Barita Insights: Weekly Newsletter February 8, 2021

Analyst Insights

What is Blockchain?

The blockchain was invented by Satoshi Nakamoto in 2008 to serve as a digital journal in order to record transactions for bitcoin, a famous cryptocurrency (Crypto), but since then it has evolved into something much greater. What exactly is the blockchain?
Simply put, it’s the technology behind the cryptocurrency (otherwise known as digital money that exists on the internet), “The blockchain is essentially a digital journal consisting of various transactions that can be programmed to record not just financial transactions but virtually everything of value”- Don & Alex Tapscott. One of the most exciting aspects of the blockchain is that it has no central authority; this means it is not controlled by a single bank, government or organization but it still provides a means by which different parties that do not trust each other can share information. Take for instance if we were to send money from person ‘A’ to person ‘B’ using the blockchain. The initial transaction is represented online as a block. The block is then distributed across the network, where the network verifies that the transaction is valid. The block is then added to the chain creating a permanent record after which the record of ownership of the money is moved to person ‘B’. The genius of the blockchain network here is that it eliminates the traditional role of intermediaries of verifying and validating transactions.

Applications of blockchain

The first real world application of the blockchain technology is cryptocurrency but not only can the blockchain transfer and store money, it can also replace all processes and business models which rely on charging small fees for transactions between two parties. Here are some varied uses of block chain technology:

  • Cross-border payments: This is what cryptos have been doing successfully. Transferring money from one party to the next no longer dependson a bank. Blockchain allows individuals to connect directly, allowing for 24×7 transfers, quick processing and low transaction fees. This

    application makes blockchain highly attractive and also poses a threat to banks and institutions that provide money transfer services.

  • Smart Contracts: This is one of the most popular applications of the blockchain which is similar to real-world paper-based contracts. A smart contract is an agreement between two or more parties that is run on top of a blockchain and consist of a set of rules agreed upon by theinvolved parties. Once the rules are met the contract is executed automatically to produce the output.
  • Data Sharing: This was first introduced by a company called IOTA (The Next Generation of Distributed Ledger Technology). The idea is forcompanies to sell their unused data that would normally go to waste. Instead, it can be sent to places that need it the most with the help of blockchain. For instance, a company that captures consumer spending patterns can sell that information differently to an advertising company looking to target a specific audience for a new product launch.

Cryptocurrency

Cryptocurrency is digital money unlike your traditional paper money, it exists on the net and is not controlled by any one entity but instead uses an online system to record transactions and manage the issuance of new units. Crypto trading involves buying and selling coins, exchanging one cryptocurrency for another and exchanging traditional money into crypto. So how do you buy cryptos? You can purchase cryptos either directly from people using online marketplaces or you can use a digital currency exchange like Blockstation. Trading with Blockstation not only maintains a control environment to conduct trades but it also provides security and liquidity (buying and selling of cryptocurrencies with ease) that peer to peer trading lacks.

The price of Bitcoin broke above US$40,000 on February 6 for the first time. This time, the market sentiment surrounding bitcoin is a lot calmer than the original bull run the coin made in 2018 where it reached just under US$19,000. Some investors and traders believe that the 2020 surge is different, mainly because of who is shopping for it. Three years ago the interest in the digital currency came from retail investors. This time, some major institutional investors have decided to join the market. For instance, MicroStrategy, a business intelligence firm, splurged on a US$650 million bitcoin purchase by issuing debt, a bold move for any publicly traded company. Household brands have also attracted small investors. Paypal announced that it would allow its customers to buy and sell bitcoin on its site, following the payments Square and Robinhood, a stock trading platform, both of which entered the cryptocurrency market approximately two years ago. The interest in bitcoin is also influenced by the global uncertainty caused by the pandemic, buying bitcoin is a way for people to diversify their assets, similar to when investors seek out gold in times of trouble. None of this is a guarantee that bitcoin isn’t in a bubble or that it won’t crash to zero. Big firms that can afford to take chances may be warming up to digital coins, but it its still one of the riskiest investments out there. We urge investors to be vigilant in approaching cryptocurrency assets, and all assets in general, while reminding them that diversity will reduce the portfolio’s sensitivity to market swings. Balancing a diversified portfolio may be complicated and expensive and may come with lower returns, but this is because the risk is mitigated.

 

Written by Jonathan Cook, Investment Strategist

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