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Cryptocurrencies: Iniquitous or Misunderstood?

• https://bravenewcoin.com

"We cannot change anything until we accept it. Condemnation does not liberate, it oppresses."

– Carl Jung

Often, I start editorials with a quote because I find it to be a useful mechanism for summarizing complicated discussions. The quotes are not meant to reflect any political, social or business prejudices I harbor. I've quoted everyone from Benjamin Franklin to Karl Marx, Gloria Steinem to President Trump, and Warren Buffet to Yogi Berra. If the suit fits, wear it.

At a recent investor conference, JP Morgan CEO Jamie Dimon maligned bitcoin and other cryptocurrencies, and issued a warning to any employee who may be thinking about the currency as his or her next big investment score, suggesting he would fire anyone who trades bitcoin "for being stupid." He equated the recent valuation runup to that of Holland's Tulip Bubble in the 17th century. It may be his firm's policy to restrict trading in certain instruments, but being a risk-taker is no reason to suggest a person lacks intelligence. 

Some of our most acclaimed intellectuals take enormous financial risks. The investments work out for some, while for others, it leads to their financial downfall. Warren Buffett, the Oracle of Omaha, famously wagered on Goldman Sachs and Bank of America at a time when banks were on the precipice. Ten years later, shareholders of Berkshire Hathaway are reaping the rewards of his risk tolerance. Sir Isaac Newton, widely known as a leading mathematician and physicist and the scientist who formulated the laws of motion and gravity, lost the equivalent of $3 million dollars investing in shares of the South Sea Company over a brief period in 1720. He never recovered financially. Risk clearly cuts both ways.

The hype and euphoria surrounding cryptocurrencies propelled a 400% increase in bitcoin's valuation earlier in the year. Shares in the South Seas Company increased ten-fold before its subsequent crash. Gouda tulip bulb prices rose 6,000% from 1634 to 1637, and about 1,500% in the year before they crashed. At one point in 1637, a tulip bulb had the value of 10 years' worth of average wages. In this context, to equate bitcoin to tulips is seemingly an over-exaggeration of the facts.

The market should bifurcate the discussion surrounding cryptocurrencies. There is the one of valuation (which is Mr. Dimon's criticism that may someday prove correct), and the other is about viability. Now, simply seeing price fluctuations for bitcoin and translating them into investment return opportunities in a global marketplace where returns are increasingly hard to achieve given low interest rates, volatility, etc., is the easy part of the equation. Understanding the meaning of how a unified global currency can produce efficiency by eliminating much of the waste in the system is slightly more difficult.

Japan is embracing change, once again demonstrating a penchant for being at the forefront of technological innovation. Legislators in the country recently approved a law that makes bitcoin a legal form of currency. As of April, more than 300,000 Japanese retailers can legally start accepting the cryptocurrency as payment for commerce. Ironically, in a month when cherry blossom trees were in peak bloom in both Tokyo and Washington, D.C., the two countries seemingly diverged in their views around the emerging asset class. U.S. regulators have done little since to promote innovation, governance or debate.

"We cannot change anything until we accept it. Condemnation does not liberate, it oppresses."

– Carl Jung

Often, I start editorials with a quote because I find it to be a useful mechanism for summarizing complicated discussions. The quotes are not meant to reflect any political, social or business prejudices I harbor. I've quoted everyone from Benjamin Franklin to Karl Marx, Gloria Steinem to President Trump, and Warren Buffet to Yogi Berra. If the suit fits, wear it.

At a recent investor conference, JP Morgan CEO Jamie Dimon maligned bitcoin and other cryptocurrencies, and issued a warning to any employee who may be thinking about the currency as his or her next big investment score, suggesting he would fire anyone who trades bitcoin "for being stupid." He equated the recent valuation runup to that of Holland's Tulip Bubble in the 17th century. It may be his firm's policy to restrict trading in certain instruments, but being a risk-taker is no reason to suggest a person lacks intelligence. 

Some of our most acclaimed intellectuals take enormous financial risks. The investments work out for some, while for others, it leads to their financial downfall. Warren Buffett, the Oracle of Omaha, famously wagered on Goldman Sachs and Bank of America at a time when banks were on the precipice. Ten years later, shareholders of Berkshire Hathaway are reaping the rewards of his risk tolerance. Sir Isaac Newton, widely known as a leading mathematician and physicist and the scientist who formulated the laws of motion and gravity, lost the equivalent of $3 million dollars investing in shares of the South Sea Company over a brief period in 1720. He never recovered financially. Risk clearly cuts both ways.

The hype and euphoria surrounding cryptocurrencies propelled a 400% increase in bitcoin's valuation earlier in the year. Shares in the South Seas Company increased ten-fold before its subsequent crash. Gouda tulip bulb prices rose 6,000% from 1634 to 1637, and about 1,500% in the year before they crashed. At one point in 1637, a tulip bulb had the value of 10 years' worth of average wages. In this context, to equate bitcoin to tulips is seemingly an over-exaggeration of the facts.

The market should bifurcate the discussion surrounding cryptocurrencies. There is the one of valuation (which is Mr. Dimon's criticism that may someday prove correct), and the other is about viability. Now, simply seeing price fluctuations for bitcoin and translating them into investment return opportunities in a global marketplace where returns are increasingly hard to achieve given low interest rates, volatility, etc., is the easy part of the equation. Understanding the meaning of how a unified global currency can produce efficiency by eliminating much of the waste in the system is slightly more difficult.

Japan is embracing change, once again demonstrating a penchant for being at the forefront of technological innovation. Legislators in the country recently approved a law that makes bitcoin a legal form of currency. As of April, more than 300,000 Japanese retailers can legally start accepting the cryptocurrency as payment for commerce. Ironically, in a month when cherry blossom trees were in peak bloom in both Tokyo and Washington, D.C., the two countries seemingly diverged in their views around the emerging asset class. U.S. regulators have done little since to promote innovation, governance or debate.

Perhaps it is human nature to fear what one does not understand. For now, fear is being fueled by anecdotal reports and quotes from the underinformed, suggesting the emergence of digital currencies, the growth of initial coin offerings (ICOs), and developments in tokenization are the haven of nefarious enterprises. Relatively speaking, the capital markets community knows relatively little about the subject. More education is required. TABB Group plans to dedicate part of its own efforts to providing education, thought leadership, and advisory services in the discipline. Change is upon us; the market needs to embrace it and progress toward a new paradigm. 

To learn more about the cryptocurrency market, please contact TABB Group for details on our upcoming research report, "Embracing Coin: The Emergence of Universal Settlement."

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