Emerging technologies are always difficult for investors to weigh up, and cryptocurrencies are no different. That’s why value investor Warren Buffett is famously hands off when it comes to the sector, although in recent times he has made an exception with Apple and before that IBM.
Buffett’s reasoning rests on two problems that confront industries based on new technologies: the lack of a moat, that’s to say an entrenched competitive advantage, and the difficulty of picking winners.
Consequently, rather than trying to find the diamonds in the dust from among the US’s countless car-makers in the early days when there were 2,000 manufacturers, investors could have taken the inverse approach. ‘There was one obvious decision you could have made back then, and that was to short horses,’ said Buffett in 2014.
That approach equally applies to cryptocurrencies (on 17 April there were 1,568 of them, according to Coinmarketcap.com) and the frenzy that has surrounded the nascent asset class (if it can be so defined) and the underlying blockchain technology. But it is not just the question of how to pick the winners that needs to be considered. Buffett and other financial professionals have more fundamental doubts about crypto – has it any intrinsic value at all?
No intrinsic value?
JP Morgan chief executive Jamie Dimon famously labelled bitcoin, the best-known cryptocurrency, ‘a fraud’, remarking: ‘If you’re stupid enough to buy it, you’ll pay the price for it one day,’ although he has since rowed back a little on those comments. Bank of England governor Mark Carney in a speech on 2 March said that bitcoin ‘has failed’ as money, which is after all its core use, and Stefan Hofrichter, head of global economics and strategy at Allianz Global Investors, recently asserted that bitcoin’s ‘intrinsic value must be zero’.
Certainly, bitcoin has given owners a rollercoaster ride: since its all-time high near $20,000 (£14,259) in December, the premier cryptocurrency has lost more than 59 per cent of its value, at the time of writing trading at around $8,150. Unsurprisingly, a recent survey by peer-to-peer lender Assetz Capital found 43 per cent of its customers thought the crypto market was on the verge of collapse, a further 40 per cent considered it too immature an asset class, with 14 per cent seeing it as a worthwhile investment ‘but only in moderation’ and just 2 per cent agreeing with the statement that it represented the ‘future of investments’.
With bitcoin and other ‘monetary’ cryptocurrencies, the valuation riddle is complicated in that they do not resemble other historical forms of money – bitcoin is not backed by a precious metal, or the tax base of a nation state in the sense of the fiat money of today. Neither does it generate an income, as bonds or dividendpaying shares do.
However, maybe that is looking at it wrongly. As Lloyd Blankfein, Goldman Sachs’ chief executive, put it in 2017: ‘Now we have paper that is just backed by fiat...Maybe in the new world, something gets backed by consensus.’ ‘Consensus’ is the term for the transaction verification mechanism on blockchain networks such as bitcoin.
In this view, if we see money as a trusted medium for the transfer of credit and debt, then bitcoin and its cousins are another form of money, as is commercial paper, m-pesa transfers on mobile phones in Kenya, or the coins that act as valid currency in certain locales, the non-crypto Bristol Pound being one example. As a form of money, the bitcoin network is nine years old and has never been hacked and, viewed as a ‘decentralised computer’, has never experienced any downtime. During this period it has transmitted hundreds of billions of dollars of value without the intervention of a corporate or governmental entity.
Many commentators and industry leaders think investors should differentiate between cryptocurrencies per se and the underlying blockchain technology. ‘While it’s true that blockchain provides the underlying technology that helps cryptocurrency exchanges, the reality is that the potential uses for blockchain are far broader than digital currencies,’ says Jerry Cuomo, vice-president of blockchain technologies for IBM. ‘At IBM, for example, we have hundreds of blockchain projects underway in diverse industries, including supply chain, food safety, government, healthcare, travel and transportation, chemicals, petroleum and insurance.’
Microsoft is also committed to developing the technology: ‘Blockchain is a transformational technology with the ability to significantly reduce the friction of doing business,’ says Mark Russinovich, chief technology officer of Azure, the tech giant’s cloud computing platform.
Why trustlessness matters
There’s a common factor in all those business relationships and that is trust. Blockchain has brought a new word into existence – trustlessness. It dispenses with the need to have previously created a level of trust between transactors. Iqbal V Gandham, UK managing director of global social investment platform eToro, explains that blockchain technology can be applied in ‘any industry which requires the establishing of trust between multiple entities in a chain who may not know each other personally.’
But that begs another question. If blockchain is so revolutionary, why has its adoption been so slow? We are nine years on from the bitcoin genesis block being mined in January 2009, and the examples of working blockchains that have gained traction are fairly thin. Didn’t everything happen a lot quicker with the take-off of the internet?
‘The internet did take time also. We need to compare apples to apples. What are being developed are the protocols – agreed ways of doing things – not the user-based applications. So we need to compare the blockchain to HTTP or SMTP [which respectively make it possible to browse web pages and send emails]. Only once these were established did we get the user apps,’ says Gandham.
Blockchain is still very much at the stage of agreeing protocols. Curious investors will probably remain just that for now, with the sector unlikely to attract mainstream money from individuals and institutions in larger numbers until volatility and regulatory issues are addressed. Moreover, the advent of the bear market in crypto this year has dampened enthusiasm significantly.
Stuart Law, chief executive of Assetz Capital, sees interest tempered by caution. ‘There’s clearly still a great deal of uncertainty amongst smart investors when it comes to cryptocurrency – the market is still in its unpredictable infancy, so the risk and wild daily swings in value of cryptocurrencies are proving too much for many.’
However, looking past the speculation that all new technologies tend to attract given the difficulty in assessing their real worth, there are a number of areas the savvy investor should keep an eye on.
Chief among them are the speed at which blockchain solutions come on stream at large corporations; adoption by existing tech businesses including the giants of the sector (Bloomberg reported last month that Google was building its own blockchain); bitcoin’s progress in solving its scaling problem (five transactions per second (tps) compared to the Visa payment network’s 8,000 tps); a central bank digital currency emerging from the period of testing all major institutions are currently engaged in; increased traction in countries with failing economies (Venezuela and Zimbabwe); and a blockchain start-up launching an app that achieves critical mass. That amounts to a lot of possibilities – but that’s emerging technologies for you.
With cash disappearing fast in China and European countries such as Sweden, payments remain an area still ripe for blockchain disruption. James Minns, head of global development at deVere Group, a global financial advisory and brokerage firm that recently launched a cryptocurrency trading and wallet app, thinks financial services businesses have to take an active interest. ‘It’s the hot topic of the moment and we need to understand it as a business. It’s something we have to take notice of, otherwise we risk becoming dinosaurs.’ However, he also appreciates why there is so much caution. ‘A lot of our competition are staying away from crypto. It’s a big risk as it could be a fad that goes away, but at the moment we are listening to all the arguments.’
Speculative bubble or not, even if bitcoin fails as the ‘peer-to-peer electronic cash’ envisaged by inventor Satoshi Nakamoto, it could still succeed as ‘Gold 2.0’, in that it has value simply because, like gold, enough people think it has value in an era of low trust in governments and bankers.
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