FTSE 100: 7421.43 ▲ 42.11 (0.57%)
Bitcoin futures have begun trading today and predictably, as with everything connected to the crypto-currency, they have surged.
Bitcoin futures are changing hands for $17,690 on the Chicago Board Options Exchange, up 18% on their $15,000 open price, mirroring the extraordinary surge of the digital currency to which they give access.
That’s outpacing the price of even bitcoin itself, which is currently trading at $16,473, up by more than 2,000% this year and having doubled in price in less than three weeks.
So far I have not invested directly in any crypto-currency. The extreme volatility is too much for me. Apparently the phenomenon is the biggest move in any asset class for 395 years, only trailing Dutch tulips in 1634-7. Even the dotcom boom of the 1990s was just a blip in comparison.
Values must stabilize soon if crypto-currencies are to be taken seriously. But I am certain that the blockchain system which powers bitcoin will become part of daily life.
Understandably there are still many doubters, but the world needs a centralised currency and not one supported by debt and the goodwill of lenders. Bitcoin and the other thousand or so digital currencies are unlikely to fulfil this role in their current guise without more control and governance, but they probably start the process.
I’ve just spent a day in Singapore with two kings of crypto-currencies and I now have a much better understanding of the whole system, which I shall attempt to explain.
Imagine a ledger into which transactions are constantly entered – this is the blockchain base into which entries of bitcoin, or other crypto-currencies, are being made every second. The holder of bitcoins uses them to buy a product by transferring them through the ‘ledger’ to the vendor, whose current holding is automatically credited.
Known as distributed ledger technology, automatically updated every second, blockchain is the digital ledger, acting like a spreadsheet, constantly duplicated across a massive network of computers, with all transactions made in crypto-currencies, recording chronologically and publicly.
That’s it, simple book keeping – but the ledger is an ephemeral piece of software, constantly maintained and updated, the cost of which is extracted in tiny amounts from every transaction – usually fractions of a cent.
Currency transfer is only one of many functions that the blockchain system enables and will probably change forever how many industries operate. There will be no need for depositing banks, their only role will be to operate loan books. Similarly share trading will simply go through the ‘ledger’, with no need for a broker or share certificates.
Bitcoin is only a basic trading currency, whereas ethereum, the next biggest crypto-currency, is much more than that. By making fuller use of the blockchain system, it is able to offer more facilities beyond financial accounting; it really is game changing technology which could dramatically improve everything from healthcare records, component traceability, online voting and insurance. Even the small independent Adelphi premium scotch whisky bottler has adopted blockchain ‘to enrich the consumer experience and battle counterfeit whisky’. They use QR codes on each bottle enabling traceability right through to the barley field.
This is a simplification of a complex system, but space precludes a fuller story. Suffice it to say that it will impact your life soon, but if you don’t understand it, don’t worry. You probably don’t understand the internet either, yet you use it every day. Blockchain will be the same.
The launch of bitcoin futures could be a watershed moment and bring some stability since futures can trade long or short and the two-way trade frequently stabilizes a commodity price.
The Australian Stock Exchange is testing whether blockchain could be used to replace its existing clearing and settlement systems. Nasdaq is investigating the possibility of creating distributed ledgers for private company share registers.
PricewaterhouseCoopers has started accepting bitcoin payments in Hong Kong, as have thousands of other businesses. Central banks, including the Bank of England, are meanwhile exploring the merits of a digital central bank currency.
Of course, the technology is still in its infancy and we are unlikely to see anything like a central bank digital currency in wide use for some years, but blockchain has now emerged from the shadow of bitcoin and offers a wide range of exciting possibilities ahead.
However, universal adoption is likely to be a lengthy process, slowed by regulatory investigations and increasing legislation given the enormity of the change. But as personal use increases and consumers become more familiar with the process, trust will increase, adoption will rise, and more companies will incorporate it into their business models.
While I have not invested in crypto-currencies, I have dipped my toe into the water with some companies involved in the world of blockchain.
These stocks are not digital currency, where the volatility devalues a potentially serious sector; they are real companies. If the cryptocurrencies do collapse, sentiment will obviously affect them, but value will ultimately come through.
Hive Blockchain Technologies (HIVE.V)
The first publicly quoted blockchain infrastructure company with a successful crypto-currency mining facility in Iceland. Exclusive partnership with bitcoin mining technology company Genesis gives them very effective hardware. Cash flow positive with a healthy balance sheet, they look worth a punt, but spread your risk in this fast developing sector.
BTL Group (BTL.V)
A blockchain business with a patented development platform, Interbit. Probably the current leader in the sector where clients include Visa, BP, ENI and other global organisations in the financial services, energy, registry and gaming sectors. The initial IPO was in 2015, but a money raising in first week of November was increased to $10 million (£7.5 million) to meet demand for the stock.
Kryptonite 1 (KR1.ISD)
A blockchain investment company focused on early stage projects and blockchain-based digital assets, quoted on NEX exchange, the UK junior market.
Big Wind Capital (BWC.CD)
A military-grade cybersecurity company operating in the blockchain / bitcoin sector, focused on finding and eliminating cyber threats. Recent news of patent filings to use biometric security to protect and recover bitcoins and other crypto-currencies is potentially huge.
Missing passwords and theft have become one of the biggest issues plaguing the cryptocurrency industry, with more than 35 major reported hacks of bitcoin exchanges since 2011, leading to the theft of over 980,000 bitcoins.
It will be fun to see where these prices go and my small stakes give me a toe in the water. If my confidence builds, I will buy more, and have now just added to my BTL holding.
David Kempton is non-executive chairman of Hawksmoor Investment Management and a non-executive director of Impax Funds Ireland. He is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He may have an interest in any of the investments which he writes about.