I’d say bitcoin has been a disappointment in terms of how much real world use it has gotten (as in people actually using bitcoin, not just trading it back and forth because they’re convinced that their local currency is being debased or because they smell a speculative opportunity), and I expect that will continue … but perhaps we’ll get to the point (and banks are genuinely researching and testing blockchain technologies) where the ideas behind bitcoin are a key part of the financial system. It’s just that I think we’ll still convert every dollar to bitcoin before it enters that blockchain, then convert it back to dollars as it leaves, all within a few moments — bitcoin makes sense to me as a transfer technology, but not as something you use to sock away your savings in a bitcoin wallet. Which isn’t to say I’m unwilling to test it out. I speculate on lots of dumb things (in fact, my last “Idea of the Month” piece for the irregulars was all about dumb and speculative things I’m trying with small amounts of capital), and I have a small amount of bitcoin that I bought when I was experimenting with it a couple years ago and seeing whether it would be of any help to me (or a help to my business, as an alternative to accepting credit cards). I didn’t find it all that convenient or useful, but I’ve still got a bitcoin wallet with a small amount of bitcoin in it… and it’s a small enough amount that I don’t need the money to pay my bills, so I’m leaving it there as a reminder to keep half an eye on this digital currency stuff.
So… when Teeka Tiwari and the folks at Palm Beach Letter started teasing that they were issuing a “strong buy” on a digital currency that they call “the next bitcoin,” I thought I should check it out. The push Tiwari is making is in ads for his Mega Trends Investing newsletter… and thankfully, he does point this out as being a high-risk investment in the ad — he implies that it could reach the heights that bitcoin did a couple years ago, when the early adopters who bought bitcoin on a lark were suddenly turning their $100 bitcoin investment into enough money to buy a Porsche, but he does note that the downside potential is 100%, so we’ll give him credit for that:
“Now, of course, the key here is position size.
“Don’t bet the farm.
“That way, you only have a small loss if you’re wrong. But you get lottery-like returns if you’re right.”
There has only ever been one digital currency that reached substantial scale before, and that generated great returns for a lot of early adopters, so it’s not necessarily true that the only two possible outcomes are “zero” or “lottery-like returns”… we really have no idea.
We’re conditioned to use comparisons because that’s the best way to justify a stock’s valuation (as, today, I looked at the difference in valuation between Facebook and Google to see what I thought made more sense), because the stock market has lots of liquidity and lots of analyst brainpower being thrown at it every day and “Mr. Market” generally wants similar companies to be assessed using the same metrics. It’s logical.
But if you’re taking one new digital currency and comparing it only to the one digital currency that has been a success (and ignoring the hundreds of others that were complete flops) you’re setting yourself up for a very biased mindset. Given the compressed timelines of modern life, you could argue that this is more like looking at the first US stock offering (the Bank of North America, in the late 18th century) and saying it would certainly be a hit and spike in value because the Dutch East India Company had been a huge hit and caused a huge bubble when it was the world’s first IPO in 17th century Holland.
Maybe that’s a reasonable mindset, since it’s probably true that this new currency is the first one to have pretty widespread adoption in the years bitcoin was introduced… but maybe not. These are uncharted waters, and there should probably be a little sign in scrolly script that says “here be monsters.” That “maybe you’ll lose it all” note should be taken more seriously than the “lottery ticket” bit.
But where’s the fun in that?
So, with all that disclaimer and dissuasion up front, what is it that Teeka Tiwari is actually talking about?
Here’s a bit from the ad:
“Will ‘The Next Bitcoin’ Make You Rich?
“BRIEF: In 2013, Bitcoin made headlines as it went from $13 to $1,147 (an extraordinary 8,526% gain). Now, a former Bitcoin developer has started a rival currency that’s gone up 1,000% this year. Already, Microsoft, IBM, and 11 banks (including Wells Fargo) have tested it. ‘A new virtual gold rush is underway,’ reports the New York Times….
“Vitalik Buterin, a Canadian programmer now living in Switzerland, has just developed a secret ‘currency alternative’ that could let early investors turn every $200 placement into a rare, once-in-a-lifetime return of $6,850.”
This is, as you can certainly find with any Google search, a reference to Ethereum, a relatively new digital currency project (that’s a simplification, Buterin wouldn’t refer to it as a “currency”). The currency enabled by the Ethereum project is commonly called Ether, and yes, you can buy “1 ether” for about $12-13 these days.
Tiwari’s argument is that there are three triggers that could “ignite the next bitcoin” like he says the Cyprus crisis ignited the bitcoin explosion. Those are, as he describes them, the “war on cash” with governments trying to do away with large cash transactions and large denomination bills; the move to negative interest rates; and the movement of either of those trends to the United States, which has so far resisted negative interest rates or penalties for holding or using cash.
Here’s one final bit from the ad (you can see the whole ad here if you want more):
“On March 30th, Microsoft made a huge announcement—They will soon let over 3 million of their developers work on “the next Bitcoin” through their Windows platform.
“This is massive!
“By one measure, that’s over 19 times the developers working on Bitcoin.
“As one ‘next Bitcoin’ enthusiast noted, it’s like ‘Bitcoin on steroids.’
“And as another noted, ‘I am beginning to doubt how bitcoin will manage to stay ahead.’
“So here’s what you need to do:
“I’m issuing a strong ‘buy’ recommendation for ‘the next Bitcoin.'”
Ether has not been around as long as bitcoin, but it is more flexible than bitcoin — and it has also been subject to what seems to have been a nasty split. Following some sort of theft of ether that I don’t really understand last month there is now Ether, typically abbreviated ETH, which has been adjusted with what they call a “hard fork” in the programming to prevent whatever happened in that theft from happening again, and “Classic Ether” (ETC).
The best explanation of Ether that I’ve come across is from one of the folks at Coinbase, which is the company I have an account with for my “bitcoin wallet,” and there’s also a short video from Vitalik Buterin here explaining the ethereum platform. (There’s also an article here about the ether/ether classic split, though you can find a lot more about that in some web browsing if you’re interested, it’s been a wild month in the world of alternative currencies.)
So what’s going to happen with ethereum, or with the ether currency?
Damned if I know.
The Microsoft interest and support for the the ethereum platform is real, though still quite small in the context of Microsoft, and I don’t know what it might mean in the end. This is still a work in progress, and people are just beginning to build tools on the platform.
It sounds really cool and powerful, but I’m not at all capable of assessing what it might do in the years ahead. The value of the ether currency in US$ terms depends on whether people have confidence in it, and whether they get excited about it and buy it more quickly than people want to sell it. Bubbles can form in anything, and interest in alternative investments and alternative currencies can certainly fluctuate dramatically. And hackers are inexorably drawn to alternative currencies, as we’ve seen by losses and collapsed exchanges in the past with bitcoin.
I do think it’s interesting, and I’ve decided to do what I did with bitcoin — buy a little bit of it and see what happens, and try to understand it more fully by reading more.
And I do mean a little bit, like the amount I might spend on a good dinner out. Thankfully, I don’t have to learn some new system or create a new account or get more involved just to get a basic transaction and start to understand it, because my Coinbase account supports both bitcoin and ether. So… now I’ve got a little bit of ether in my back pocket. And hopefully I’ll learn more. I am not counting on it creating a lottery win for me (in the ways that count, I’ve already won the lottery several times in my life), but I won’t object if I make some money from it.
That’s about all I can tell you — Ether is being promoted as a next-generation bitcoin, and ethereum as a platform is being examined by banks and financial folks just the way they’ve been looking at the bitcoin blockchain technology (you can’t “buy” into ethereum more broadly, from what I can tell, and there isn’t a stock or a for-profit enterprise in charge, it was crowdfunded and is collaborative). There’s been some discussion of Ether by readers here at Stock Gumshoe, both in relation to this ad and as a “what’s going on” query following the heist last month, and I’m sure plenty of readers know more about than I do — if so, I hope you’ll chime in below with a comment.
I don’t know if we’ll have a huge surge and an ether bubble, or if there will be another thousand alternative currencies and something better and cooler will come along that gets everyone excited… and if you think the dollar or the financial system will collapse, I’d feel a lot better about holding some gold and silver coins than I would about relying on a particular digital currency. But the blockchain idea seems here to stay, and more powerful than we yet understand when it comes to bringing security and speed to all kinds of computer communication, and I like what I read about ethereum more than I liked what I read about bitcoin a few years ago (even if I probably don’t really understand either)… it should be interesting.
P.S. If you want to reward your friendly neighborhood Gumshoe, you can check out Coinbase using my referral code and I’ll get some kind of payment of a mysterious tiny decimal of a number of bitcoin or ether as a reward for sending you their way (I’m not arguing that Coinbase is the best way to buy or hold bitcoin or ether, and I wouldn’t dissuade you from using some other exchange, service or wallet — I don’t know anything about most of them, Coinbase was just the service that I found easiest to handle and I trust their system with some of my money). Or, better yet, if you don’t give a hoot about bitcoin or ether you can sponsor my fundraising ride for cancer research and treatment here. Thank you!
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