Blockchain & Cryptocurrency, blog from Matthew J Mulholland, Investment Advisor
It seems like everywhere you turn, someone is posting about Bitcoin, Ethereum, or blockchain in general, but like most people, I merely thought of this as a passing tech gimmick. Since starting at Hotaling, I wanted to find some way to make my mark on our client base, so as the resident millennial, I figured that the fledgling world of cryptocurrency would be a great place to start.
Cryptocurrency is a broad term to describe any digital, encrypted asset that serves as a medium of exchange. While concepts of cryptocurrency date back to the end of the 20th century, the term truly caught on with the invention of Bitcoin in a paper published in 2008 by the pseudonymous Satoshi Nakamoto in 2008.
In the paper, the author lays out a plan for a fiat currency build around “block chain”. Blockchain is an algorithmic way to securely and openly maintain a list of records. Ownership history is stored through a public record attached to the individual asset (the bitcoin), and the public record is adjusted every time the asset changes hands. These changes are then distributed throughout the entire network. Through this peer-to-peer storage and the NSA-created, one-way encryption algorithm known as SHA-256, the more widely adopted the currency, the more secure the blockchain. The supply of bitcoin is also controlled through this open-end encryption, as new blocks are only created as users are able to crack parts of the algorithm through a process known as “mining”. Instead of pick axes and hard hats, customized computers with multiple GPU (Graphics Processing Units) attempt to verify the blockchain. Successful attempts slowly decipher new blocks, and the discoverer is subsequently rewarded with new Bitcoins. While the most common usage of GPU’s has been for high-end video gaming, miners have found that these chips are better at doing many simple calculations (which is required for mining) than CPU’s, which traditionally do most of the labor in a home PC.
A change is coming to the Bitcoin encryption technology on August 1st, 2017. The change, called “Segwit2x”, increases the block size, as well as having many other stabilizing effects. Market participants are divided on whether or not to begin utilizing this code in their mining, with the dissidents believing this change will lead to a corporatization of bitcoin. They want to retain bitcoins status as a libertarian currency, which differentiates itself from Ethereum, a similar blockchain-based currency whose price has surged in 2017 due to its more corporate-friendly approach. If a majority of miners do not adopt this new technology, Bitcoin would split in two after August 1st, with a SegWit-only bitcoin, and a duplicated non-SegWit compliant bitcoin. Such a deviation is almost certainly bound to increase volatility in the already volatile cryptocurrency.
While investors may be enticed by the exorbitant returns in the currencies themselves (Bitcoin up ~140% YTD, Ethereum up ~15,000% YTD), the volatility and liquidity of these currencies makes them too risky for direct investment for most clients. However, there are many other ways to profit off the recent surge of interest in these currencies, if you believe this trend to continue. The surge in mining requires many more graphics cards to be sold, so a long position in the leading providers of these cards, could act as a proxy for Ethereum/Bitcoin. The surge of interest in these cards has left suppliers with limited inventory. Chipmakers with larger scale production already in place are in a better situation to profit from this short term burst of interest.
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