Blockchain, Bitcoin, and the future of money

December 29, 2017 | Diandra Ramsammy
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Although email is quick and easy, I still like to send postcards when I travel internationally. It’s usually a hassle, especially finding stamps, and a working mailbox. This preference of mine doesn’t mean I shun contemporary technology. Still, I like to keep a healthy dose of skepticism, especially as an investor.

Our cautiously optimistic approach allowed us to invest in some of the high fliers of today’s hot equity markets back when they were much cheaper and more appealing. We bought them when they had missed a number of quarterly earnings or after what turned out to be “busted IPOs.” We always enjoy chasing bargains and that policy has served us very well over the years.

We like to apply the same skepticism to all new technological inventions until we fully understand the change they are bringing.  As investors, we have to avoid the harms of creative destruction on one hand while capturing the wealth-creating wave that results.

Blockchain has been on our minds for a while now, and here we propose a three-part discussion.

First, we will examine the potential benefits of blockchain technology. Second, we will explain why we believe that Bitcoin might turn out to be a misuse of a great technology. Finally, we’ll sketch out our idea of the future of money, finance, capitalism.

Blockchain – a revolutionary change, and great opportunity?

In blockchain technology, we see an immense opportunity to revolutionize both many industries and many aspects of our lives.

Blockchain, simply put, is a continuously growing list of records. The records (also known as blocks) are linked together using cryptography. Each block contains a link to the previous block, timestamp, and transaction data. Because of the blockchains’ design, they are resistant to modification.

Harvard Business Review’s definition is: “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”

In other words, it is a decentralized way of keeping trustworthy records of all kind that cannot be altered retroactively.

Blockchain can be public (visible to all) or private (with limited access).

What are the benefits of blockchain?

Trustworthy record keeping

Given that it’s hard to modify historical data, and data is held in a decentralized manner, the system is very trustworthy. In simple terms, we can trust the data.


With the use of the distributed ledger (the same ledger kept by many “record keepers” – nodes or miners), the data is complete, correct, and consistent and changes are visible to all.

Fast and cheap transactions

Transactions in such a system can be processed very quickly and at any point of the day or night. Blockchain could even enable instant settlement, leading to major cost savings and efficiencies.

Let’s look at three key ways that blockchain can change our lives…

First of all, blockchain has an opportunity to revolutionize record keeping across ownership of property, health care records or voting systems — among others.

If we are able to keep trustworthy records of real and intellectual property, the potential for fraud diminishes and the cost of buying and selling property drops. It leaves less room for fraud, and it lowers the cost of selling and buying property. It could also empower billions of people in the developing world who still can’t prove the ownership of their property something that we take for granted in the developed world. Our health systems could improve with this new, better, record keeping. How we monetize our intellectual property globally, and how it’s protected could improve as well. Finally, a trustworthy, transparent, and faster voting system could further strengthen the democratic process, potentially incentivize more people to participate, and re-establish confidence in its fairness. These are just a few possibilities.

Second of all, blockchain has the potential to revolutionize our currency. Regardless of the development of crypto-currency, blockchain could dramatically improve e-commerce, payments, peer-to-peer transfers, and lending. New businesses would be created, and some traditional institutions might be in danger if they don’t adapt.

Third, the broader financial services which encompass public and private equity market, debt, derivatives could run on a blockchain-powered platform which could potentially be trustworthy, transparent, fast and inexpensive. We can see how that could make the financial service industry even more connected and even more global. In many ways, such a development could level the playing field so that investors and capital-seekers of any size could participate in the world economy in many new ways. We picture an open, unobstructed global crowd-funding phenomenon when everyone has equal access to capital and investment opportunities.

Many see in blockchain a true chance to create a peer-to-peer global economy that lifts billions from poverty by providing individuals easier access to funding, credit, business partners, suppliers, customers. In this idealized vision no talent, no resource, no value is too small to monetize. Our economic rights would be no longer secured by central government with officials, courts, armies, but by technology.

Is Bitcoin a misuse of a good idea?

In the present it’s Bitcoin. In the 1990s it was the dotcoms. Back in the 1920s, it was radio stocks:  in each instance, a new, poorly understood technology gets everyone excited, and ignorance seems to heighten the thrill.  For now, we feel that blockchain could possibly revolutionize the world we live in, but Bitcoin itself might be a major disappointment.

What is Bitcoin?

Put simply, Bitcoin is a cryptocurrency: a digital asset designed to work as a medium of exchange. Because it’s digital, it has no physical form, and its transactions are secured by cryptography.

Another distinction is that Bitcoin is decentralized, meaning it works without a central bank or a single administrator. All transactions happen in peer to peer network without an intermediary. Transactions are verified by network nodes (which download every block and transaction and check their validity) and recorded in a public distributed ledger called a blockchain. The new units are created through a process called mining, but the total number to be created is limited to 21 million Bitcoins.

Bitcoin’s challenges

Bitcoin and blockchain have their challenges. Energy consumption is one, the incentive to run and maintain is the second one. In case of Bitcoin the so-called miners get compensated through new units, but when we reach the pre-set cap of 21 million, the incentive to mine will disappear. Maintaining nodes which are crucial to keep and verify the “ledger” is costly, too, and financial incentives are not that clear.

What do we actually buy when we buy Bitcoin?

As we see it, in buying Bitcoin you buy a unit, a line of code so to speak. There is a limited number of those units, and as long as there are believers, there will be a market for them. The concept, effectively, is not that different from a trading card that can sell for a lot or end up worthless in a shoebox. The “value” is created entirely by potential buyers, and may not always be rational or lasting. Cryptocurrencies may prove to be total busts like the early dotcom concerns. The early sellers might get lucky. An early example is Litecoin whose founder is believed to have sold all his crypto-holdings. We always think that actions tell us more than words.

The future of money

Technology has already revolutionized our world. There’s no reason why money shouldn’t also be affected.

We can picture trustworthy, transparent currency, a unit of account, and immediate low-cost transactions. We can also picture an honest, decentralized, peer-to-peer global monetary system where value exchanges of any size happen in a blink of an eye.

What we don’t want to get lost in the discussion is the fundamental nature of the exchange. It always involves something of value, whether goods, services, or assets. And it always requires at least two parties.

From an island tribe to a global connected village

Let’s go back to the basics.

In simple terms, if an island tribe living on a lush tropical island is self-sufficient and never trades, never leaves, and produces only for itself, nothing has a price. Still, goods, services, and assets do have value to the members of the tribe. Let’s imagine they all live in one happy commune, grow their veggies, raise their chickens, help build each other’s homes. It’s all theirs, belongs to all, feeds all. Like a household. We don’t charge our kids for sleeping in their rooms, and they don’t charge us for throwing the garbage away, yet the value transfer happens all the time.

The minute another tribe comes with a canoe and wants to sell us some fruit or spice, our products are transformed. Where before they had value to us, now they have a price. On our island that prices are expressed in the quantity of other goods that another tribe brings. At the end of the day, their canoe is emptied and refilled with new goods: same-day settlement.

Let’s say one day we trust the other tribe more, and one day they are short of mangoes. We tell them to bring more next time. Instantly, we have IOU, or an informal line of credit You’ll pay next time we see you.

At some point a generally accepted and desirable commodity appears – salt, gold, shells. It can coexist or compete with IOUs. Then perhaps the IOUs develop a time dimension: if you are not paying now, you’ll need to pay me more later. Suddenly interest is earned.

Wealth, capital, and capitalism get established, not by a verdict or law, but because we all want to exchange with others at the right price something of value.

In a free-market economy, prices should be freely determined according to the laws of supply and demand. Our desire to create value, to trade it for something else of value, and to hold on to the value we have created, is the very foundation of any successful, wealthy society.

Over time, our trade and business activities become more complex. We don’t want to move the gold, the salt, the shells back and forth to market so we issue a warehouse receipt of sorts. We assert that it’s redeemable anytime for the gold or shells but it can also be exchanged in its own right. Our trading partners grow to embrace this system.

However, the fellow warehousing the gold (a merchant on his way to becoming a banker) sees that not all the gold is being redeemed at all times. Sometimes it just sits there idle, so he issues more receipts and creates more credit in the economy. His experiment fails a few times, so eventually, first kings and later governments start to regulate it by creating a central bank and setting rules and standards. The central bank becomes a lender of last resort and a sole issuer of the currency.

Instead of letting the early banker with controversial business practice fail, and vanish, we, in fact, legalize, formalize, and regulate what’s later called a fractional reserve banking with central bank’s oversight.

Fractional is the key word here. The banks eventually create much more credit than they have in deposit holding a fraction of their deposit liabilities in reserve. The central banks choose to hold a fraction of gold reserves to back the currency they issue. When the currency is no longer redeemable for gold, we end up with fiat currency – the dollar, the euro, the pound, the yen, and all the other.

That’s the history of money and the financial system in a nutshell, from an island tribe to a global connected village.

What’s next? Medium of exchange vs. unit of account

The foundation of today’s financial system is the use of generally accepted fiat currencies. A fiat currency is a medium of exchange as much as precious metals, salt, and shells used to be. A medium of exchange has a value that can be exchanged for goods, services, and assets. A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.

How about we do without the inconvenience of the medium of exchange itself? What if we use a unit of account that expresses a relative value of goods, services, and assets, without the medium of exchange as an intermediary.

And this is where we come back to the blockchain, but not Bitcoin. We don’t see a need for yet another medium of exchange, that seems to be yesterday’s thinking, where some see Bitcoin as tomorrow’s gold.

In an increasingly virtual, digital world, we can imagine a disappearance of the medium of exchange and an emergence of a unit of account. The unit of account by itself has no value. There is no need to store digital, virtual unit of account. It’s virtual after all. We might have to keep a decentralized record of units of account, but not the actual unit because it does not physically exist. All we really need is a ledger that keeps a record of who created what and sold to whom; who owns it now; and how much wealth was created in the process. The wealth that can be spent, invested, lent to anyone, anywhere. Blockchain could possibly be that ledger.

Optimistic about the future

In this brave new world, we picture many more investors participating in the global market, and many more tremendous opportunities of all shapes and sizes available to them globally.

In a world where property rights are respected, and ensured by technology, where there is no currency risk, an investment advisor will have many more clients, and many more options to pick from. We will be still here, possibly busier than ever helping clients evaluate, choose, and manage their investments.

Very exciting times ahead. We haven’t seen anything yet!!!


Bogumil Baranowski


This article is not intended to be a clientspecific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.