Bitcoin and the Blockchain

By Karl Maier

1. Is Bitcoin just a scam or a bubble?

To me, there are two key points to consider.

First, if someone in Venezuela or Zimbabwe was dealing with their currencies hyperinflation, they might think that Bitcoin looked like a stable store of value compared to what their government was offering. These are cases where Bitcoin (or more generally, cryptocurrencies) make sense from a current economic perspective.

Second, Bitcoin is the first example of blockchain technology. (More about blockchain in a moment.) Bitcoin’s value to blockchain is significant in that it is a proof of concept. Bitcoin has a combined market value of well over $100 billion, depending on its current market price. While people have hacked some of the exchanges that trade Bitcoin, no one has hacked the Bitcoin blockchain. If someone did hack the blockchain, they would be able to get away with billions of dollars. So, based on this standard, the technology of blockchain looks very secure.

2. Isn’t Bitcoin just for black market activity?

Actually, Bitcoin and most other cryptocurrencies (cryptos) are very traceable based on their wallet ID’s. Governments did not initially understand this aspect of Bitcoin, but they are becoming more sophisticated about cryptos. In fact, governments may eventually want cryptos to replace the cash transactions (85% of all transactions worldwide are in cash) to make transactions more easily taxable.

3. What is blockchain?

According to the Harvard Business Review, blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. Or in other words, a secure public database to trace transactions and ownership.

4. Why does anyone care about blockchain?

Blockchain has the potential to change the nature of trust. Traditionally, people have had no choice but to trust individuals and their institutions. For example, people have come to trust (to varying degrees) governments, banks, stock exchanges and similar institutions. As blockchain is outside the control of institutions that are potentially subject to manipulation, trusting blockchain only requires trusting the program that runs the blockchain. That is why the fact that Bitcoin has operated for a decade without having its blockchain hacked is a big deal.

5. What are some examples of potential blockchain transformations?

At the point that blockchain is more widely implemented, the following areas have been identified as potential areas that could be disintermediated (like Amazon has done to retail) banking, stock markets, DNA sequencing projects, social media, property title registries and many others.

6. How would banking be disintermediated?

Currently, every time a non-cash transaction happens, a bank or other institution (Visa, PayPal, etc.) is involved in the transaction and takes a fee. With blockchain, the transaction would essentially be person to person with an enormous drop in fees.

7. How would social media (like Facebook) be impacted by blockchain?

Currently, Facebook knows everything about its users and is able to sell advertisers very targeted information for advertising purposes. With blockchain based social media, individuals will have much more control over their personal information and be able to use cryptocurrencies to facilitate micro-transactions to sell bits of their information. This model is fundamentally a distributed model which is the opposite of the current Facebook-style social media.

8. When will we see blockchain transform these business models?

This transformation is not a small task. Just as the Internet rapidly changed software packaging, but has taken years and decades to transform retail, initially blockchain is likely to impact areas that do not have a good solution in place, like property titles in developing nations. It could easily take years or decades to transform areas like banking and social media.

9. There seem to be a lot of cryptocurrencies. How many are there and why so many?

There are currently over one thousand cryptos. The different cryptos have different characteristics that make them more or less interesting for specific uses. Some of the key characteristics include:

Transactions Per Second (TPS) – Bitcoin can handle about 2-3 TPS compared to the Visa network which handles tens of thousands of TPS. Ethereum can handle about 5-8 TPS, Litecoin about 30 TPS, and WAVE can handle over 100 TPS. EOS is in development and claiming it will be able to handle tens of thousands of TPS. Other cryptos are likely to come along with faster TPS capabilities.

  • Market Recognition – Just as most people around the world know and accept the US Dollar, Bitcoin has the most recognition among cryptos, however, the top 20 or 25 currencies currently have market caps over $1 billion. Most of the other 900 plus are likely not going to gain wide acceptance.

  • Smart Contracts – One of the capabilities of a few cryptos are smart contracts. Smart contracts allow agreements about digital activities to trigger the transfer of crypto money from one person’s wallet to another. Currently, Ethereum (ETH) is the main crypto known for smart contracts. Others have this capability (like Bitcoin, Stellar) or have plans to offer it (like EOS).

  • Niche – Most cryptos are focused on a specific niche. SALT is focused on lending against cryptocurrencies. Ripple is focused on being a tool for banks and payment providers. There are many possible niches.

10. Will there be a shakeout among cryptos?

Most technologies go through a phase where there are lots of options and then a collapse where there are a small percentage of the original participants. In cars, there were dozens of car manufacturers at one time. Then the industry consolidated to the Big 3 in the US. The Internet in the 1990’s had many, many companies, but very few survived the dot-com crash in 2000. The same could easily happen with cryptos and blockchain.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on nearly $475 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.