Blockchain, not Bitcoin Per Se

In early 2015, I wrote a column here about Bitcoin (See TEQ Magazine – Issue 21-3 – “Everything You Wanted to Know About Bitcoin but Were Too Afraid to Ask”). I’m still happy with a key recommendation I made in that article: “Unless you love flat-out gambling, I recommend that you not speculate in owning bitcoin as an investment (I own exactly zero).”

Today, as we weather another crypto winter, I bet many people wish that they’d followed my 2015 advice. Sam Bankman-Fried (SBF) for one? For the record, I still have never owned any cryptocurrencies. Or any NFTs (non-fungible tokens: Baseball card trading meets digital art meets Dutch tulip mania of 1637).

However…when I wrote that article on April 17, 2015, bitcoin was (were?) priced at $222. As I write this column in 2022, even after falling75% from its peak about a year ago, if you bought then and sold today at $17,248, you’d be up almost 7,700%, slightly better than the S&P (up 94%) over the same period. So yes, I’m still happy with the recommendation I made in that article although I’m sure some of you think I’m an idiot.

That said, I am more excited about Bitcoin than ever. Strike that. I mean that I am more excited about the technology that powers bitcoin than ever. It’s called blockchain and its ultimate impact on our society may be as immense as the advent of personal computers (PCs and Macs) and the world wide web.

Before I explain why, a few more thoughts about cryptocurrencies. Remember when there were 13,000 paper currencies circulating in the U.S.? Probably not, but back around the time of the Civil War, banks were issuing their own “notes” (AKA Banknotes). Eventually, U.S. citizens and a lot of other people settled on the U.S. dollar as their preferred “store of value” and most or all of those other “currencies” went to zero.

My concern about “cryptos” is that there are currently 18,000 flavors (bitcoin, ether, dogecoin, etc.) and the world needs somewhere between one and three such systems (maybe U.S., China and one that’s neutral). I’m pretty sure humans of the future will get there, but in the meantime that leaves 17,997 crypto candidates going to zero. Buy the wrong one (somewhat likely) and, well…it seems like we’ve seen this movie before.

A specific concern about bitcoin (the current leader by total value) is that its “proof of work” algorithm is outrageously energy intensive. By contrast, Ethereum (ether) has recently switched to a “proof of stake” algorithm (the so-called Fall 2022 “merge”) which is 2,000 times more energy efficient. So, if I were going to gamble with one of these…I know, it sounds like I’m speaking Greek.

Back to English (mostly): Cryptocurrencies and NFTs are powered by blockchain technology. It’s the blockchain idea that I’m excited about for two different reasons.

First, blockchain is a type of database that is unhackable, today and possibly forever. But instead of thinking about it as a database, think of
blockchain as a ledger. While both a database and a ledger can show you what you’ve got right now (and I’m thinking about any kind of data, not just money), only a ledger shows you every transaction that led to the current state.

Second, in all of human history, person-to-person transactions (including humans organized as businesses) have required outside “authorities” to “bring the trust.” Think insurance companies, which otherwise keep a peer-to-peer shared risk pool honest. Fabulous, but they add a lot of overhead. Think lawyers and the court system. Think the Federal Reserve and the “full faith and credit of the United States.”

Take a minute to consider the astounding implications of having a currency, any currency, NOT BACKED by a trusted authority. That’s a big idea! (Even when we trade gold we depend on trusted intermediaries.) With blockchain, for the first time in human history, trustable peer-topeer transactions are possible without requiring trusted authorities, because the technology brings the trust. That’s worth repeating. The technology brings the trust! This will change the rules about how humans interact.

We’re just starting to see the first “traditional business applications” of blockchain. For example, search the web for “McDonald's joins blockchain pilot to improve ad spend efficiency, supply chain transparency.” In time, blockchain-powered “smart contracts” will reduce the need for lawyers and judges. Similar applications will lower the cost of insurance, sadly reducing the gecko’s income (AKA Geico Insurance, to name just one player).

And we’ll probably wonder why we ever trusted we-don’t-even-know-who-it-is to manage our medical records. They’ll live in a public blockchain where each of us controls access to our own valuable data. There’s a great idea!

Warning, more Greek: Blockchain will likely power much of the metaverse and web 3.0.

Enough said. Today, I believe that all of this is too new and too volatile for most of us business people to invest in. But blockchain will likely make a monumental impact in the end. Start watching. And when you see applications “proving-in” in your industry by your competitors, your suppliers, your customers…then be a fast follower. You’ll be traversing a proven (and safer) path.