Blockchain for Dummies #2 – bitcoin goes bonkers, pioneering pussies and an Aussie revolution
Last Tuesday I set up a bitcoin trading account to research my blog. I got myself a blockchain wallet ID and exchanged 200 lovely concrete safe pounds for the latest gambling craze to sweep the world. This morning, I’m sitting on £308. That’s a 54% increase in 10 days. It feels like sitting in a car with a dodgy handbrake at the top of a steep hill. Revolut have joined the crypto-party and announced yesterday that their (premium) clients can now trade digital currencies with them. Some people are going to get very burned.
Also hitting the headline is CryptoKitties, a new game which lets players buy and breed gender fluid "crypto-pets" on Ethereum's underlying blockchain network. (#sentences you could not predict writing a year ago). At an average price of about £20. The volume of traffic is unprecedented and vast and these little critters are doing their best to foul up the metaphorical Ethereum litter tray. Perhaps more pertinent to our investing lives is the news out yesterday that the Aussie Stock Exchange is going to use blockchain to enable the buying and selling of shares.
What does this actually mean? If you think back to last week’s blog, my blockchain analogy was of a library, where the villagers use their own personal coloured Lego bricks to leave a record in the village square of who has last borrowed the book. Doing away with the need for the librarian’s computer as the record of ownership becomes public and visible to all.
Let’s think about the role of a stock exchange – it brings together a bunch of mutually distrusting parties who want to buy and sell shares. The exchange is the librarian, keeping the records and managing the system. And it makes a lot of money in doing so. In Q3 this year, the London Stock Exchange made revenues of £486 million.
The problem is that if that “librarian” suddenly announces that it is upgrading its technology and using blockchain – big deal. If all we do is give the Lego to the librarian and get them to use Lego rather than their existing signing out book we have not improved the situation because we still have the cost of the librarian and we also need to trust the librarian. It only becomes 'fun' when we give the Lego to the book borrowers and dispense with the librarian. This is why banks and stock exchanges and other financial institutions are in part wetting themselves about blockchain, because it makes their role in life suddenly look a lot smaller.
This week’s announcement is arguably an opportunistic tech vendor and a monopolistic market utility (a stock exchange) saying they are replacing their crummy old tech with something a bit snappier. But if we start to think about a meddle-proof public record of ownership, which does away for the need of the 21st century equivalent of omnipotent monks with quills, keeping records on behalf of us poor peasants – well, you can start to see why banks and stock exchanges and the bastions of finance look a bit vulnerable to this change. And that’s much more exciting that a bunch of weird looking cats on t’internet.
OK. Right. That is definitely enough technology for this week. I am shortly going to down tools and think of nothing more taxing that whether Mollie and AJ are going to have a pash on this week’s Strictly.