Investment

Coin of the Realm

Bitcoin-coin-of-the-realm

That Bitcoin and its ilk are experiencing a “Netscape Moment” should serve as a cautionary note on many levels to investors. The practical similarities between the web browser Netscape Navigator as an investment, and Bitcoin as an investment are obvious. Netscape made using the World Wide Web practical for the average computer user. Bitcoin is the first application to make blockchain technology accessible for the average computer user. But with technology stocks, it does not usually payoff to be the first person at the party. So, it should come as no surprise if the “Bitcoin Moment” ends badly.

How the web was like blockchain

The World Wide Web was for much of its early years an intriguing idea without any widespread application beyond the military and academia. It took the creation of a universal access tool, initially Netscape Navigator, to make a sprawling, but difficult to access network something everyone could find a use for. Navigator made it possible for anyone to get aboard what is now called the Internet and communicate (email), connect (Facebook), share information (Google) and offer a platform for commerce (Amazon).

Netscape Navigator 1994 IPOLong story short: Navigator launched in late 1994 with an IPO in late 1995 being one of the most successful ever, up to that time. Additionally, Netscape set what many investors would still consider a bad precedent by also being unprofitable when it went public. Long story short, by 1997 Microsoft’s Internet Explorer was the hand’s down winner in the so-called “browser wars” and Netscape never recovered. In 1998 AOL acquired Netscape. Its fate was the canary in the dot.com coal mine.

For our conversation today, let’s sum up the browser analogy this way. When Netscape opened up access to the Internet, few people were thinking about e-commerce or online bullying. The evolution of the Internet browser was trial-and-error in its purest form. Where blockchain ultimately ends up taking us remains unknown and we are still very early on a long journey.

So, what’s up with the futures exchanges?

What grabbed my attention was the announcement of the two Chicago options exchanges now offering futures contracts on Bitcoin. And there is some irony to the fact the contracts can only be bought and sold using dollars – you can’t actually short your Bitcoin collection,BITCOIN-EXCHANGES-RISKS just gamble on its price variations. Yet the speed with which the options exchanges embraced the blockchain left me baffled until reading about a couple of projects MIT is working on in collaboration with two very different consortiums.              Herein might be the next phase of blockchain implementation with the potential for serious impact on the global financial system.

One powerful application of blockchain is to create a viable currency to be shared among fringe economies. Think of Eastern bloc countries like Bulgaria, Romania, Albania, and Hungary creating a shared currency for use on par with the Euro and Ruble. Or of the many marginal countries in central Africa, also challenged by failed economies. In theory, the open nature of blockchain ledgers would make it possible for everyone – both inside and outside of the currency network – to see when a government is, for lack of a better term, cheating the system and exclude just their blocks from commercial use. Here, the transparency of an open ledger creates value and stability, making allies of adversaries.

Global Blockchain NetworkAnother interesting idea is using blockchain to create a cryptocurrency tied to physical commodities like gold, oil, sugar or wheat. This would eliminate the necessity of having to price commodities in dollars, Euros or rubles, reducing the amount of friction and cost in transactions by moving toward a true barter system. For international trade, this would be a huge shift in the balance of power away from the major currencies. To my mind, this scenario provides a perfect explanation for the rush to embrace blockchain by the futures exchanges.

 

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