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One of the most talked about subjects of late centres on cryptocurrencies, which polarises opinions like few others. What does it all mean? Where is the value? Can one make money? Is it too late? BACCI decided to research this and wanted to focus on trying to understand the Blockchain technology at its core, and share some of the findings with you all.
Blockchain is completely overhauling the way digital transactions are conducted and could eventually change the way several industries conduct daily business. Two words that have become part of the mainstream dinner party chats are Bitcoin and Blockchain, which are often used interchangeably even though they shouldn’t be. These terms refer to two very different things.
Bitcoin is a form of virtual currency or cryptocurrency, which is decentralised and allows users to exchange money without the need for a third-party. Well at least this is the intention. All bitcoin transactions are logged and made available in a public ledger, helping ensure their authenticity. The underlying technology that facilitates these transactions and eliminates the need for an intermediary is the blockchain.
I suppose one of Blockchain’s main benefits lies in its transparency, as the aforementioned ledger functions as a chronicle of all peer-to-peer transactions that occur.
Each time a transaction takes place, such as one party sending bitcoin directly to another, the details of that deal – including its source, destination and date/time – are added to what is referred to as a block. This block contains this transaction as well as other similar types of transactions recently submitted, apparently within the previous 10 minutes when dealing with Bitcoin in particular. The validity of the transactions within the cryptographically-protected block is then checked and confirmed by the collective computing power of miners within the network in question.
Essentially, these miners are computers which are configured to solve complex mathematical problems, passing the block’s data through a hashing algorithm until a solution is found. Once solved, the block and all of its respective transactions have been verified as legitimate. Rewards (i.e Bitcoin) are then divvied up among the computer/computers that contributed to the successful hash.
Now that the transactions within a block are deemed valid, it is attached to the most recently verified block in the chain, creating a sequential ledger which can be viewed by anybody. This process continues in perpetuity, expanding upon the blockchain’s contents and the aim is that it provides a public record that can be trusted. In addition to being constantly updated, the chain and all of its blocks are distributed across the network to a large number of machines, which ensures that the latest version of this decentralised ledger exists virtually everywhere, largely eliminating the possibility of fraud.
Blockchain has come to the forefront of many discussions because of its role in the distribution of cryptocurrencies like Bitcoin. In the long run however, these digital cash transactions may end up being a very small part of blockchain’s technology’s overall footprint and the way we transfer assets online.
The possible blockchain implementation seem endless, as its underlying technology can ideally be leveraged in virtually any field to perform a number of tasks, for example:
Private Blockchains should allow companies to revolutionise their own internal processes, whilst public open-source variations could continue to change the way we handle business in our daily lives.
For Blockchain to function properly, these are 5 key areas it needs to represent:
Whilst the underlying technology seems to be a little better understood, the apparent main cryptocurrencies are Bitcoin and Bitcoin Cash. How these perform now and going forward is really anyone’s guess. The price volatility is a critical factor though, and it is important to understand that we as an investment business do not see Bitcoin as an investment, because there is no basis for value, and one invests in this cryptocurrency with the hope that the price will go up. At best it could be a speculative investment for a small portion of your portfolio. Until there is greater clarity around government regulation and less controlled ownership of Bitcoin (apparently only 21 million in circulation with a large majority held by first mover investors) we can’t hope to see stability in terms of price movement.
As a business, our investment approach is unconstrained with an emphasis on capital preservation in real terms. For these reasons we prefer exposure to companies that are simple with understandable business models strong cash conversion and healthy balance sheets; transparent financial statements, and sensible capital allocation. Where we allocate capital to other managers on our behalf we look for managers that share our investment philosophy, with a proven track record and commitment to this process. Wealth is created and preserved by following a disciplined approach with a low turnover and a specific focus on the price one pays for an asset at inception. This is often one of the few things in financial markets one can control. This approach should ensure superior long-term returns.
If you have an interest in discussing this further, we would be happy to talk.