Possibly, you might have noticed that I have been writing on Bitcoin, Cryptocurrency and Blockchain over the last few weeks here on Tekedia. It happened for a reason: we have been working for a client, an investment club, which is exploring opportunities in the nexus of cryptocurrency and blockchain. They needed to know as much as possible to guide them as they allocate resources. I thank all the fans on LinkedIn who continue to share insights through comments: LinkedIn remains a lab since we discovered its real value.
Yesterday, I spoke to this awesome team. The challenge has been to know if Bitcoin (or others like it) is money, tulip, or gold. I would not go there in this public piece to avoid misunderstanding. But in the conversation, I provided analogies and elements, to provide guidance. When I wrote on modeling the marijuana business in U.S., post Obama era regulation, I was looking for a pattern into the soul of cryptocurrency if government indeed makes it wholly and completely legal. We got many insights from what happened in the marijuana legalization. It was a moment as the 37 men smiled!
In summary, the end goal is that once governments begin to regulate Bitcoin, it would be price-normalized. With that, it joins other currencies and the game is over. The growth will be predictable, taking out speculators. That will make it less appealing to some people even though it would attract new classes of players. While South Korea will not drive this game, it can serve as a live experiment into the future. The world is waiting for U.S. to take action and once it does, that will become the golden regulation guiding Bitcoin and other cryptocurrencies. I believe no matter what happens, the Marijuana Equilibrium Principle will follow Bitcoin once it is regulated. Yes, by looking at what happened to marijuana (yes, goof), one can predict Bitcoin, post-regulation.
Here are elemental insights to my presentation: the deepest are for the clients, of course.
Bitcoin and others like it could be our generation opportunity. It is an opportunity the next generation would not have, since by then, the price would have stabilized, making it a boring investment (for those investing). With blockchain, it could be as revolutionary as the Internet in changing the natures of states. U.S. Government is already taxing gains from Bitcoin investment which means it is not absolutely illegal. So, it is a quasi-legal instrument for wealth creation which is normal enough that governments make money on it. Also, if government taxes investments on Bitcoin, it does mean that it is not seeing it as a pure currency. (I will leave the explanation of that last statement here as it involves currency trading. Yes, you can think of Bitcoin as using Euro to buy Dollar hoping that one will fall; Bitcoin could be that Dollar.)
The use of Bitcoin as a currency would remain limited because of the speculation opportunity. Why spend a $5 that could become $50 in three years? So, you can see it as a store of value which has limited usage in payment. In that case, we call it a dig-gold. But it has an advantage over the metal because its “structures” can be changed unlike a metal which is already formed.
Bitcoin enjoys the Metcalfe’s law [“the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2)”] with its first mover advantage. I do believe that this Bitcoin would be part of the Internet 3.0. Yes, it would remain dominant in its class provided cryptocurrency as a category survives governments.
We explain the processes involved in the mining and how investors could profit therein. We elevated the minds of the audience on the possibilities of the future via quantum computers.
Mining Bitcoin is solving the NP-complete maths problem. The Shor algorithm offers hope but would require a quantum computer with qubits. Classical Newtonian-based computers cannot do the work but quantum mechanics-based machines will.
If you use a quantum computer, using Shor algorithm, run on a polynomial (recall your Further Maths in secondary school, the section for Remainder Theory) time, you can take qubits of order O((log N)2(log log N)(log log log N)) under fast multiplication. In this phase, you are running a quantum Fourier transform which is supremely efficient.
About 80% of total Bitcoin are already mined, out of the available 21 million units. This means that in near future, mining investment would be worthless, as there is nothing else to mine, specifically for Bitcoin. And without a governing body, the only acquisition would be purchase. (Sure they could introduce transaction fees for managing the record keeping).
Money, Tulip, and Gold
We explained what money is, what gold stands for (store of value), and how Bitcoin could be either (or both), and in addition a tulip. This is the trio-nature of cryptocurrencies and what could happen in each scenario. Could Bitcoin be seen more as a “store of value” than a currency?
There is also the value for some nations without strong monetary systems. For example, Venezuela, Iran, Zimbabwe and some other countries can adopt a single treaty on Bitcoin. This can help in monetary system to avoid sanctions, and more. This emerging application nexus could delay any tulip moment.
If you think it is gold, then it has its own asset class. Big banks could build such in coming years, driving the value upwards. But if you think it is a tulip, it could be the biggest deception worldwide since it is a universal “investment” already.
I do not expect any outright ban by U.S. government which can have a mortal impact on the currency. Though one may argue that banning Bitcoin in U.S. may not stop the movement, the fact remains that U.S. remains the location where the highest investment activity is happening. So what happens in U.S. is critical. China is another country of interest but I do not expect even outright ban by China to have a definitive impact on Bitcoin. It would slow it momentarily but it would recover. It is only the U.S. that could kill Bitcoin.
Banning it could be as simple as instructing all U.S. banks not to do business with Bitcoin exchanges. If that happens, exchanges would become largely underground businesses and they would fizzle from the mainstream economy. From Coinbase to others, their apps would leave Appstore and Google Play since they cannot be allowed to connect into U.S. financial system. That does not mean that Bitcoin would not continue to be traded globally. But do not expect momentum without America.
Here are some ways government regulations could affect Bitcoin:
- Defeat of the Original Purpose: Government regulations will defeat the purpose why the currency existed in the first place. Sure, a government intervention will bring many new players into the cryptocurrency world but it would also stabilize the value of the currency. When that happens, Bitcoin would track typical currencies like US dollars, Euro and Pounds Sterling.
- Core Advocates may exit: With regulation, Bitcoin value will stabilize. Some people may lose interest as the value will not be growing. Most are not there for 2% quarterly appreciation; they want double digit growths.
- Stringent Rules: As government moves in, buying and selling Bitcoin would be harmonized. Channels would be streamlined and new trading classes could be created. Brokers could decide which investor categories can buy Bitcoin without guidance. The possibility may be that retail investors earning a certain wage level may be excluded [think of the Startup Act which prevents non-qualified investors to buy equities in startups in U.S.]. Government will put these rules to protect the small guy [it reasons] which unfortunately hikes the frictions for trading cryptocurrency.
Tech Risk / Exit
There are many ways cryptocurrencies can be deployed without necessarily causing problems. We noted the key element to drive that distinction where the central bank or reserve bank would not cause problems. In short, despite the “currency’ in the name, there are many applications which are legal. One is loyalty-program.
Yet, there are inherent technology issues with Bitcoin. The problem is that we can have Bitcoin 2.0, Bitcoin 3.0 and no one knows how the present ones could advance. Unlike gold which has attained its final formation phase (physically), a new guy can create something totally better that makes today’s Bitcoin diminished in engineering and investment value. Should that happen, people may ignore the present Bitcoin and move to the next big thing. That is a risk because I know that not all technologies are interoperable.
Besides, there are concerns on the privacy of transactions. It is not right to publicize all business transactions. Do you want to tell your boss that you have hired a job searching firm? As it gets popular, it would become challenging to keep some transactions private as solutions will emerge to decode those transaction paths. Besides hacking which remains a huge issue, Bitcoin network can handle about 7 transactions per second. That is not a network for the global economy. Visa and MasterCard can support thousands of transactions per second. And most importantly, who would pay for sausage with Bitcoin? The transaction fee could be more than the cost of the sausage. The future may be a digital gold and not a currency for exchange of value.
The last path was on EXIT – how do you get out, avoiding potentials risks while not leaving too much money on the table in case the value continues to go north. That exit has to consider that Bitcoin has a long way to go if it could be dig-gold. In short all the cryptocurrencies have a long way to go. The total value of gold is around $9.7 trillion; all major cryptocurrencies are around $500 billion. For Bitcoin specifically bounded by the 21 million units, you would need it to rise to $460k per unit from about $20k it is today to match the value of gold.
Bitcoin is inherently risky but is also potentially rewarding. I have none and have no appetite for it. But that does not mean I cannot find another way to make money from it: providing insights to clients. But I am a big fan of blockchain and to make that happen, my proposal is that Nigeria creates its own cryptocurrency tied to the Nigerian naira to help drive blockchain products in Nigeria.
We do not need Bitcoin but Nigeria needs a digital currency tied to the Naira that will enable the efficient functioning of the blockchain infrastructure which I expect to evolve in coming years in the nation. If the Central Bank blesses such a plan, we will experience a virtuoso innovation system in redesigning the architecture of some of our industrial sectors and make them more efficient even while being cost-efficient. As I noted in my entry on Blockchain Africa, blockchain has a promise for Africa. Nigeria just have to find a way to lead in that promise atleast in West Africa where its impact is huge.
Acknowledgment: I have read many documents. I thank Fortune for the excellent editions on Bitcoin and Blockchain. Also, to my team that worked on our research.---