It is very easy to look at the price of bitcoin and assume that it is way too volatile, perhaps even worthless, and unworthy of wasting one’s investment dollars on. At USD3,236 the price is way off the heights of last December, when it spiked over USD19,000.
But regardless of what one thinks of cryptocurrencies like Bitcoin, Ether and other variants, they are but one manifestation of a new digital era that could change the very fabric of how we live and, more importantly, do business.
Underpinning cryptocurrencies, and every ICO you hear about being launched, is blockchain technology.
It is thanks to this distributed ledger technology that we now stand at the edge of a new frontier where assets such as private equity, infrastructure and real estate are set to become digitalised and as such, open up huge investment opportunities.
Going viral…?
Mark Yusko (pictured), Founder, CEO and CIO of Morgan Creek Capital Management is hugely excited by the future and what this digital asset world – in which cryptocurrencies will operate – may look like.
“I think we’re at the beginning stages of the viral growth stage,” says Yusko. “This is a technological evolution, as opposed to a revolution. The technology is not super revolutionary, cryptography has been around for decades, distributed ledger technology has been around for decades but what is new is the concept of zero-basis proof, the idea of consensus and smart contracts.”
Every virus needs a ‘patient zero’. The more they come into contact with people, the faster the virus spreads. But it also depends on how prone the virus is to spread. When the cypherpunks first started thinking about cryptocurrency in the late 1980s, they were on the edge of society; off-grid.
For many years, it stayed within the libertarian realm of a few rogue people who wanted to get off the grid.
To continue the virus analogy, this made it too difficult to infect people and spread the virtues of what cryptocurrency could mean for an individual’s wealth.
There was also a design flaw. Early attempts to create digital cash were too centralised and had a single point of failure. This is why Napster failed when the US Government shut down Sean Parker’s server; if downloaded songs could have been passed from one person to enough, in a decentralized system it would have been impossible to stop.
This is where Satoshi Nakamoto comes in. He, she (or they) overcame the single point of failure problem, as well as the problem of double spend. Nakamoto decided that the individual would have to publicly declare that they had sent person A a Bitcoin and everybody else on the chain had to acknowledge that this had happened.
Hence the explosion of bitcoin activity in recent times.
What excites Yusko is that whereas people fixate on the daily price of Bitcoin, of more import is the network value. Networks grow exponentially. In 1996 Google was the 21st most popular search engine, now it is a verb. But it has taken time for the Google network to develop.
Metcalfe’s Law
Cryptocurrencies like Bitcoin have not even come close to realizing their network value. The first sneeze has happened, but we are still way off a pandemic.
“As businesses are established and reach critical mass they benefit from network effects and Metcalfe’s Law takes over, which states that things don’t grow linearly they grow according to a non-linear logarithmic function, leading to exponential growth. And that’s when the virus really starts to spread.
“In Venezuela six months ago, there was around USD2,000 of daily active volume in bitcoin. Today it’s in the millions. Why? Because the currency (Bolivar) has been massively devalued, people’s wealth is being confiscated and the only way to defend against it is to hold a decentralized currency like Bitcoin,” argues Yusko.
In his view, we are at the beginning of a long S curve as we move from early adopters to the mainstream.
Picks and shovels
He refers to technology following a 14-year cycle of innovation. In computing power the mainframe was developed in 1954, fourteen years later in 1968 came the microchip, then in 1982 the personal computer was born. Another fourteen years later in 1996, the Internet was developed. Then in 2010, the Mobilenet evolved.
“In 2024, we will have what I call the ‘Trustnet’; which some people refer to as the Internet of Value,” says Yusko.
“Whereas the Internet was all about connectivity and the Mobilenet focused on the ubiquity of access to information through mobile devices, the Trustnet will establish a single point of truth that will allow peer to peer exchange of value. When you think about a true peer-to-peer world without intermediaries, it gets really exciting really fast.
“But we have to develop the infrastructure, lay the pipes, put all the systems in place, transmission and security systems, and the tools for programming. All of that work needs to be done. We are still in the picks and shovels phase.”
I ask Yusko if capitalism is failing in western economies. Riots in France and a feeling of people being left behind in large parts of the UK as it fumbles its way through the EU exit door, social tensions in other parts of Europe and the US. Is this a tipping point?
It is, says Yusko, but capitalism is not the problem, the fiat currency model is.
“Fiat currency oppresses us,” says Yusko. “There’s only so much money available to us because we’re not in control, we need jobs and the better the job the better chance we have to get more money. The problem is the central bank can, at any time, take our money and make it their money; the elites own most of the assets, all most people have is income. In an inflationary world, asset values go up and incomes go down.
“As sound money, a cryptocurrency like Bitcoin removes the threat that my income can be manipulated by an agency beyond my control.”
Upsetting the apple cart
Some high-profile financiers have a lot to lose if cryptocurrency upends the natural order. Bitcoin has been referred to as rat poison squared, or akin to trading harvested baby brains.
When incumbents see disruptive technology, they spread fear and uncertainty; just as the candle makers did when the electric light bulb was invented, telling people they would go blind if they used them in their homes.
Banking executives are absolutely incentivized to say bad things about blockchain technology because the reality is, people don’t need banking anymore, in the traditional sense. People can transfer value individually, across borders, at little or no cost; completely bypassing the Bank of International Settlements and circumventing banking treaties that have existed for 400 years or more.
“The genius of the bitcoin model is that it is self-policing,” says Yusko. “If you try to game the system, all the other nodes in the network will know about it, trust will be eradicated and your bitcoin value will go to zero. Everybody is incentivized to make sure that everything stays independent and functional because they all want their assets to have value. It is the complete inverse to the governmental fiat currency system, where the elite can, at the push of a button, steal your wealth by devaluing the currency.
“It’s happening in the US right now. Every day we are devaluing our currency. The poor cling to the idea that the elites will give them handouts while all they are really doing is stealing their wealth surreptitiously.”
He think “some number” of cryptocurrencies are making inroads to replace fiat currency – how many will succeed remains to be seen but as Yusko remarks: “I think the fiat system will steadily be defeated by the crypto system. It’s an opportunity to go back to our roots of what a money supply ought to be: a store of value and a medium of exchange, not something to be diluted or debased.”
To capitalise on the opportunities that lie ahead, the Morgan Creek team has created a new VC fund and recently integrated the Full Tilt team to form a dedicated operating arm, Morgan Creek Digital Assets, to focus on backing real companies that will develop the protocols and build the necessary infrastructure – i.e. to invest in picks and shovels, as referred to earlier.
“Also, we have partnered with Bitwise Asset Management to build the first institutional-quality Digital Asset Index Fund. The aim of the Morgan Creek Digital Asset Index, on which the Fund is based, is to become the S&P 500 of the digital age.
“We want to become one of the industry’s trusted investment advisors in the digital age,” concludes Yusko.
