To coin a phrase: it’s a bitfad
The opportunities presented by blockchain and bitcoin could be significant for investors, and in fact in everyday life. I have usually heard youngsters in sneakers and with a pony tail discussing these topics, trying to look super cool, so it was interesting to hear a more sober, less hyperbolic view from a man from Mercer, which after all started as a firm of actuaries.
Don’t confuse this Mercer with the hospital superbug of the same name — it is a global firm that forms part of the Marsh & Mclennan professional services group.
Michael Forestner, who runs Mercer’s global alternative assets, says there are undoubtedly benefits to the bitcoin system. Through blockchain, online payments can be sent directly from one party to the other without a financial institution claiming its cut. The network timestamps transactions and forms a record that cannot be changed by redoing the proof-of-work.
I have never understood why blockchain isn’t called unblockchain; its purpose, after all, is to facilitate financial transactions and make them as smooth as possible. But “block” in this context doesn’t mean creating bottlenecks; it refers to the block of code written for each transaction. This block of code then gets added to a chain with an indelible record of transactions.
One day we will probably take as much notice of blockchain as we do of the water pipes going into our houses. Bitcoin, though, seems to fascinate investors — or, strictly speaking, speculators — as much as gold has throughout the ages. Forestner argues that bitcoin has many of the characteristics of money, being portable, scarce, divisible and increasingly recognisable.
But it is also being regulated: when new bitcoins are issued the event is treated as a security issue and given the ridiculous name of initial coin offerings
(ICOS), and China has banned the currency outright.
Forestner says bitcoins are useful as a form of money, even though the price can be highly volatile.
Bitcoin has increasing support from merchants, users and startups even though it has neither the physical backing of gold or silver nor the trust based in a central bank that promises (with mixed success) to protect the value of the money in your pocket.
There are no physical vaults for storing bitcoin. The omission of a single word in the code allowed hackers to steal US$30M in the currency. This is not the Visa system, in which transactions can be reversed. There is a single password to protect holdings, but if it is lost there is no backup system.
Profit and loss
Many people have made a profit investing in bitcoin, and there have been heavy losses too. Speculating is unregulated, with no way of protecting the downside by taking short positions. Regulated institutions will find it difficult for regulatory reasons to invest in cryptocurrencies.
Rather than holding and trying to trade bitcoin, Forestner suggests taking a look at venture capital funds invested in enabling technologies and services.
There are a few hedge funds that speculate on cryptocurrencies: it is an incredibly inefficient market, and the lucky can enjoy excess trading profits.
I have some sympathy for Jamie Dimon, head of Jpmorgan. He supports blockchain as a way of tracking payments, but is notoriously hostile to bitcoin, which he calls a fraud and worse.
I am not sure bitcoin is contributing that much to civilisation in the long run: but it is a fad rather than a fraud.
Bitcoin [is much like] money, being portable, scarce, divisible and increasingly recognisable