Investing in Blockchain Technology Through Digital Coins


With Bitcoin surpassing $50,000/coin, we have had an overwhelming interest and questions on behalf of our clients, so we thought we would put together an email to address investing in blockchain technology through digital coins.

Perspective

Let’s take ourselves back to 1985, when the internet first began, and some people utilized it by either entering chat rooms to have public conversations, or basic email through AOL.  Remember how our original emails didn’t allow for attachments such as photos or articles, there were no links to websites or other information on the web for us to reference?

What if someone told us back then, that 35 years later, this technology would evolve into a medium for finding any information that existed- basically making encyclopedia’s and libraries irrelevant. What if they told you this technology would provide a platform to view any product or service that existed in the world, and allow you to conduct a transaction with that business without ever physically going to it or picking up a phone. This innovative technology would even enable you to conduct any financial transactions using your banks or credit cards, without ever speaking to a banker or setting foot in a branch! Imagine you could send pictures, video’s documents, and even run a business in a virtual environment now called the “cloud”.  Not to mention, accomplish all of this by reaching into your pocket and pulling out a mini super computer that fit in your hand and that also allowed you to make phone calls.  What would you say?  No f-n way!? Or “Not in my life time!?”  

If someone told you at the time that you could invest in that space, may your response be the same? Would you take the risk?

Modern Day

We are now living with the accessibility to world at our fingertips. Had you invested in the internet 35 years ago, you may have the financial freedom people aim to have. Technology is everchanging and now there is a buzz around blockchain & digital assets. Knowing what happened 35 years ago, are you keen to learn more?

Now we are not saying or implying that blockchain technology will have the same magnitude of change or impact in our life as the internet, but we are saying that it has some very powerful elements that has the potential to advance and change how we do use the internet and those mini super computers we now call

smart phones. Everything we just referenced and the current web as we know it primarily allows for such functionality using some form of centralized database, to account for everything. Blockchain is the disruptive technology that could decentralize databases, proving to make your personal information more secure and private.

For example, we mentioned being able to store pictures, video’s, documents on the cloud, we typically are using some services such as Amazon Web Services, Apple iCloud, Google Docs, Microsoft One Drive, and DropBox or Box. These companies are using some centralized system.

When completing financial transactions using your bank or credit card, these are also using some kind of centralized database and intermediary being that specific bank or credit card merchant are most likely tied into the federal reserve which is also an intermediary in this case.

Seeing how many industries use centralized systems, do you see the potential room for change?

2020 & 2021 The Acceleration of Trends & Adoption of New Technology

We have all observed large companies, institutions and governments responses to the global pandemic. Some which we would agree with, some which we would disagree with, some that were successful, some that were unsuccessful.  Although a very serious pandemic by any measure, all of us can agree that this was on the mild end of what it could have been or what we could face in the future.

The question that arises now is how dependent are we on these governments, companies and institutions, and how dependent should we be.

The younger generation has spoken, and they have a preference for less involvement by large parties and more involvement by peer groups. Of which, they are adopting all things that fit these criteria very rapidly.  Perhaps their approach could be viewed as antiestablishment, or just as a catalyst for change and finding more efficient ways of doing things. 

For instance, when we purchase a house now there are wires moving money, law firms and escrow accounts, brokers, deeds and mortgages to be recorded.  Several moving parts and parties involved to make sure the transaction is valid and safe. What if we could simplify buying a house without multiple moving parts & third parties? Imagine having one place on the web to make this transaction, and then having one code or “address” on the web that you could look back and see all of the parts of that transaction, including the history of the property.  

What about when we purchase a plane ticket, a reservation for a hotel or vacation, what party holds the verification and details and how was it paid?  What if all of this information was on one address on the web. 

When it comes to sending money to someone or a business, we can currently use: Wires, Zelle, Venmo, Paypal, Amazon pay, Apple pay and so on. It typically takes a day or so for the funds to clear. What if we could instantaneously send any amount of money, to anyone in the world, regardless of their currency, without fees or time delay. And to be clear, completing all these transactions with no third party involved.  

Now let’s think about when we send a wire or pay for a good or service by credit card, how do we prove that payment was made?  We typically use something like the fed funds identification number for the bank wire and the credit card transaction history or statement for a credit card charge. What if none of that was necessary because it was recorded on an address on the web and you could simply show proof of the payment via a code or key that would reveal the details. 

All of these things are not only possible, but they are happening to a small and large degree on the blockchain. Like all technologies they will evolve in time and morph into other a new use cases, many that we can only imagine. 

Decentralized Finance

Essentially in the used cases above, you have financial instruments and transactions not tied to any one organization. This new way of transacting business is called Decentralized Finance or DEFI for short. Think of it as a parallel universe to the traditional banking and financial system and prevalent adoption from the younger generation. This DEFI has an opportunity to disrupt the traditional long-standing banking and financial system; taking market share over time.  In response to this, the traditional players in this space have been innovating to compete. However, it’s yet to be determined if they can re-design an old technology to compete with one that was designed specifically for the purpose of reducing friction, cost, increasing speed and efficiency.

Investing in Blockchain Through Digital Coins

The term coin makes us immediately think of a small circular piece of metal that is used to purchase something.  In the digital asset world, it has some relevance for some types of coins, but not for others.

In general, there are three types of coins which I’ve outlined below.  By purchasing one of the coins, in each category, you are essentially making a bet and investment in that category.

The first category is an Alternative coin commonly referred to as an Altcoin, with the most prevalent Alt coin being Ether.  The Alt coins really are just platforms for applications built on blockchain by developers/programmers. Essentially creating something that will have real utility and purpose.

The second category is a Stable coin, with one of the most prevalent being USD Coin.   The Stable coins are being used more similar to digital currencies with a smaller trading range and sometimes tied to an underlying currency or asset.  They will probably turn out to be closer to a digital currency, and are also used as a path to purchase other coins. 

The third category is a Stored Value coin, with the most prevalent being Bitcoin. The stored value coins have wide fluctuation in values and are not tied to any underlying currency or asset class.  They are being viewed as a stand-alone asset class that can accompany other asset classes such as commodities like gold.  This coin has been viewed as a better way to hold value than cash or other assets that may depreciate over time with inflation. 

Re-examine the Incumbents & Establishment

I think it’s fair to assume we can all agree that this pandemic has accelerated the use and utility of everything digital amongst all of us, and that we understand the younger generation’s preference has been digital for a while now.

Another trend and discussion we’d like to address is, how reliant do people want to be on large and concentrated institutions such as Governments, Fortune 500 Companies etc. We have trusted these intermediaries as they have represented safety and security both figuratively and by actual policy; but do we question how and if they maintain strong enough balance sheets, are their officials or executives making the most prudent long-term decisions? 

Then of course, there is the increasing pressure on the federal reserve to print money to deal with the financial impact from the pandemic, in addition to the long-standing issue of financial inequality that only seems to be widening as a result of the increase in asset values.

Regardless of the political party you may affiliate yourself with, do you feel having asset values and securities tied to the federal balance sheet as safe and secure as it once was and may become?  We are not at all speaking about solvency and the ability of the U.S. govt to meet all obligations, just the notion that people may start to prefer intermediaries other than the U.S. govt or in fact no intermediaries.

What if technology now existed that could take the place of our governments & large corporate intermediaries? Would you replace them with trusted technology that represented decentralized sources driven by peer groups?

Blockchain offers this secure technology via a decentralized ledger system that can track and account for all transactions of which are verified by other computers, every second of the day, whilst not being controlled by one party that charges a fee, but rather everyone participating. 

Below are illustrations to help you understand the Blockchain technology.

Here is a visual of what a Blockchain looks like


Each Block includes Data of Transactions, a Hash which is a unique “fingerprint” for all data in the block, and the Hash from the previous block’s data

Each block contains data about multiple transactions

Each Hash is unique to each block in the blockchain which is why its called a “fingerprint.” When the data in the block changes, so does the finger print

In addition to the blocks own Hash, It will include the Has from a previous block, therefore the history of data is consistently held within the Blockchain. This allows the blockchain to be tamper-resistent as it becomes very easy to identify when data in a Black has been changed.

A Blockchain is not stored on one person’s computer, rather a large network of computers called peer-to peer networks and thus is decentralized and updated across the entire network of “Nodes” or members. Each time a new block transaction is added to the network, all nodes within approve the transaction via a consensus. This also reduces the ability of Hackers who try to attack the blockchain, unless they access a majority of the computers within the network.

Each software that uses a Blockchain will provide its users with a public and private Key. Similar to a Hash, each key is unique to its users and provides access to your block. The public key is known to others to send data and the private is personal and is used as your digital signature to access. Both keys combined become your Blockchains “Cryptography” as its a mixture of numbers and letters.

Wide Spread Adoption & The Network Effect

Think about Facebook, Venmo, LinkedIn etc.   Initially there were only a few users, then more started using the application, then more and more and eventually most of the globe.  With widespread adoption comes the network effect & the true utility being able to be realized at scale.

Regulation

There is a lot of uncertainty regarding digital coins and some of that uncertainty is in the area of future regulation. To date, it is relatively unregulated although there are some notable early actions.

The Commodity Futures Trading Commission has designated the digital coin bitcoin as a commodity, and the internal revenue service has stated that the digital coin bitcoin must be treated as property for tax purposes.

Two of the regulations we foresee in the space will involve 1. the elimination of anonymity of owning the digital coins to prevent them being used for the payment of illegal means, and 2. More control over the institutions and custodians that store the coins so that the proper taxes can be levied on transactions relating to a profit.  

Many people believe more regulation will decrease the value of the coins, and many believe it will increase the value. Only time will tell but we believe common sense regulation will be favorable.

Investing in Digital Coins

There are many different ways to purchase, trade, and sell digital coins, as well as methods for holding the coins. There are also many strategies for investing in these digital assets. 

Traditional banks and brokerage companies do not have the infrastructure, process and protocols to store these coins safely. Coins can be stored in either Hot Storage (unsecure, but liquid) or Cold Storage (more secure, less liquid) custodians or an external wallet. A wallet looks like an external hard drive that allows one to transfer their coins on and off exchanges securely, however it does present the risk of wallet damage, loss or password issues. Many digital custodians offer hot storage trading platforms, however there are a few digital custodians that offer cold storage and insurance for your assets. We have analyzed such custodians, and for now have chosen Gemini Trust Company, LLC.

As far as strategies are concerned, there is a wide spectrum of solutions; and if there is such a thing as the conservative end of the spectrum of speculative investments, it would be to buy and hold the two most prevalent coins Bitcoin and Ether.  Although the 24/7 digital coin market has more volatility, Alt coins are recommended for more risk adverse investors.  Linn Wealth Capital Management looks to buy on pull backs and dollar cost averages each week to mitigate price fluctuations.

The demand to purchase digital assets has been strong, however the new account procedures are stringent and clients may experience delays. To establish accounts for our clients, we have partnered with a firm called Eaglebrook Advisors to help streamline the onboarding/verification process and also to execute trades on our client’s behalf at the custodian Gemini.  Clearly this is a dynamic and quickly evolving space and we will continue to monitor both Eaglebrook and Gemini, but believe they are both best in class solutions and will be long-term partners. 

Linn Wealth Capital Management is a registered investment adviser.

As with all crypto assets, a complete loss of capital is always a potential outcome.

Founders of Gemini | Cameron & Tyler Winklevoss

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