Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
Last week, the price of Bitcoin -- that invisible cryptographic currency which exists only in the cyber space of computer networks -- crossed an amazing threshold of $7,000. Given predictions over the past year that it could go to $100,000 and higher, this fact may not seem all that amazing.
But a year ago, it was trading under $1,000 and just 4 months ago it was at $2,000.
That pace of roughly doubling every quarter is pretty amazing -- and downright scary to those who are afraid of missing out.
Speaking of scary, the impetus for the surge from $6000 to $7500 this month was an event that took place on Halloween: the world's largest regulated derivatives exchange, CME Group CME, announced that they would be launching a Bitcoin futures contract before year's end.
This powerful, bluechip entrant into the wild west markets of Bitcoin instantly gave that market a new legitimacy and a brighter future. Because one thing that Bitcoin markets had constantly dealt with for the past 5 or 6 years was unreliable exchanges getting hacked and people losing their money.
Creating a Bitcoin futures contract on a centralized exchange where the CME would act as the intermediary to guarantee transactions and settlement would add new levels of security, transparency, liquidity and price discovery that the scattered network of small, unregulated exchanges could never achieve.
Bitcoin… a Fraud?
But some observers are still skeptical. While CME Group is simply doing what Goldman Sachs GS had been thinking about for a few months when that bluechip bank pondered a trading desk to provide Bitcoin liquidity, hedging and derivatives for their institutional clients -- and what LedgerX is doing with Bitcoin options -- some see it as a trap for the small investor.
Not an intentional trap. But one of their own making where, lured by the promises of riches, and never having traded a futures contract before, the small investor will suddenly be allowed to gamble on an asset they probably don't understand.
The skeptics look at what's going on as wild speculation, a mania, a bubble in the making. And they don't want to see it take the hard-earned money of hopeful investors with lottery tickets in their eyes.
The CEO of a top global bank probably agrees. In September and October, when Bitcoin was bouncing between $3500 and $5000, Jamie Dimon of JPMorgan JPM called it "a fraud."
Speaking at the Delivering Alpha conference presented by CNBC and Institutional Investor on September 12, Dimon said "It's just not a real thing, eventually it will be closed."
Dimon also said he'd "fire in a second" any JPMorgan trader who was trading bitcoin, noting two reasons: "It's against our rules and they are stupid."
To hear more about where I think Dimon is right and wrong, be sure to listen to the podcast attached to the is article.
Quorum: A Blockchain Innovation Jamie Dimon Does Approve Of
What's interesting about the straight-shooting talk from Dimon on Bitcoin is that also in the month of October his firm launched a Blockchain platform called Quorum, based on the Distributed Ledger Technology (DLT) architecture of another crypto-currency called Ethereum.
I think this added enormous legitimacy for that cryptocurrency and I am trying to get some experts on the show to talk about Quorum.
And while you may have never heard of Quorum, nor understand what it is designed to accomplish, know that Dimon and his team had been thinking about it for some time.
In a January 2016 article, Ben McLannahan, writing in the Financial Times, described the bank's trial project using Blockchain...
The move is among the clearest statements yet of banks’ determination to explore the potential of blockchain, the computer network on which bitcoin sits. Blockchain has caught the imagination of the financial services industry within the past year, with a host of companies vowing to find ways to use it to reshape many of their daily operations, from upgrading old back-office systems to automatic execution of contracts.
The technology is essentially a digital public database of events that is continuously maintained and verified in “blocks” of records and shared among various parties. This means payment ledgers can be instantly updated in multiple locations without a single, centralised authority.
I should note that Nasdaq began a Blockchain project back in 2015 called Linq and this May, Citigroup joined them as a partner to facilitate settlements.
Who Put the Block in the Chain?
To get at where the "block" in blockchain comes from, this brief description from Investopedia should help...
A blockchain is a public ledger of all transactions in a given system that have ever been executed. It is constantly growing as completed blocks are added to it. The blocks are added to the blockchain in linear, chronological order through cryptography, ensuring they remain beyond the power of manipulators. The blockchain thus stands as a tamper-proof record of all transactions on the network, accessible to all participants. The blockchain offers a chance to work at lower costs with greater regulatory compliance, reduced risk, and enhanced efficiency.
So what's the difference between Bitcoin (which Jamie Dimon hates) and Ethereum, which he loves?
Basically, think of ethereum as a robust programming language and architecture that has multiple, maybe unlimited, use-cases. I made up a simple analogy that may be oversimplifying it, but I when it comes to abstract technology, simple analogies work:
Bitcoin is like a an average piece of software with limited applications and Ethereum is like an operating system from Microsoft MSFT or Apple AAPL, something a developer can build off of.
Behold Smart Contracts
Let's hear from a self-described Blockchain evangelist, Ameer Rosic from his Huffington Post article of December 2016 Ethereum Vs Bitcoin: What’s The Main Difference?
The first thing about Ethereum is that it is not just a digital currency. It is a blockchain-based platform with many aspects. It features smart contracts, the Ethereum Virtual Machine (EVM) and it uses its currency called ether for peer-to-peer contracts.
Ethereum’s smart contracts use blockchain stored applications for contract negotiation and facilitation. The benefit of these contracts is that the blockchain provides a decentralized way to verify and enforce them. The decentralized aspect makes it incredibly difficult for fraud or censorship. Ethereum’s smart contracts aim to provide greater security than traditional contracts and bring down the associated costs.
Curious, or Just Bored?
Now that I have shared some basic ideas about Blockchain and cryptocurrencies, I have a question for you: Does this technology interest and excite you, or do you find it boring?
If you find it boring, stay with me. I didn't want to hype this technology before I gave a basic explanation.
Now I will hype it a bit, in my own words... or at least try to give you a vision of what's coming and inspire your imagination a little bit.
Blockchain is going to revolutionize finance, law, medicine, and definitely some aspects of your career will be completely transformed.
Think of it this way: everything valuable is digitized on some way and it's all instantly available to be transferred to someone else, for virtually nothing, in private transactions, with no middle-man.
Think about how this changes money, medical records, and legal contracts. How does no more physical passports or real estate deeds and paper-based mortgages sound?
What if voting in an election could be electronic and secure? What if your ideas, inventions, and other creative assets could be stored securely and verified by immutable records? This is what Blockchain does and how it could conceivably work for all kinds of things that we value and can track digitally.
Honestly, a few months ago I didn't really imagine or think about any of this. I was too wrapped up AI stuff.
But it was my AI quests that helped me stumble upon a group of blockchain-crypto ninjas who run another podcast you must listen to.
Just listen to my podcast and I'll tell you all about them!
And if that doesn't get you excited, maybe this will: IBM's IBM Blockchain Business Solutions division is trying to help British Columbia track and regulate their marijuana industry "from seed to sale." The pot supply chain will surely never be the same.
Disclosure: I own AAPL shares for the Zacks TAZR Trader portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service.
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