Cryptocurrency — an exercise in semantics

As I continue to build an understanding of Blockchain technology I can't help but run up against it's partner in crime — cryptocurrency. It's something inherently vital if Blockchain is going to be used in a a decentralized way (either to disrupt a current trust institution or support an ecosystem). Simply put, cryptocurrency is the reward for engagement and effort, and it is something that can be assigned value. 

It is important to understand that you can have a Blockchain without cryptocurrency but you can never have a cryptocurrency without Blockchain — they are two very separate things. Blockchain can be a very difficult concept to grasp and even harder to understand from a technical perspective, whereas cryptocurrency is equated to as money and much easier to align your thinking with. You can exchange two Bitcoin for US dollars and buy a car; it's something easy to understand, as well as captures the imagination of making great wealth.

Recently I was having a conversation with a successful investor and entrepreneur (an intrinsic value investor to be specific, and a student of Benjamin Graham and Warren Buffet); in our conversation it came up that I was on a sojourn to understand Blockchain technology. Ultimately the blockchain conversation became a discussion about cryptocurrency and investing. I mentioned that someone ask me if they should invest in cryptocurrency and my answer was if you have to ask me then the answer is "no".

He then looked at me and said, "Speculate. The term is speculating. You don't invest in cryptocurrency"

Investing* — in simple terms it refers to purchasing an asset with the hope that it would yield income in the future. Investments can be made in a number of forms depending on the investment return the investor requires and the risk that he is willing to take. 

Speculating* — the taking of higher risk and standing the possibility of losing all money invested. Speculation is similar to gambling and entails a very high risk that an investor may loose all his money or make very substantial returns if his speculation turns out to be correct. However, it must be noted that speculation is not exactly the same as gambling, because a speculator will take a calculated risk whereas gambling is more of a decision made on chance.

He went on to say that if a "Speculator" came into his office to discuss cryptocurrency he would entertain the discussion because there are many very successful speculators. Although if an "Investor" came into his office to discuss cryptocurrency the conversation would be very short — as an intrinsic value Investor cryptocurrency simply did not align with his investment thinking because it is impossible to calculate an intrinsic value. For me it was good we had this little talk.

So this is what I know about cryptocurrency —

• I would rather be discussing Blockchain.
• If you want to be involved with cryptocurrency you are by definition a "Speculator".
• If you speculate in cryptocurrency you must be prepared to loose all of your money.
• If you are building an ecosystem using Blockchain technology cryptocurrency is vital.
• Cryptocurrency isn't going away anytime soon.

As I said, it was a good little talk.

iamgpe

* Definitions from www.differencebetween.com  

Blockchain and Contrarians...

Lately I've been investing some time to understand Blockchain — what it is and what it isn't; how it works and what does it mean for the future; should I get involved with it or stay a million miles away. As part of my process I wanted to blog about it for a number of reasons: 

1. Help galvanize my thinking and understanding of Blockchain.
2. Work on my language so I could clearly articulate my thinking about Blockchain.
3. Stimulate discussion and feedback on the topic to help with my thinking.

And for my efforts my friend Phil Friedman posted a blog entitled, "Some important truths about cryptocurrencies". To my surprise (and great appreciation) Phil dedicated his post to me.

This piece was inspired by Graham Edwards, who may or may not agree with what I've said here, but who is always, as I see it, an authentic contrarian and more than willing to explore concepts and ideas openly and honestly. Thank you, Graham, for being a good sport.

I suppose this blog is a bait and switch because I don't really want to discuss Blockchain technology but re-enforce something much more important — the value of the Contrarian. Phil's dedication wasn't just a great compliment but an important reminder about what is needed to drive better understanding (as well as better decision-making).

con·trar·i·an [kənˈtre(ə)rēən] NOUN — a person who opposes or rejects popular opinion  ADJECTIVE — opposing or rejecting popular opinion; going against current practice or thinking:

There is a Truism that says if you want to make a good decision you really have to understand the situation. And to really understand a situation you have to look at it from as many perspectives as possible — and ask questions you probably haven't even thought of. As Phil says, "...explore concepts and ideas openly and honestly." 

I view the contrarian as a facilitator —

• They help prevent groupthink.
• They push back to ensure there is a discussion.
• They ask the questions that may not get asked (for many reasons)
• They offer a different perspective
• They ask the question, "Why is that person running in the opposite direction? What does she know that we don't"
• They know it's easier to agree — although they also know it doesn't really serve the discussion.

Contrarians are crucial for developing better understanding and better answers — and yes, maybe we can be a pain in the ass sometimes (but it's for your own good).

I suppose since Phil was nice enough to dedicate his blog to me I should use it to help with my continued understanding of Blockchain and it's partner in crime, cryptocurrency. In his blog, Phil had identified five cryptocurrency truths —

Truth #1: Crypto-currencies do not have any intrinsic value. Whatever value they have to an owner depends entirely on someone else wanting to buy them. Therefore, investing in such currencies amounts to nothing other than gambling on rising demand, whether that demand is rational or irrational.

I totally agree. As an intrinsic value investor myself I would never invest in any currency for that matter. If you can't calculate it's intrinsic value you simply can't determine if you are buying too high or too low. It's why Warren Buffet has very little interest in cryptocurrency (and my portfolio manager for that matter).

Truth #2: No single crypto-currency held by an investor will ever appreciate in "value" as long as the issuer of that currency continues to sell the currency at the same price or lower than that paid by the investor in question.

I also agree... in theory. In reality many markets are inefficient and allow for arbitrage opportunities. I was shocked when someone said they make $7,000 per month with retail arbitrage — they buy product on Craig's list and then turn around and sell it on eBay for a higher price.  

Truth #3: You cannot rely on the advice about investing in crypto-currencies from anyone who has already invested in them.

I agree. For me it's like the person who enthusiastically offers a "stock tip. I do believe they can offer insight as to how the "crypto-currency" ecosystem works, but I'm not taking investment advice from them.

Truth #4: Decentralized blockchain-based data-keeping was originally associated with Bitcoin crypto-currency as a means for imbuing the system with perceived credibility. 

This is where I think Phil and I look at Blockchain differently and maybe it's my issue over the term "perceived credibility". My understanding is because of blockchain the "double spend dilemma" was eliminated. And because of this, internet currency could be created without the concern of it being copied 1,000,000,000,000 times. Blockchain has created a "credible internet currency" — now what that currency value is, well that's another discussion. And although I agree crypto-currency doesn't have any intrinsic value, I do believe it can have associated value with whatever ecosystem it is part of. Much like paper money. 

And this is what excites me — something of value can now be created for our efforts in Internet ecosystems. 

Truth #5: Investing and trading in crypto-currencies is a zero-sum game.

All I can say is there will be many people that make money and there will be many people who lose money. What I can also say is cryptocurrency isn't going away anytime soon.

Again thanks to Phil for dedicating his blog post to me; thanks even more for your thoughts, perspectives, and way of thinking. It's the only way for me to better understand.

So is the way of the Contrarian. 

iamgpe