Dear Reader,
The bitcoin bonanza is back. But why?
The list of possibilities is rather long…
With central bankers back to printing vast amounts of money, perhaps people want money that can’t be printed.
With taxes likely to spike in coming years to pay for COVID-19 policies, perhaps people want money that’s hard to tax.
With working from home now established, working from anywhere in the world is suddenly plausible for many millions of people. Perhaps they want an international currency like bitcoin.
With lockdowns exposing how far governments are willing to go, perhaps people want a currency that governments struggle to crack down on.
With huge debt defaults looming, perhaps people want to have a payment mechanism that doesn’t rely on the financial system.
These aren’t particularly optimistic reasons for bitcoin to boom.
But I’m increasingly thinking bitcoin itself isn’t how bitcoin will change the world. And I think it’ll change it for the better.
The technology behind bitcoin — distributed ledger technology (DLT) — will be what changes the world. It already has in many ways, bitcoin being just the lead story.
But I don’t think cryptocurrencies are the real topic you should focus on, as an investor. I think it’s the other applications of DLT which will have an impact on your life. And that presents investment opportunities.
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How Crypto Will Change Your Life
For example, the Australian Stock Exchange is set to replace its outdated share registry and transaction systems with a DLT system. That’s been delayed until 2023. But it’ll be a leap for the technology, not a step. The cost savings could dramatically change the ASX’s prospects as a company.
Another Aussie company, the National Stock Exchange (NSX), recently announced it has a DLT system ready to go and in the final stages of approval. NSX’s share price went from below 9 cents in mid-October to 38.5 cents a few days ago…not bad, even compared to a cryptocurrency.
National governments are attempting to use DLT technology on their own currencies too. Initially as a sort of parallel currency.
They love the idea of an open ledger that records every transaction and shows who owns what money. Ironically, for the opposite reasons to the libertarian cryptocurrency enthusiasts. It gives the authorities complete information about you.
Cryptocurrency’s anonymity is possible, but if you lose it or design it out of the system, the ledger becomes a tool for surveillance too. Once your ID is connected to your public key, anyone can know your entire transaction history.
If governments go ahead with their cryptocurrencies, that’ll have an extraordinary impact on your life. It’ll be the end of privacy in your financial affairs. And it’s likely the government will ‘incentivise’ the move into its digital money too…
Cryptocurrencies could deliver the opposite future to what they promised. More government control over your finances…
But let’s get away from the gloom again.
Businesses’ and governments’ cost savings from DLT will be huge. It’s comparable to what computers did to information processing and storage. Huge registries of information and vast amounts of processing power could become obsolete and our interaction with their information much more efficient. And secure too.
Many of the stocks which truly boomed over the past few decades were all about harnessing the change of the internet and computers to do ordinary things. The largest taxi company has no taxis. The largest hotel company has no hotels. The largest advertisers are really just online platforms for other activities — Google and Facebook.
The same upsets could occur as DLT gets commercialised. Businesses that currently face huge back-office costs, such as stock exchanges, could soon crush costs by using DLT technology. A large chunk of banking, legal and financial services would become obsolete as we learn to trust DLT over professionals.
I almost wrote that government departments could achieve vast cost and efficiency improvements from DLT too…but that’s not how things work in the public sector…
Then again, a few nations’ customs authorities have experimented with blockchain successfully already.
My own favourite prospect for DLT is one I haven’t read about elsewhere — although I’m sure someone has thought of it. It’s all about diplomacy and international trade.
Right now, when two governments or multinational companies deal with each other, they have a very simple problem. Whose authority do they appeal to in a dispute?
For a long time, the UK’s legal system was the go-to for multinational companies. International legal institutions have also developed. But enforceability is still an issue. And what if you can’t agree on the arbitrator in advance?
What DLT promises is something better. A system that is run by hard rules instead of arbitrary decisions and political considerations. That could bring a whole new level of trust to cross-border transactions and diplomacy. And a lack of trust is one of the biggest factors holding back businesses today, especially internationally.
International commercial legal systems, which function far better than we’ve ever had before, are now possible. Without institutions that have their own incentives and influencers.
If you ask me, we should be hunting for investments that benefit from DLT. That’s not just cryptocurrencies like bitcoin, but a huge variety of things which are barely emerging.
If you miss them because you don’t like bitcoin, well, they’re probably coming for you anyway.
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
PS: How to Survive Australia’s Biggest Recession in 90 Years. Download your free report and learn more.
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