By: Chris Tell at http://capitalistexploits.at/
“Bitcoin is the anti currency”; “Bitcoin, the currency of the future”; the “currency of the resistance”; “Bitcoin is a Fad”; “Bitcoin is a fraud”; “Bitcoin is a currency for drug dealers, kiddy fiddlers and terrorists.”
These are some of the opinions I've heard thrown around when discussing Bitcoin.
I have no particularly original insights into Bitcoin, and I won't pretend to understand the technology behind it. I can barely understand how my coffee machine makes such great coffee. This is the complexity of the world.
Firstly, let me say that we think Bitcoin is "cool". I love disruptive technologies. 5000 years ago shipping changed the world. I discussed this in depth in an article entitled Predicting Prosperity. I alluded to the “Guano age” of the 1800's which was destroyed by the advent of nitrate-based fertilizers.
The Internet, at least the Internet that most of us know has only really existed since the mid-90's, and even then VOIP and data streaming were far from common. Technologies which we take for granted today have often only been around for less than a decade. Yet we're all comfortable enough with them.
In the 1990's the first fibre optic cables where being laid allowing for what would become the world wide web. Who could have known who was going to profit and who was going to fail?
When a friend introduced us to Bitcoin nearly 4 years ago now we were busy, looked quickly at it, decided we didn't understand it and dismissed it as quackery of some kind. This despite our friend being a man we hold in very high regard. Hindsight, as they say is 20:20. It was still very early days in Bitcoin history.
Fast forward to today and we've spent more time learning about digital currency (not Bitcoin per se) and this is how we see it.
Markets, especially those affected by revolutionary technology exhibit distinct patterns. This is because human beings really don't change.
Circumstances change, technology changes, environment changes but human behaviour never changes.
I found the chart below from Gartner. It provides us with a visual image of what I'm talking about.
The crazy, silly hype that existed is now over, and I think we're in the third stage.
Please note that I'm not a Bitcoin bull or bear. I think people miss the point behind Bitcoin and that point is simply that Bitcoin is at its core a technology. That technology has been replicated to a large extent with dozens of other digital currencies. As such there is no particular moat around Bitcoin other than first mover advantage. First mover advantage in technology is not always all it's cracked up to be, heck Netscape had first mover advantage too, right?
The value lies not in Bitcoin but in the technology. Technology is a market I can understand and play in. Trading, or rather gambling on what price a Bitcoin should trade for isn't.
How useful then is the technology? As Goldman Sachs IT analyst Roman Leal argues:
“in 2013 money transfer fees would have fallen by 90% if Bitcoin had been used. Global transaction fees at retail point of sale, meanwhile, were $260bn on over $10trn of sales. Using Bitcoin those fees fall by almost $150bn to $104bn."
I don't care who you are, these sorts of numbers are compelling and the odds favour this technology being utilized in the future.
I believe that the technology is here to stay. That doesn't mean that Bitcoin is here to stay. I have no idea but I do think that the cat is out of the bag in terms of the technology.
How Best to Play It
Investing in core technology (note: I said technology, not Bitcoin) companies that are building the infrastructure for digital currencies is right now the best way to play the odds game.
The market is currently disillusioned with the price of Bitcoin. It's collapsed from well over $1,000 to just over $400 today. The companies we've been speaking to, who not 6 months ago had all the arrogance of a pimply-faced teenager who'd found the powers of tequila and testosterone, today sport far humbler valuations!
The sector is ripe for discerning investment and we're actively exploring private equity in this sector. Our friends at Pathfinder Capital have setup the first FSA regulated crypto technology fund. We think they are on the right track! Target the companies building the ecosystem and the platforms that will drive innovation. Let others try to figure out which "currency unit" will win.
"Any sufficiently advanced technology is indistinguishable from magic." - Arthur C. Clarke