One of my technology obsessions interests is
blockchain technology and how it will integrate itself into the world’s
financial system. We’re still in the wild, wild west stage of the technology,
but it’s not a matter of whether blockchain will be part of the future of
finance – and therefore financial crime – but how it will manifest itself as
the technology matures and becomes more widely understood and accepted by the
general public. I started out as being deeply skeptical and borderline hostile
to the idea of cryptocurrency, but I’ve long since come around.
We already seeing how Bitcoin has been used for criminal
transactions such as B2B type transactions in the underground economy, good old-fashioned
money laundering, or being used for victims to pay ransom as part of ransomware
scams
Let me just start off with an acknowledgement that blockchain
technology has many uses beyond payments.
There are nigh-endless possibilities on what can be done with a
distributed ledger system well beyond exchanging payments and that is one of
the reasons we’re seeing so much energy and funding being poured into the
technology. I’m planning on devoting some future blog posts on explaining how
blockchains are being used in innovated ways that aren’t just about exchanging
payments and storing value.
If you read the blog in the past, you know that I like doing
interviews. I plan on starting them up
again when I get the readership levels back to where I had them before I had to
stop blogging. I’m basically starting from ground zero so I suspect this blog
post is being read by, at most, a half dozen people and I don’t want to have an
interview subject spend time on an interview that will be read by almost no
one. Thus, I’m going to just interview
myself for a bit because it’s my blog and I can do weird things like that.
What is blockchain
technology?
Great question, but one that I can’t answer better than what
has already been done by others. Head on
over to Coin Center and read their excellent starter. Take your time and click around the site
while you are there. I’ll wait. You’re Back? Excellent!
We’re talking about
Bitcoin, right?
Bitcoin is “just” one of over
1,300 blockchains as I write this. That said, Bitcoin is the belle of the
ball when it comes to media coverage, cryptocurrency advocacy, and public
attention because it’s the blockchain that kicked this all off and because, as
I write this, it has experienced a dramatic recent increase in its value. It
has immense first mover advantage
since it was the first to market and opened the minds of many to the
possibilities of what can be done with a distributed ledger system.
What exactly are we
talking about? You’ve used the terms “blockchain”, “distributed ledger”, and
now you just injected the term “cryptocurrency” into this.
It’s confusing, isn’t it?
I don’t think we’ve settled on the language aspect on this yet so I
think we’ll see some language standardization as the technology continues to
develop and gain public acceptance. I suspect it will be much like the term “APT”
and “Cyber” in that it’s cute that the people who are deeply involved in a
particular aspect of technology have an opinion on the terminology, but it’s
the media and popular culture that will eventually define the language.
The word blockchain is a good example. The original white paper for Bitcoin used the
term “Block Chain”, but the language evolved where it’s now one word. Blockchain is one of the underlying
technologies of cryptocurrencies like Bitcoin.
The Wikipedia
entry on blockchain is useful. It
states:
A blockchain[1][2][3] – originally block chain[4][5] – is a
continuously growing list of records, called blocks, which are linked and secured using cryptography.[1][6] Each block
typically contains a hash pointer as a link to a previous block,[6] a timestamp and transaction data.[7]By design,
blockchains are inherently resistant to modification of the data. Harvard Business Review defines it as
"an open, distributed ledger that can record transactions between two parties
efficiently and in a verifiable and permanent way."[8]
Blockchain is how you get a distributed ledger system which
is why I tend to just used the word “Blockchain” when I write about this sort
of thing.
What I tend to stay away from unless I’m specifically
writing about the currency related blockchains is the term “cryptocurrency”. Wikipedia to the rescue again on this
term. The entry for cryptocurrency
states:
A cryptocurrency (or crypto currency) is a digital
asset designed to
work as a medium of exchange using cryptography to secure the transactions, to control the creation of
additional units, and to verify the transfer of assets.[1][2][3] Cryptocurrencies
are classified as a subset of digital
currencies and are also
classified as a subset of alternative currencies and virtual
currencies.
I tend not to use the term cryoptocurrency unless I’m
talking about a particular blockchain such as Bitcoin that is focused on acting
as currency because there are so many different use cases for blockchains. That’s
not to say that it’s not accurate to use the term for those blockchains and
that’s why I’m curious to see how the language plays out in the end. Ultimately, I’ll just adopt the terminology
that ends up being established because I’ve long since given up swimming
upstream against the language on these types of things.
Why should I care
about any of this?
Back when dinosaurs roamed the earth and I was a recruit in
a police academy, our physical fitness instructor told us that as soon as we
signed up to be police officers, we lost the right to be physically unfit. It’s the same thing with the situation with
blockchains and crime. If you are
involved in the investigation of financial and/or computer crime, you’ve lost
the right to be ignorant of this technology.
The burden of being good at what we do when it comes to law enforcement
or information security is that we have to keep up on current and future trends
otherwise we will be increasingly less effective at our jobs which makes us
less valuable to our employers whether it’s a private entity or a law
enforcement agency.
Fine. I care! I care!
What’s the story with Bitcoin?
It’s the ground zero blockchain that kicked this all
off. Its primary focus is to act as a
cryptocurrency and it has captured the imagination of countless people who are
either still working on making Bitcoin better or have moved onto other
blockchain projects.
Why has it increased
in value so much so quickly?
Bitcoin is a nifty new digital currency technology, but the
rules of economics still apply to everything. There is an increasingly scarce
number of bitcoins because it’s become increasingly difficult to mine them and
scarcity is built into this system.
Demand is driving a price increase.
The bad news is that part of the increase is a bubble. In
fact, I think most of what we’re seeing right now is an old-fashioned bubble
that will eventually burst in a pretty spectacular and healthy manner. The
media attention of the sharp valuation increase is driving people into
purchasing bitcoin who have no earthly idea what they are buying.
In other words, I think we have quite a bit of the greater fool theory
going on right now.
What’s so healthy
about a bubble bursting?
We’re in the very early stages of blockchain development and
I think we’ll see blockchain mirror what we saw with the dot-com era where we have
an immense amount of money, creativity, and, frankly, irrational hype mixing to
get things moving. We’ll experience all of the talk about how this time things
are different and the rules of economics don’t apply to technology right up
until we have a massive bursting of the bubble.
The bubble bursting will result in marginal projects being swept away
and a more mature approach that will drive capital and creativity into more
viable projects.
We’re in the infrastructure stage of blockchain development
where even the big names such as Bitcoin and Etherium still are struggling with
issues such as control, scale, and how to truly become decentralized
projects. It’s an exciting time, but it’s
also incredibly volatile and speculative.
So should I be
investing in blockchains?
HAHAHAHAHAHAHAHAHA!!! <gasp> HAHAHAHAHAHAHAHA!!!
Sorry, that was rude.
Seriously, I don’t give investment advice and what you
shouldn’t be doing is taking investment advice from some random blogger on the
Internet.
I will tell you my personal approach to blockchain
investment which is to not do it. It’s
entirely too volatile of a market right now for someone like me to get involved
in. I’m not even thinking about touching
any of this with a 39-and-a-half-foot pole until the after the bubble bursts
and the market matures.
There are people who are putting money into this space and
that’s great because there needs to be capital to spur innovation, but I’m
leaving that up to the experienced sophisticated investors like various
blockchain focused hedge funds, angel investors, and venture capital outfits who have capital, risk tolerance, and knowledge
(like the ability to review code for the projects they are considering
supporting) to make these calls.
There are some great projects that look very promising right
now, some that look positively silly and/or mediocre, and some blockchains that
are obvious fraud.
I have a whopping 0.00203115 BTC left over some research I’ve
done recently. If I add anything more to
that position, it’s only because I want to do more research.
Fine. It’s a
bubble. Who are Pets.com of the blockchain
world?
No idea. I’m guessing
that just like the dot-com era, we’ll see only a few survivors who will go onto
thrive and turn into something big like Google.
Most of the 1,300+ blockchains right now aren’t going to amount to much
in the end and that’s just how the market works.
For example, I doubt we’ll have more than a handful of
successful cryptocurrencies once things shake out. One of
the people who I follow closely in this space is Naval Ravikant and I heard him recently
speculate that we might end up with someone putting together a successful
digital currency option that is based on a basket of cryptocurrencies. If you have ten cryptocurrencies and one
disappears overnight, you’ve only lost a fraction of value rather than
everything.
So, I should be doing
short selling to exploit this bubble, right?
Again….HAHAHAHAHAHAHAHAHA!!! <gasp> HAHAHAHAHAHAHAHA!!!
This is a bubble, but we don’t know how long it will go on
and how much capital will flow into it before it bursts or how a bubble
bursting would look. It could be days, months, or years
Is it just one blockchain like Bitcoin or something more
systemic? Is it a one big bubble
bursting event or a rolling bit of mini-bubbles? Will we see any bubble re-inflation?
I know I’m not smart enough to know when or how this it will
go, but it will go.
What blockchains do
you find interesting?
Bitcoin for obvious reasons that its blockchain prime and is
the cryptocurrency that is getting the most attention from media and
investors. I am a bit of a cautious
Bitcoin skeptic over the long haul for reasons I’ll address in a future blog
post.
Etherium is super interesting to me since its a platform for
decentralized applications fueled by tokens and that’s caused an immense amount
of creativity both in that particular blockchain as well as many affiliated projects.
Zcash and Monero are the most interesting crypto currencies
to me other than Bitcoin at this stage because there have very serious
financial and technical backing from various entities. That’s the stuff of a future blog post also.
Cryptokitties is
pretty cool because just reading the website alone is a great way to conceptualize
the possibilities of how blockchains can be used in unique ways. Plus, cats.
Bananacoin is another
one of those blockchains that can show the possibilities on how the technology
can be harnessed as a sort of security. It also poses some interesting
questions regarding how blockchains should be regulated. Are they currencies, commodities, securities,
or something else? Fodder for another
blog post down the road, of course.
There are more, but this is a good start if you want to do
some reading and research.
Wait. There are fraudulent
blockchains?
You’re not allowed to be surprised, but I followed one
fraudulent initial coin offering recently that ended up with the fraudsters
getting a reasonable amount of money for their efforts before closing up
shop. Bad guys are all about leveraging
blockchain whether it’s just stealing token from people or setting up their own
evil blockchains in attempt to con people into giving them money.
Definitely the stuff of future blog posts. More to come
soon!
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