What about Bitcoin?
“What about Bitcoin?” is a question I have been hearing a lot lately, so I thought I’d write about it here. First, let me digress.
In 1848, gold was discovered in California and hundreds of thousands of people throughout the world travelled there to “strike it rich” by mining for gold.
Five years later, in 1853, a salesman from New York ventured out to San Francisco to provide dry goods for the miners. At first, he provided general clothing and supplies. Later, in 1870, he developed pants for the miners with riveted pockets that were very durable and he eventually sold millions of them. The man was Levi Strauss, and his “blue jeans” are still a product that is in demand today.
Some of the miners did strike it rich, but most went bust. It was the companies that sold the picks, axes, shovels, clothing and dry goods that made the most money. In my opinion, this relates to Bitcoin.
What is Bitcoin?
To begin a discussion of Bitcoin it helps to first understand what it is. Bitcoin is a digital currency, or electronic currency, that has no central bank. It allows payments to be sent from user to user without intermediaries. Payments are verified and recorded in a secure public ledger called the Blockchain (more on Blockchain below. This is critical).
Some predict that digital currencies will replace paper money, but I’m skeptical. Even if it eventually does replace paper currency, there’s no telling whether Bitcoin will be the one to do it. There are over 2,000 digital currencies available. Bitcoin is simply the most popular right now.
What is Blockchain?
Blockchain is the technology platform that Bitcoin runs on. It’s a type of database that stores data in blocks. These blocks have robust security and data capabilities. Once they’re filled up, secure and verified, they are closed and cannot be altered. Another block is then opened and connected to the prior block. This process creates a chain of blocks, hence the name.
The benefits of the Blockchain are many. The main benefit is security of data. Once a block is verified and closed, it can never be altered. Imagine a spreadsheet of historical information that users could add to, but never change the prior entries. It provides data that can be relied upon, and rather quickly.
Companies are already using Blockchain today for critical items. In 2018, there was an outbreak of e.coli-tainted lettuce that made scores of people sick and killed 5 others. At the time, the supply chain was paper-based and inefficient. It took over 3 months for authorities to trace the tainted lettuce back to farms using water from a certain canal.
Shortly thereafter, Walmart created a Blockchain database (in conjunction with IBM) and required every company that sells them leafy greens to put their supply chain on it. Every movement of produce is entered into the chain with tremendous amounts of data so it can be traced. The results are incredible. Walmart can now trace a produce shipment to the original farm in 2.2 seconds.[1]
Now let’s return to the Gold Rush and how it relates to Bitcoin and the Blockchain. In my opinion, Bitcoin (or any of the digital currencies) relates to the miners. Some will strike it rich but most will go bust. The Blockchain relates to the companies that sell the picks, axes and shovels because they can be used by anyone, not just the miners/digital currencies. It’s possible that cyrpto-currencies, like Bitcoin, could be the future. But the Blockchain will be used (and IS being used now) whether or not crypto-currencies are successful because there are many more applications for it.
If you have any questions or wish to discuss this further, please don’t hesitate to contact me.
Notes:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. The forecasts set forth in this material may not develop as predicted.
[1] “Bubble or Revolution? The Present and Future of Blockchain and Cryptocurrencies,” Neel Mehta, Adi Agashe, Parth Detroja, 2nd Edition, 2021