Bitcoin May Fade, But Blockchain Technology Is Here To Stay

Steve Pomeranz: Now that some of the Bitcoin hysteria has subsided, I thought it would be a good time to take a fresh look at it. A fresh look at it and all the cryptocurrencies that have been created. I’ve asked Christian Magoon, a veteran in the exchange-traded fund arena, to join me today to see if there are any new areas of focus in the digital marketplace. Hey, Christian, welcome to the show.

Christian Magoon: Hey, thanks, Steve. Great to be on. I listen to you on iTunes quite often, so a pleasure to be not only a listener but a guest.

Steve Pomeranz: That’s great. Remember everybody, we’re on iTunes and you can podcast us. Let’s get from the very beginning. Let’s say I never heard of Bitcoin or Blockchain. Let’s start with Blockchain, ’cause that seems to be the area that people think really have amazing long-term potential. What is Blockchain?

Christian Magoon: Yeah. Blockchain is a foundational technology, and one way to think about it is to go back maybe 20 years when we learned about another foundational technology called the internet. A lot of us learned about the internet for the first time by encountering a website or using email. That was an application built on internet technology. Bitcoin is an application, as are other cryptocurrencies, that’s built on Blockchain technology. What Blockchain technology is is a decentralized ledger. Another way of saying it is it’s like a massive data spreadsheet that’s not held on one computer and instead it’s held on many computers, and it’s a network that really stores, verifies, and secures data. Some people have said the internet is like the information superhighway, Blockchain is like the data verification and transaction superhighway. It creates a trusted way to transact all-around data.

Steve Pomeranz: If you create a transaction, what exactly happens that allows that transaction to be spread I guess to different computers around the world to be tracked back to its original source? How does that work?

Christian Magoon: There’s essentially a network of computers that form the Blockchain. There’s public Blockchains, something like Bitcoin or other cryptocurrencies where you or I could buy a Bitcoin. We suddenly become part of that network. Then there’s private networks where maybe a group of companies our service providers would enter in that’s just for them. Essentially data is entered into the Blockchain in the form of a block. That block and that piece of data then needs to be verified by an algorithm that all the computers on the network share. Essentially it involves cryptography and decoding whether or not that piece of data is valid. Once it’s confirmed by one computer and they, quote-unquote, solve it by the way that’s called mining, then all the other computers take that answer and run it backward to verify it. Once it’s verified that piece of information or that piece of data, the block, gets chained to all previous other blocks or pieces of data in this Blockchain group. That’s really where it gets its name, and that’s one of the unique parts about Blockchain is that there’s not one central party that decides if data is correct or not, that stores the data, and that offers a lot of interesting implications when it comes to speed, trust, as well as cybersecurity.

Steve Pomeranz: Wow. Good answer. Actually, I understood it. So, congratulations. Where does Bitcoin come in? I mean, you said it’s an application based on this Blockchain, but it’s an application that does what? I know what email does. What does Bitcoin do?

Christian Magoon: Bitcoin really, I think, is designed as a store of value. Some people would say it’s a commodity. Other people would say it’s a currency. It’s kind of up for debate. Essentially it’s a store of value and with that Bitcoin, you can actually go out and hopefully transact whether it’s trading or buying different types of potential intellectual property or maybe even a pizza. In a famous case where someone paid, I think, 10,000 Bitcoin for a pizza when it was near worthless. I think the important point to think about Bitcoin or a theorem or any of these other cryptocurrencies is cryptocurrencies need Blockchain, but Blockchain doesn’t need cryptocurrencies. It’s just the first application that was built using Blockchain and this goes back to 2008.

The creator of kind of Blockchain and Bitcoin published a paper, we’re not sure if it’s an individual or it’s a group of people, that outlines Blockchain technology and its first application called Bitcoin. In one case Bitcoin is a store of value. There’s other types of cryptocurrencies that represent other stores of value. Some cryptocurrencies might represent the ability to use some computing power of the Blockchain to essentially borrow some computing power to solve a problem. Others might be involved in the ability to transfer money. Ripple is one that’s known there and is being embraced by many financial institutions to do money transfer including cross-border. All these different cryptocurrencies generally have a unique core purpose, although with that being said, there are scams out there and one really has to understand the use of this cryptocurrency often is theoretical, not many of them are actually in use. That’s really kind of how you assess potentially, the viability of a cryptocurrency.

Steve Pomeranz: Alright. Let me ask you a question here. I understand as an investment person, I understand what a store of value is. I can see that gold would be considered a store of value because it has a certain finite amount or it’s a finite resource, number one. Number two it’s desirable to many for jewelry and just for its very nature. Actually, gold is fairly pretty much indestructible. I understand that is of value because it’s in demand and it’s desirable. I can’t understand why Bitcoin, where the value is in Bitcoin. It doesn’t seem to give me anything back.

Christian Magoon: Yeah. I think that’s a great kind of approach looking at gold. Like gold, Bitcoin, there is a scarcity to it. Like gold, where it’s probably the most widely accepted precious metal or store of value in the metals complex worldwide, Bitcoin is the most widely accepted type of cryptocurrency worldwide. Like gold, you could potentially take a gold coin to almost anywhere in the world and get some, quote-unquote, hard currency or fiat currency. Bitcoin has that fungibility as well do cross-border transactions, to show up in another country and translate that Bitcoin into some type of hard monetary value. However, as you know, gold isn’t as volatile and that’s one of the issues around Bitcoin right now. If it’s a store of value, what is it really worth? We’ve seen it worth several thousand dollars in the last year and a half and you know, 20,000 dollars in the last year and a half. It hasn’t matured yet to really have kind of this stable form of value and to me that’s one of the underlying issues that in my opinion makes it more of a speculative alternative investment than a true store of value like gold.

Steve Pomeranz: That’s a great answer. Yeah, I would agree. I can’t figure out how to value it, so I would not want to buy it except as a speculation and, as anyone knows, a speculation can return a wonderful rate of return, but you can also lose everything or most of everything with a speculation like that. Let’s get back to Blockchain for a moment. It’s this digital ledger. A ledger, when I hear the word ledger I think of kind of the old style, you open up this book and there’s two columns there, debits and credits. You’re keeping track of all the money that’s coming in, you’re keeping track of all the money that’s going out and that’s your ledger. A digital ledger sounds to me like kind of the same thing only it’s digital and it’s spread and it’s checked and re-checked and algorithmically proofed by all of these other computers. I also got to understand a little bit about this when Kodak announced that they were going to be using Blockchain for their photographers.

Then I started to really understand that, first of all, I didn’t even know Kodak was still in business, but that a photographer who has this intellectual property, maybe they sell their stuff to sites like Shutterstock and others and people license their material. I would think it would be hard for them to prove that they actually own something or very cumbersome anyway to prove, “hey, this is my photo and here’s my proof.” If you use Blockchain and that digital information is now traceable back to its source, wow, I thought that’s pretty powerful. Can you take it from there?

Christian Magoon: Yeah. I think that’s a great example of kind of an innovative use. Not only could that intellectual property be tracked, but then you could actually be paid through that Blockchain. I think Kodak is talking about not only having the ability to track that intellectual property like photographs digitally but then also for companies that use that intellectual property, be able to then repatriate some licensing fee or revenue through that Blockchain back to the actual creator. You’re exactly right. I think Blockchain’s big promise is that, in a lot of ways, it eliminates the middleman that typically was providing friction in any transaction. It takes them time to go in between the two parties. There’s cost involved. In this case, if Kodak is using this Blockchain with photographers, it’s really kind of a peer to peer commerce. Photographers use the Blockchain and it goes right to the end user. The end user secures those rights and then sends payment back on the Blockchain.

There’s not an accounting program or a payment verification. It’s very efficient. It also creates trust. When you think about how do you trust that you can actually license this image or how do you trust that someone’s going to pay you for this image. The Blockchain does that because it only releases the image if there’s payment. There’s also a lot of security around this because this is a Blockchain and there’s not one single ledger, the ledgers are on thousands of computers all updated and verified in real time. There’s not something called a single attack vector. That simply means there’s not one point that can be attacked that has all the information. Today when we look at data, payments, transactions, and we see a lot of these cyber attacks, it’s because there’s essentially a centralized point of information that they’re able to attack and, by that single attack, they’re able to get the information. In a Blockchain, you’d have to literally attack thousands of computers at once to bring the Blockchain down. What that does …

Steve Pomeranz: Why? I don’t understand. Hold on a second.

Christian Magoon: Because taking one computer out doesn’t affect the rest of the Blockchain.

Steve Pomeranz: But hold on, hold on, hold on.

Christian Magoon: Yes.

Steve Pomeranz: Hold on. I’m trying to understand this. Isn’t all the information from that transaction or on that block contained on each computer? It’s not as if these thousands of computers have little parts of the information so you can steal one and get it all, can’t you?

Christian Magoon: If you did steal one computer, you have a cryptographic key that you’d actually have to go in and decrypt the actual access to the Blockchain. Then you couldn’t steal information from the Blockchain because you could access it and there’s varying levels of types of Blockchain in terms of what permissions a user can get. If you were on a public Blockchain, you stole someone’s computer, you decrypted yourself into the Blockchain, there’s no ability for you to change what’s in the Blockchain. It’s immutable. There’s no pencil and eraser that you can go out and do it. What you could potentially do is try to add a false block if you will or set of information, but ultimately that wouldn’t be proved out because all the other computers would have to verify it and that would be an error. However, you could steal someone’s key to their Blockchain, or sorry, to their Bitcoin and actually be able to go in and essentially unlock their vault where their Bitcoin is kept.

Steve Pomeranz: Yeah. That’s definitely happened before.

Christian Magoon: Yes, with exchanges and individuals who own cryptocurrencies.

Steve Pomeranz: I’m talking with Christian Magoon. He is really a veteran in the exchange-traded fund arena, and we’re going to talk about a fund that he and his company has created to help you invest in Blockchain. That was one of my questions and we’ve got about two minutes left. As investors who are not actually doing any transactions in Blockchain, or may or may not own Bitcoin, as we said, which is speculative, I think there’s starting to be some ways to invest in this Blockchain technology. And you’re involved with a Blockchain ETF that was created, the symbol B-L-O-C-K. Tell us a little bit about that, we have about two minutes left.

Christian Magoon: Yeah. We believe for longer term investors, the approach to take to Blockchain technology is really to invest in the underlying technology, not necessarily speculate on cryptocurrencies but really invest in the pick in the axes, the infrastructure of Blockchain because of so many disruptions that it’s likely to start to promote in various industries. Whether that’s banking and stock exchanges, logistics, record keeping, computing, and media. What we’ve done is we’ve put together a group of Blockchain engaged companies. These are publicly traded companies that are the leaders in investing in private Blockchain companies, research and development in their own companies, and also there’s a variety of companies that already receive revenue from Blockchain related activities. We’ve bundled these groups of companies together, about 50 of them around the world, that we think provide a great infrastructure play on Blockchain. We think it’s a little bit like investing in the internet 20 years ago. You don’t really know who the winners are going to be, but you can kind of look at the groups that are most engaged now as being a healthy group to have one of the leaders or many of the leaders emerge from.

Steve Pomeranz: Very good. Alright, well, unfortunately, we are out of time. To all my listeners, listen we’re just talking about the facts. We’re not making any predictions. Please, please do your homework before making any investment decisions. You can definitely lose money in investments and investments like this that are especially new and, in a sense, untested. Be very careful. Get yourself a prospectus and read it, talk to your investment advisor, and all of those other things that I always say all the time. Be careful out there.

Hey, if you want to hear the interview again and want to get these and many more informative interviews straight to your inbox, subscribe to our weekly update at StevePomeranz.com. If you have a question about what was just discussed, ask us. Go to StevePomeranz.com and ask us anything you’d like. That’s StevePomeranz.com. Hey, Christian Magoon, thanks so much.

Christian Magoon: Thanks for having me, Steve.