now be automated in a trusted environment. The terms are inviolate and whatever ‘money’ is involved in the agreement is escrowed within the blockchain.
Shipping, purchasing, selling, transferring, and/or manufacturing orders would execute without any interference. Tactics like stalling payment, or just disputing the terms of the deal until you win would no longer be possible. Donald Trump would have to find another way to do business.
The funny thing is, not only will smart contracts change the way business transactions are carried out, but as a platform, blockchain technology will revolutionize business itself.
Using the blockchain framework, developers can create things called DAOs or decentralized autonomous organizations which are administrated through a series of smart contracts and led by consensus not management.
To make things real, Ethereum launched The DAO in May 2016. The DAO was basically an investment fund created to operate through collective voting. The organization was owned by everyone who purchased a DAO token and was overseen by a team of Curators who could be elected or removed by DAO token holders.
The DAO took off, and at its peak, had approximately 10,000 investors and a market cap of ~$168.0 million. Not surprising since The DAO’s Curators included a collection of well-connected Ethereum contributors such as inventor Vitalik Buterin.
Unfortunately for Buterin and The DAO investors, The DAO was ‘hacked’ within a matter of weeks. In June 2016, an industrious individual made off with the cryptocurrency equivalent of $50.0 million dollars using an exploit in The DAO’s smart contracts.
The attacker had done nothing illegal and was merely following the letter of the smart contract, but in his reaction, Buterin committed a crime of pride and asked the community to allow the Curators to create a soft fork.
This would effectively rewrite history and return the funds to The DAO as if nothing had happened, but it went against everything The DAO and blockchain technology was based on, so a vocal contingent of Ethereum users rebelled and demanded a hard fork, creating a two distinct blockchains – Ethereum and Ethereum Classic.
The DAO’s fall showed even blockchain can be made vulnerable while proving the human condition can’t be coded out using algorithms.
Now, blockchain technology may be fallible in its application, but banks are far from impervious. Last year, a Nilson Report showed global payment card fraud hit US$21.84 billion in 2015 and that number continues to grow.
We need blockchain, but the tech is embryonic and the only way to iron out the problems is by going “live” with it and fixing any issues that arise.
But here’s the problem for both investors and the industry…
Institutional adoption is slow and the bureaucracy of business, especially when it comes to finance, is entrenched.
Blockchain providers and early adopters are attempting to facilitate change through something called a Minimum Viable Product (“MVP”). MVPs streamline the commercialization process by bringing bleeding-edge products/services to market in their most basic form.
This Minimum Viable Ecosystem (“MVE”) helps accelerate learning as products/services are built out, reducing wasted R&D and creating a better product/service from the ground up.
Nasdaq, following the MVE model, announced earlier this month at Coindesk’s Consensus 2017 that it had launched a blockchain solution for the pre-IPO investment community on its LINQ platform.
However, we may not see the big boards switch over for at least a decade because of the current state of transaction validation.
It can take about ten minutes to validate a transaction in a blockchain, and as algorithms used to build the blocks become more difficult and the blocks themselves become bigger, that time can increase. There’s no real day-trading in VC/PE so transactions don’t have to be verified at the speed of light, but trades carried out on public markets like the TSE, do.
Speeding this process up for mass consumption will require a significant redesign in hardware as well as a remodelling of blockchain verification methodology. Proposals have already been put forward to address this, but they remain proposals.
It isn’t just the blockchain platform that needs to evolve, we need to evolve right along with it. Despite how proponents feel, this is going to take time and may even be a generational thing as it requires almost a whole new way of thinking to implement and operate.
Besides technical, operational and logistical challenges, there are many ethical questions to be answered when it comes to blockchain and cryptocurrency that we’ve only begun to discuss.
For instance, Vitalek Buterin and Ethereum.
Cryptocurrency is based solely on supply and demand. Wrapping up a currency under the celebrity of its creator builds an unhealthy attachment to what should be an independent, democratically controlled currency. This point is boldly illustrated by the 4Chan rumors of Buterin’s death.
For as long as Vitalek lives, he will be inextricably linked to Ethereum and its value will be materially impacted by his health and safety. Is this a volatility we should accept?
Also, what happens when a blockchain becomes defunct? Are there any protections for those using it?
How do you deal with currency manipulation when that currency also acts as an asset?
However, as I sit here and discuss ethics and a larger picture, cryptocurrencies continue to be mined and their value continues to climb. So how do you get in on it?
The days of economically and profitably running a private bitcoin mining rig are pretty well gone, unless you’re secretly tapping into street current and getting your power for free.
Companies like HIVE Blockchain Technologies (LTA.H:V), are stepping up to do the mining for you.
HIVE came into being this month and is backed by the Fiore Group, led by mining investment mogul, Frank Giustra, Gord Keep and Brian Paes-Braga.
Investors in the company can expect exposure to an operating cryptocurrency mining business and the resulting cash flow due to Hive’s recent announcement that it had formed a strategic partnership with Genesis Mining, a leading Icelandic cryptocurrency miner with over 700,000 customers.
Genesis has become one of the leading miners and owners of Ether and despite what I said about Ethereum, it is shaping up to be the heir apparent.
HIVE is getting a state-of-the-art blockchain infrastructure facility out of the deal for US$9.0 million. The facility will produce mined cryptocurrency upon closing.
It is expected that HIVE’s initial facility, based on system capacity, historical prices and required hash rates, will have a 12-month trailing EBITDA of US$7.0 million.
According to the company’s investment deck, “HIVE will use its hardware and the ﬂexibility afforded by Genesis’ infrastructure design and software to identify and focus computing resources on existing and new cryptocurrencies as they become most proﬁtable to mine.”
So, what does this mean?
We’re in a reality trough and I think there’s more corrections in store, but the long-term trend of cryptocurrencies and blockchain technology will continue upward. So where should you put your money as a retail investor?
Whoever wins the blockchain popularity contest and however the moral and ethical questions are answered, cryptocurrency will have to be mined and companies like HIVE, will give you an opportunity to get in on that gravy train.
FULL DISCLOSURE: The companies named in this piece are NOT EQUITY.GURU clients and the author has no connection to them.Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.