Investor Archives

Deutsche Bank: Europe Strains, Bitcoin Gains?

Posted on September 28, 2016 | by [email protected]

Europe Strains

The European banking system is struggling in the face of regulatory burdens and low interest rates. Banks are shifting business models to work within narrower margins.

In recent days, Deutsche Bank has contributed to the pooling fears over European Banking. Since July 2015, shares have decreased in value by more than 65%. Furthermore, net revenue dropped 21% in the first half of 2016 relative to 2015.

Deutsche Bank U.S. Stock Exchange Chart from Yahoo Finance

In addition to prior problems, a recent request from U.S. Department of Justice for $14 billion from Deutsche Bank has prompted media attention and concern. Bank officials have denied the need for a government bailout, yet limited investor confidence is reflected in the low share price, that has not experienced a strong rebound.

Meaning for Bitcoin

Bitcoin exists as an alternative to traditional banking systems. The weakening banking system validates the value that Bitcoin investors place on decentralization for two reasons. First, if Deutsche Bank’s initial failure is the product of a centralized system, Bitcoin is a good option for mitigating the risk of further future problems. Second, if Deutsche Bank’s failure is contagious because of a centralized system, Bitcoin is preferable because an internal failure would be largely limited to Bitcoin. These considerations have fueled excitement on Bitcoin forums such as Reddit as investors watch the European situation unfold.

In weighing these validating factors, it’s important to recognize that the comparison is somewhat between apples and oranges. Bitcoin and traditional banking systems are similar in that they facilitate the flow and storage of funds. However, they differ in prevalence and human interaction. The struggles of Deutsche Bank highlight issues associated with human error. In a hypothetical world in which Bitcoin is more prevalent than it exists today, regulatory burdens and government controls would contribute problems to Bitcoin, similar to those faced by the banking system.

A complete shift away from centralized systems and banks, as Bitcoin purists would have it, may seem like an extreme reaction to many investors. More likely, weakness in Europe serves as a motivator to place a stronger emphasis on diversifying through decentralized investing strategies, such as Bitcoin.

Investment Firm Raises Bitcoin Valuation

Posted on September 26, 2016 | by [email protected]

Bitcoin Valuation Adjustment

In a recent report, investment firm Needham and Company revised the estimated present value of Bitcoin from $655 to $848. The estimate accounts for a projected increase in market share in the retail payments market, upward trending adoption rates, reduced volatility, and technological developments surrounding Bitcoin. The firm believes that the global market for retail payments will reach $67.5 trillion by 2020 and that Bitcoin will likely capture .28% ($182 billion) of payments. Using confirmed Bitcoin transactions as a correlative tool to estimate total transactions, information from blockchain.info reveals that daily confirmed transactions have approximately doubled over the past two years to 200,000 per day.

Graph from Blockchain.info

Reduced volatility also contributes to Needham and Co.’s analysis of Bitcoin. Volatility is now more comparable to traditional assets, even smaller than certain energy and technology stocks. Lastly, the investment firm believes that the expansion in technologies surrounding Bitcoin that will come to market over the course of the next year will increase demand for Bitcoin, driving the value upwards. The rapid growth in valuation reflects the magnitude of these shifts.

Report Credibility

The report was issued by New York based firm Needham and Company. The firm has offered investment banking services and asset management for 31 years. Since its founding, the firm has led or co-managed over 785 public offerings and completed over 385 mergers and acquisitions.

Report author Spencer Bogart is a chartered financial analyst, with two years’ experience as an equity researcher at Needham and Company. In a previous report, Bogart estimated the value of Bitcoin to be $655, over $200 higher than the $412 present day value of Bitcoin when the report was issued. Following his previous estimation, the value of Bitcoin exceeded his estimations, reaching $675 within three months of his projection. If his current estimates are accurate, Bitcoin investors can expect serious value growth in coming months.

Needham and Co. logo from wikipedia, Blockchain.info graph from article.

Bitcoin’s Rising Role in Higher Education

Posted on September 23, 2016 | by [email protected]

Education Background

The prominence of Bitcoin at higher education institutions suggests that college and university students are engaged and interested in cryptocurrency. This post is largely in response to the claim that Bitcoin is unpopular with students, issued in article by cryptocoinnews.com and the Boston Globe. In these articles, authors use an MIT study to support the theory that Bitcoin is not popular with students. The study was conducted by two MIT students who raised $500,000 for research. Using the funding, they issued $100 in Bitcoin to every undergraduate student on campus. Over the course of the two-year study, they monitored usage rates and foudn that 3/5 students stopped using Bitcoin and cashed in for $100 USD. News outlets have taken this as an indicator that Bitcoin is unpopular with students in this demographic. However, upon scrutiny, these findings are not robust.

To offer a personal opinion, an adoption rate of 40% for a currency that could revolutionize finance seems significant. Ignoring opinions, college student expenses are high. The opportunity cost of holding onto $100 in cryptocurrency for academic purposes deserves recognition. These two considerations warrant a high level of skepticism in considering the headline conclusions from news sources.

Signals of Growth

Even if the study demonstrated low adoption rates of college students, Bitcoin’s presence in higher education has increased in tangible steps. Elite educational institutions, such as Stanford and NYU, now offer Bitcoin development and litigation classes. Princeton released its first draft of a Bitcoin textbook earlier this year. The visible growth of Bitcoin is due to a growing demand from students.

An Important Demographic

The debate surrounding Bitcoin’s popularity begs the question: why should investors care? As a succinct answer, college students today can help predict the future of the currency. As classes develop to clarify the legal status of Bitcoin, or promote the development of Bitcoin and blockchain apps, usage will become increasingly widespread. Positive usage rates positively impact Bitcoin value.

Decentralized vs. Fiat Currency: Identifying Failure

Posted on September 21, 2016 | by [email protected]

Decentralized Currency

Critics have cited Bitcoin’s decentralized nature as problematic to long-term investment, but this criticism deserves deeper analysis. Notable dissenting voices include investor Warren Buffet and economist Paul Krugman. Critics are entitled to their opinion. In considering the potential demerits of Bitcoin, however, investors should be aware of the benefits associated with its decentralized character. The intent of this post is to explore the failures of historical fiat currencies. (For reference, fiat currency describes government issued and/or authorized money, lacking intrinsic value.) From fiat currency failures, the benefits of a decentralized system become clearer.

Currency Failures of the Past

Fiat currencies, similar to Bitcoin, are susceptible to shocks in value. Since they lack intrinsic value, immaterial forces can dramatically influence their worth. This post examines the failures of the German Papiermark, the Argentine Peso, and the Zimbabwean Dollar.

After Germany’s World War I defeat, the Treaty of Versailles mandated Germany provide war reparations to allied nations. When Germany neglected payments, France and Belgium occupied areas of German production, which forced the German government to print papiermarks for salaries. As the quantity of currency increased, the value of the currency decreased. This induced a spiral of hyperinflation.

Following the 1973 OPEC oil embargo, Argentine budget and trade deficits threatened to collapse the economy. In response to growing debt and civil unrest, the Argentine government printed money. The value of the peso drastically decreased, until the government established a new peso to stabilize the economy.

The situation in Zimbabwe echoed that of Argentina and Germany. Excessive government spending and economic problems led the government to overissue currency. The government printed Zimbabwean dollars in higher denominations as the value of the dollar plummeted.

Lessons Learned

Each of these cases shares a common denominator. Social, geographic, and political forces contributed to devaluation, and eventual collapse, of each of these currencies. Bitcoin is exempt from these sources of error. As an independent, decentralized currency, Bitcoin will not face pressure from foreign governments or internal unrest. Monetary supply is fixed, which means that supply will not respond to changes in the world. Effectively, Bitcoin removes the element of human error.

The argument of this article is imperfect for several reasons.

Historical currencies are tested under harsher conditions than Bitcoin through wider use and longer duration.
This piece overlooks the benefits of monetary policy, which have been used to stabilize economies.
Hyperinflation, which is the common source of failure among these currencies, could still occur to Bitcoin.

Despite these imperfections, the trend in other intrinsically valueless currencies points a finger at geo-political variables as the culprit for currency failure. Since Bitcoin avoids geo-political variables, it may be less prone to failure.

Bitcoin’s Disruption: Conflicting Opinions

Posted on September 19, 2016 | by [email protected]

Acknowledging the Disruption of Bitcoin

Since Bitcoin’s creation in 2009, financial professionals have considered the new technology a threat to financial services. The financial services industry moves, trades, stores, lends, and accounts for money. In an article published by McKinsey and Co. Don Tapscott points out that each of these practices are challenged by Blockchain technology. Tapscott was not alone in recognizing Bitcoin as potentially disruptive to financial services. As visualized on the below Google Trends graph, Bitcoin attention has spiked since 2013.

The disruptive nature of Bitcoin spurred public attention. From 2013 to the present, major consulting firms such as Deloitte and McKinsey have issued reports on Bitcoin’s disruptive nature, with specific interest in the underlying Blockchain technology. Financial firms, such as Goldman Sachs and Morgan Stanley, are seeking to understand Bitcoin and employ tools such as the Blockchain, which is evidenced by their reports over the same period.

The consensus remains that Bitcoin is a potentially disruptive force. The effect of Bitcoin, and in particular Blockchain technology, may extend beyond the financial services industry. This article examines professional, conflicting opinions regarding this disruptive reality.

Professional Opinions on Bitcoin Disruption

Paul Krugman: In December 2013, Paul Krugman wrote an article for the New York Times, “Bitcoin is Evil.” In his piece, his first qualm with Bitcoin is that it fails as a store of value. Unlike gold or USD, it has no floor of value. This criticism alone seems insufficient to label Bitcoin “evil,” but he proceeds to identify Bitcoin disruption as a threat to infrastructure, using a quote from Charlie Stross.

“Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind- to damage states ability to collect and monitor their citizens’ financial transactions.”

Krugman’s critique of Bitcoin technology is understandable, particularly in the wake of the Silk Road, which shed light on horrible illegal transactions, facilitated through the use of Bitcoin. However, I believe he overlooks the benefits associated with the efficiency of a decentralized system.

Blythe Masters: The decentralized nature of Bitcoin that Krugman dislikes has inspired confidence and investment from Blythe Masters, economist and former executive of JPMorgan Chase. Masters, recognized as a developer of credit default swaps, has invested time and money into the development and re-purposing of Blockchain technologies. In a 2015 interview, she highlighted Blockchain technology’s ability to reduce risk as a motivator for her transition into the FinTech industry. Her faith in Blockchain technology led her to acquire the CEO position at Digital Asset Holdings, a Blockchain technology company providing settlement and ledger services. Master’s faith has not been misplaced. Digital Asset Holdings opened a London office in January 2016, and hired eight new executives as of August 2016.

Spells of Genesis: Bitcoin’s Entry to Online Gaming

Posted on September 16, 2016 | by [email protected]

Bitcoin and Gaming

The recent release of online game Spells of Genesis (SoG) signals a positive transition in the usage of Bitcoin for online games, even though Spells of Genesis uses another platform called Counterparty, which powers smart contract execution and has its own assets some of the game’s success will pour over into Bitcoin as well.

In its early years, Bitcoin was used for many illicit activities, including illegal online casinos. Recently, however, game developers have worked to integrate Bitcoin into conventional video games. This movement is part of a greater transition, legitimizing Bitcoin in the eyes of the public, in response to growing demand for a decentralized cryptocurrency. Recent games include Wargame, Night Becomes Butterflies but SoG is a little different in the sense that its tokens called BitCrystals which power the blockchain-based trading cards are much more representative of a free and more fair game economy where people actually owns the assets they purchase and are free to trade them in any way they want and nobody can take them from them.

Through these games, users can conduct in game purchases using Bitcoin. Bitcoin payment integration could expand the Bitcoin user base, remove barriers to entry, and help create a demand for Bitcoin in games where it is not yet present.

Spells of Genesis

EverdreamSoft, a Swiss based gaming company, created SoG as a mobile game that mixes trading card play with arcade gaming. The development team developed the game in close contact and with feedback from the developer community. This is not their first rode as EverdreamSoft experienced early success from the release of an earlier mobile game Moonga, which has had over a quarter million downloads since release. The SoG uses the same fantasy world as Moonga, although the structure of the SoG is different. In game play has a feel similar feel to online arcade games, much like those of miniclip.com. These arcade games are paired with a longer storyline for users to build up a profile and develop strategic ownership of different cards. By leveraging a loyal user base, EverdreamSoft could promote the growth of SoG and the associated blockchain gaming platform.

For Bitcoin investors, the payment methods SoG could open the doors to Bitcoin for the gaming world. Digital gaming sales reached $61 billion in 2015. Even a fraction of $61 billion in transactions would have serious consequences for Bitcoin, which has a market cap of $10 billion. Of the top earners, League of Legends secured the number one spot with $1.6 billion in revenue. League of legends follows the “freemium model,” which allows users to play freely and pay for premium features. SoG employs the same freemium model, featuring in game micro transactions. These microtransactions use BitCrystals, part of the blockchain gaming platform, which can be exchanged for Bitcoin. Blockchain technology’s decentralized nature enables the currency to move about, beyond the scope of the game. If SoG can successfully replicate the growth of other online gaming models, or if BitCrystals are integrated into other systems, this could seriously increase the value of Bitcoin.

Image sourced from Spells of Genesis.