Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
Last week we dove into the brave new world of blockchain and cryptocurrencies. I read some good passages from a prescient 2014 essay by venture capitalist Marc Andreessen who explained and validated many of the amazing accomplishments we've come to see from "fintech" and Bitcoin, nearly four years later.
In this episode of the podcast, I read a few more important ideas that Andreessen shared back then, including his explanation of Bitcoin as "a classic network effect, a positive feedback loop" of at least four constituencies: consumers, merchants, miners, and developers.
Andreessen believed that all four players were important but that developers played a special role. Here's what he said...
All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. And at our venture capital firm, Andreessen Horowitz, we are seeing a rapidly increasing number of outstanding entrepreneurs – not a few with highly respected track records in the financial industry – building companies on top of Bitcoin.
For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance.
What Andreessen got right was the success of Bitcoin. What he may not have seen is that other platforms could evolve with new features.
As we discussed last week, while Jamie Dimon of JPMorgan calls Bitcoin "a fraud," he built a new blockchain banking technology called Quorum on the Ethereum cryptocurrency protocol.
"Bitcoin Surges Back Above $7200 As Square Tests Crypto Payments"
That was the headline this morning from ZeroHedge. Recall in last week's podcast Blockchain 101: If Bitcoin's a Fraud, How is Ethereum Different? we talked about Bitcoin surging to new highs above $7,000 after CME Group (CME) announced they would be launching a futures contract on Bitcoin.
That further validated Bitcoin as a legitimate member of an asset class -- or, more likely, a new asset class of its own as Marc Andreessen would probably suggest.
But the day after my podcast, a big decision event for Bitcoin miners and developers transpired, sending share flying first higher, then over $1,500 lower. That potential event, known as a "hard fork," is a radical change to the protocol that makes previously invalid blocks and transactions valid, and as such requires all nodes to upgrade to the latest version of the protocol.
This is why I asked my colleague and Bitcoin fanatic Dave Bartosiak to be a guest on my podcast and help me break it all down. He explains the "hard fork" and why it didn't happen. He also explains how to avoid losing your hard-earned cryptocurrency with the right kind of crypto "wallet."
One thing Dave explained is that Bitcoin started surging on Monday from below $6,000 up over $6,500 as word got out that a hedge fund master named Novogratz bought between $15 and $20 million worth over the weekend. More on him coming up.
Back to Square
The ZeroHedge story was actually broke by Forbes on Tuesday night as Laura Shin reported “Some customers of Square's Cash app have gotten a surprise in the past week. The app, which is used for payments between friends and is a competitor to Venmo, has also given them the option to buy or sell Bitcoin.”
Not-so-ironically, word started spreading on Twitter, as Jack Dorsey was a founder of both companies. Early Wednesday morning, Bitcoin was in surge mode, up over $700 to $7,300 because the Square experiment added further validity from a leader in "liberated" payments processing.
Square (SQ), the peer-to-peer payments provider which just hit a $15 billion market capitalization today above $40 per share, is apparently testing integration of cryptocurrency payments in its cash app.
According to CoinTelegraph, Square has issued a rollout to a limited number of customers, using pooled wallets to allow Bitcoin payments without the current high fees.
"We’ve found that customers are interested in using the Cash App to buy Bitcoin,” the company said in a statement.
“We're exploring how Square can make this experience faster and easier, and have rolled out this feature to a small number of Cash App customers. We believe cryptocurrency can greatly impact the ability of individuals to participate in the global financial system and we're excited to learn more here.”
Banks and Hedge Funds Are Getting Ready for Bitcoin Adventures
In addition to JPMorgan's entrance in October into the Blockchain realm with Quorum, in September there was chatter about Goldman Sachs launching a trading desk to facilitate liquidity and hedging for their institutional clients. They probably knew that CME was researching a Bitcoin futures contract.
Well on Monday, Reuters talked to Mike Novogratz, the former macro hedge fund manager at Fortress Investment Group who now runs Galaxy Investment Partners, a firm that bets on cryptocurrencies and related businesses. He believes that mainstream institutional investors are about six to eight months from adopting bitcoin.
In the article Big money is coming to bitcoin, Novogratz is quoted talking about a "turning-point product" from a big financial firm that could make buying Bitcoin as easy as picking up the phone. There is also a video interview in that link.
“When it’s that easy, the price of bitcoin or ethereum is going to go much higher. And that is a lot closer than people think,” said Novogratz, who spoke at the Reuters Global 2018 Investment Outlook Summit in New York.
Novogratz also told Reuters that he bought $15 to $20 million worth of Bitcoin over the weekend in that recent pullback.
And on Tuesday, Reuters spoke with Luke Ellis, CEO of hedge fund firm Man Group, with $100 billion AUM. Ellis said the firm will add Bitcoin to its 'investment universe' if CME launches a futures contract as planned. So there is a case of an established trading institution like CME attracting other entrants.
But maybe the Square news is what Novogratz was talking about. He did tweet this on Wednesday: "Big news -- looks like Square is adding a function to buy and sell BTC... the herd is coming #bitcoin."
Note: in the podcast, I mistakenly referred to Novogratz as the CEO of Man Group.
CME Group to Provide Regulated Price Discovery… and Arbitrage
While there has been concern about CME entering the Bitcoin market, I am a firm believer that it's a fantastic move for all participants. I used to work for the exchange and came to understand its economic functions of risk transfer and price discovery quite well across all asset classes.
The CME Bitcoin futures will bring a new level of transparency and access to big institutions, small hedgers, and private speculators. And obviously, a new ability to "go short" Bitcoin will provide its own brand of fun to those who believe that the cryptocurrency is a bubble waiting to burst.
In the podcast, Dave said he's getting the popcorn ready for mid-December when the contract launches. We also discuss the pros and cons of the newest CME initiative. You can learn more about the CME contract here.
On the pro side, I really like the fact that exchange officials and quants did their homework for the past year to track and create reliable Bitcoin cash market price information. This is extremely important since the futures contract will be cash-settled in some rule-based relationship to these prices.
This brings in a vital market function that links various related cash markets and their derivatives: arbitrage. In short, if a price isn’t “fair” in one location, a bank or large trading institution should be able to buy the cheaper version and sell the pricier one.
According to the CME website, "CME CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI), a standardized reference rate and spot price index with independent oversight are accelerating the professionalization of bitcoin trading and further establishing digital assets as a new asset class."
The BRR and BRTI launched November 14, 2016 and CME notes that "Several bitcoin exchanges and trading platforms will provide pricing data, including Bitstamp, GDAX, itBit and Kraken.
I'm really looking forward to the launch of this futures contract and all the other financial, trading, and payment institutions that will step out before year's end with their own Bitcoin initiatives.
This week's past news and research has really opened my eyes and I now have a "sure thing" prediction of my own: Bitcoin will reach $20,000 sometime in the next year, well before it ever fails and collapses to zero as the naysayers believe.
What's a Teraflop and Why Does the New Xbox Have 6?
Dave is also a "gamer" and so while I had him on the show, I had to ask about the exciting new launch of the Xbox OneX. I heard that sales in the UK were trouncing the new PS4 Pro and that it is now the fastest console on the planet with 6 teraflops of processing power.
A teraflop is the capability to handle one trillion "floating point operations per second" (FLOP).
Dave explained that the One X also has the capability to be upgraded, thus eliminating hesitation and preventing buyer's remorse over obsolescent consoles.
Check out the full podcast for his views on the console wars between Sony and Microsoft (MSFT) and the GPU chip wars between Advanced Micro Devices (AMD) and NVIDIA (NVDA) -- both of who also make the chips that power cryptocurrency mining.
Finally, I asked Dave -- a car fanatic like none I've ever met -- what we should expect from Tesla's big announcement Thursday about their new electric truck. While we can be pretty sure one reveal will be that the truck is autonomous too, Musk usually has more surprises too.
And a tweet on Sunday was already prepping the hype...
“Tesla Semi Truck unveil to be webcast live on Thursday at 8pm! This will blow your mind clear out of your skull and into an alternate dimension. Just need to find my portal gun.”
Be sure to tune into the Mind Over Money podcast to hear my favorite car expert's wild prediction about what Elon could have in store for us.
The one burning question I forgot to ask Dave was this: "Why didn't you tell me to buy Ethereum at $10 earlier this year?"
Disclosure: I own shares of NVDA and AMD for the Zacks TAZR Trader portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service.
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