Bitcoin has attracted all the publicity. Bitcoin has all the infrastructure and investment. For now Bitcoin dominates the space.
But the altcoins may one day come to rival Bitcoin.
Litecoin is said to be silver to Bitcoin’s gold. It has faster transaction time confirmation than Bitcoin, making it a better system of payment. It also claims its storage efficiency is better.
Like Litecoin, Dogecoin also has faster transaction time confirmation. It is a more inflationary system – there is no limit to supply and it has a faster coin production schedule. Its primary use has been for online tipping and fundraising – you see something you like, you give them some dogecoins.
Some coins have been developed which are more private and anonymous. Darkcoin is currently the most famous of these. Transactions are pooled together in its block chain, so they cannot be traced back to individual wallets. No prizes for guessing where Darkcoin is going to find use.
Other coins have greater functionality. Mastercoin is used to send smart contracts and smart properties. Primecoin searches for chains of prime numbers during the mining process – so it has use in mathematical research. Namecoin acts as a decentralized domain name server outside of the Internet Corporation for Assigned Names and Numbers (ICANN), which co-ordinates the internet’s global domain name system. This provides added protection during outages, but it also makes censorship that much more problematic, and decentralizes the American-centric control of the domain name system.
Ripple aims to allow instant, secure and ‘nearly free’ payment, exchange and remittance of any fiat currency, cryptocurrency, commodity or other unit of value from air miles to mobile minutes. It does not consume energy in the way that bitcoin mining does. It also has a transaction time confirmation of between two and five seconds.
Ethereum is combining Bitcoin’s decentralized mining system with a software development platform – more on this in a moment.
It’s not hard to envisage a future with hundreds of different altcoins – all with their own quirks and uses. Perhaps you will have many different wallets with many different coins – just as now, you have different currencies, air miles, rewards points and so on. Or, perhaps, just a handful will come to dominate – and maybe those coins that will dominate have not yet even been invented. There is a long way to go.
One thing is for sure: the next generation of cryptocurrencies is just beginning.
The multimillionaire hedge fund manager who is risking it all for cryptos
This is no squat in Bow.
It is a large house in Chelsea.
There are no broken windows or aggressive notices.
The front door is immaculately painted, the brass door ware is gleaming and the garden is green and kempt.
When I ring the bell, a formally dressed housekeeper answers almost immediately.
She shows me into the drawing room, where, after a moment or two, the master of the house and his wife come to greet me. The wife is very glamorous. For an informal Sunday, there is a lot of jewellery going on. She offers me tea, passes my order on to the housekeeper, and then politely excuses herself. She knows the men are here to talk about this Bitcoin thing that her husband is suddenly so interested in.
We’ll call him ‘Philip’.
Mid-forties, trimmed, greying blonde hair, military bearing, strong grip, clear blue eyes that are not scared to meet yours.
He manages a multi-billion-dollar hedge fund born after the collapse of the Dotcom bubble.
‘The internet bubble was ahead of its time,’ he says. ‘In 2000, when prices were high, the internet was already ten years old, but for most people it didn’t work in their house. Most people didn’t have access to email, most people didn’t know what a browser was or a website or a URL. Now everyone understands all this stuff without a problem. Price bubbles are always ahead of their time.’
He laughs.
‘In 1995, my boss told me email would never catch on and the world would be fine using fax machines.
‘People are going to be very sceptical about crypto for a very long time. And eventually you’ll wake up one day in a decade or something and they will become everyday. All the funny new terminology like ‘difficulty’ and ‘hashrate’ and ‘wallet’ and ‘block chain’, and all these new expressions no one understands will become second nature to everyone.’
This successful banker is considering walking away from what is, clearly, a very well paid job. But why?
‘For me the big problem is the market,’ he says. ‘We live in a post-QE [quantitive easing] world and there’s no value in anything. There’s definitely going to be some kind of reset in my opinion. Stock markets are fully valued in the western world, certainly in America where there’s been the most QE. Other markets just look like they’re in trouble – Japan and so on. China has got its own difficulties with maintaining this high growth rate, which seems to be unsustainable, and other emerging markets are feeding off that. And so it’s hard to see how the case for global growth is a good one. When you look at fixed income markets, yields have not been this low in living memory. So there’s no return, there’s low nominal GDP growth, there’s no inflation. Put it all together it’s pretty hard to find some good investments.
‘The world is looking for something – for a new trick. I think that crypto may well be that thing.’
I ask him when he first started looking at Bitcoin?
‘Early 2013. I went to a conference to find out what was going on. I bought some and played about to find out how it works. I tested a couple of exchanges, a Bitcoin ATM; I even bought a glass of wine at a bar in Chamonix. I’ve been fascinated ever since, but I’m still not confident in my heart of hearts as to why the world actually needs it, how it’s going to work in the future. And I also don’t fully trust the system, so haven’t yet committed significant capital. So I sympathize with the sceptic views. But at the same time I think that all those problems are being solved one by one and I hope to contribute to that as well.
‘I watched that explosive Bitcoin price move in late 2013 and it was mesmerising. You could see the excitement in all the people who owned all these altcoins. Significant wealth was created out of thin air in moments and, of course, it’s all evaporated since in most cases. There are only two or three coins that have really maintained any sort of value.’
So, how is he planning to get involved?
‘Looking at the crypto world, I recognized that a lot of sites were very amateur. A lot of the data was amateur, incomplete, disjointed. As a fund manager, my instinct is to tidy it all up – log all the sources of data and repackage them in a way that’s more digestible and more complete. Although the good data on Bitcoin is quite good, there’s really just not enough to be able to make complete decisions on whether you’d actually invest in it on an institutional basis. With your responsibilities as a fund manager, you couldn’t honestly say that Bitcoin is ready for mainstream institutional investment.
‘And so I’m trying to answer all the questions we all want answered. Is this thing real? Is the network real? Is it a bunch of spivs who are just having a bit of fun? Is it all about buying drugs? Or is it actually a new digital asset class, which is a natural extension of the growth of the internet?
‘The first thing I want to do is accurately be able to measure the state of the market. So we needed a proper index. It’s quite easy to get prices and sort of mix them together and create an index, but actually we wanted to get access to the networks of all the various different coins. We wanted to put in prices and also other inputs from social media and so on, and we want to be in a position where we can ask the questions, is this thing real? Is there a proper network with real transactions? And the way you can do that is by trying to eliminate speculative volume so you can understand what the real use actually is. And if you can find a coin that’s actually got a growing network, then it’s a highly valuable asset for the future.
‘What we’re doing here is trying to assess this as an instituti
onal asset class. If it comes up with a green light, then I think we’ll find Wall Street will be all over it in no time. Goldman Sachs and UBS have already published notes. Bloomberg publishes the Bitcoin price. Bitcoin is being taken seriously and it is being looked at. To say that Wall Street’s unaware and carrying on regardless isn’t true. Some people are waking up.
‘Of course the vast majority of people in the financial world either think it’s a scam or simply don’t care. I think many would change their minds if they bothered to study it. I’m yet to meet an informed bear.
‘I’m not going to make this decision lightly. One’s got to be absolutely certain that this crypto space is real. And I’ve been asking the question for nine months and I’m pretty convinced it is real, but I don’t quite know how or why. And the key is – why do we need Bitcoin and cryptos in the future? It’s obviously a brilliant idea and it’s not going to go away, I’m certain of that, but why do we actually need it?’
‘So,’ I ask him. ‘What do you think? Do we need it?’
‘I’m going to ask you a question,’ he suddenly says. ‘How often do you cross a border each year?’
‘Twenty times, maybe?’ I venture.
‘Yes, I think the average person would be slightly less than that, Dominic; you are a mover and shaker. But how many times do you cross a border online each day?’
‘God knows.’
‘Hundreds, right?’
He continues:
‘So here we are with this idea of ‘on the internet they don’t really have borders’ and I think that’s an important point. When we’re talking about real transactions and you say, ‘Okay, well Bitcoin, it gets rid of the banking system and so on. Great, so we go to Paris, we buy lunch and, assuming the restaurant accepts Bitcoin, we knock out some nasty thieves from Visa and MasterCard, great. I get that, but that’s not going to change the world. And if necessary Visa and MasterCard will drop their prices to compete so there could be a nice pressure – and about time.
‘Getting back to the basics of the argument, is Bitcoin a store of value or is it a means of exchange? And it’s trying to be both because, essentially, it’s a gold bar that you can email which is rather nice, because when I try to email a gold bar I struggle to get it into the socket. In that sense, cryptos really do work and very well.
‘But as a store of value you really wouldn’t want the volatility that it has. The average volatility over the last five years for Bitcoin has been 110% and higher for altcoins. For gold it’s 18%, for silver it’s 28% and for the stock market it’s about 15%. For the dollar it’s about 5%. So you are dealing with something that’s extraordinarily volatile and, as it matures, which, hopefully, it will, then the volatility will come down – presumably once it reaches a much higher price.
‘The other way volatility could fall is by having a deeper order book. So, of course, there’s a chicken and egg here because, if institutional investors become buyers, then falls won’t be as severe because there’s going to be more depth in the market. Certainly, there will be more sellers when the price rises, so that will reduce the volatility as the number of participants in the market increases. The whole thing’s still very immature.
‘The store of value argument makes sense, but I can’t think that many people would see Bitcoin as a safe haven, as things stand.
‘This idea about crossing borders many times a day on the internet…Well, imagine there’s a blogger in Australia and they’ve written a nice article and actually they want to be paid a little bit of money when people read their thing. He’s not set up on Visa, you don’t want to type out all this stuff on a credit card. Surely, if you were to pay him 50p’s worth of bitcoin for this incredible article that he’s written, or a piece of data that he’s calculated that for some reason has value to you, it enables little transactions like that to happen on a vast scale. You can do it quickly and simply and get rid of all this noise in the middle. Ironically, I think cryptos are more likely to push the world towards paid content than the other way around – because they enable it in a way that wasn’t possible before.
‘Imagine there’s a situation where there’s some wonderful exposé that’s just happened. Let’s say Victoria Beckham is caught having an affair or something like that, and it’s released on a blog with a live video. For the next 15 minutes this is the most important piece of web real estate in the world. You can just imagine an advertising system that’s auctioned a space above that video via a Bitcoin-based system that’s automatically picked up the traffic levels. The people buy the adverts through a bit of artificial intelligence that has just gone and made the decision to spend your Bitcoin budget for the day there – as opposed to the current system, which is probably not speedy enough. And so I imagine the whole idea of artificial intelligence and computers thinking for themselves and exchanging value, without us even touching the keys. I would rather load up my computer with bitcoins to do that job than let it have access to my bank account. What I am suggesting is open source. No middlemen. Just a vast ecosystem in which to exchange value for a whole host of reasons that I can’t even imagine today.’
‘Is crypto actually going to replace fiat?’ I ask him. ‘Are we talking about a new form of money here? Or is it something else?’
‘There’s no reason why one day they couldn’t put the dollar onto the block chain, as it were, and make it cryptographic, so that you can email it around the world as you do Bitcoin. They probably should do that, but it’s still going to be centralized. Cash pays interest, it’s controlled by the state, it has an exchange rate and an assumed rate of inflation. Cash is cash. Commodities are commodities. Cryptos are somewhere in the middle. They’ve got commodity-like characteristics and they’ve got transactional capability as well. It’s a new asset class.’
‘What’s a better buy?’ I ask him. ‘A hundred grand’s worth of gold at $1,300 an ounce or a hundred grand’s worth of bitcoins at $500?’
Without pausing, he answers.
‘If you want to make lots of money, crypto; if you want to preserve your wealth, gold.
‘The world needs bubbles. I think they’re an inevitability of the current system and we’re always looking for a good candidate, but it’s got to be credible. We’re not just going to go and inflate tulips in this day and age.’
‘How would you invest in Bitcoin?’ I ask him.
‘Well, I think that what is more interesting is to find a good altcoin – to find a real network that’s growing that’s not Bitcoin. I think Bitcoin itself is a very interesting investment. You should probably have some money there. But on the side if you want to make the real money, the catch-up trade – some altcoins. I think your first trade should just be $50 to try and learn how the system works. Don’t do anything until you’re absolutely comfortable with how the system works. Then I suggest you go and put 90% of your crypto book into bitcoins and 10% into altcoins. To find the good ones, don’t believe the stories and avoid hype. Avoid new coins, they are actually worthless most of the time, and they’ve got no network. Stick to the ones that have been around for a while.
‘As for companies, I don’t think there’s a single investment that you can make that’s non-private at this moment. You can buy a hedge fund that owns bitcoins, but you may as well do it yourself.
‘Most people have got more money in their pension fund, their 401k plans or their ISAs, so if you can have a vehicle to own a wacky asset, that enables crypto investment using these pools, then that’s an incredibly attractive proposition. Like the gold ETFs. They solved a legal problem. The first person to package Bitcoin for the mass market will make a fortune.
‘That is what we’re hoping to do.’
How Bitcoin is just the start of something much, much bigger
Ethereum is probably the most talked-about development in cryptography at present. Some call it Bitcoin 2.0.
It combines the decentralized mining system central to Bitcoin with a software development platform. Its founders s
ay the potential applications are unlimited: from peer-to-peer betting, to financial derivatives, to identity and reputation systems, to insurance and legal contracts.
Some say Satoshi Nakamoto may now even be working for Ethereum.
Its former CEO is Charles Hoskinson. A bespectacled, bearded, extremely bright, friendly and fast-talking mathematician.
I met him over Skype.
I wanted to talk to him about Ethereum. But there was something else. I’d been tipped off that he was holding copies of all the private emails Satoshi had sent when Bitcoin was being developed. People had handed copies of their correspondence with Satoshi over to him, on the understanding that Hoskinson would archive it all and make it publically viewable. But, once he had collated all the emails, something changed his mind. He now wouldn’t let anyone, including me, see them without Satoshi’s express permission.
‘That’s not something I’m ever going to get,’ he says laughing.
I asked him about his background.
‘I started as a mathematician in analytic number theory, and then I moved into cryptography because the problems were a fair bit more applied and interesting. And I worked for a variety of government and private interests.
‘Imagine doing a Google search, but not having Google know what you’re searching for. Or maybe navigating with Google Maps on your cell phone, but not having Google know where you’re going. Basically, operating on encrypted data without ever decrypting it. That’s what my most recent cryptographic projects before going into Bitcoin were about. It’s called fully homomorphic encryption – really good awesome stuff if you can get it to work.’
He doesn’t own many bitcoins, I discover. I ask him why.
‘From an economic perspective I don’t like Bitcoin too much. I don’t think it’s a viable currency. Generally money has three components. It’s a store of value, a means of exchange and a unit of account. And you need all three for it to actually be real money. And then of course there are a lot of properties that you generally look at to determine if it’s high quality money or not. So you look at things like the visibility, ease of transferability, how the scarcity dynamics of the money work. You look at the range of products and services that you can acquire for that token. You also look at the groups of people who have control over the supply-and-demand dynamics.
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