With Christian Magoon, CEO of Magoon Capital, CEO & Founder of U.S. based ETF Sponsor, Amplify ETFs
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Now that some of the Bitcoin hysteria has subsided, Steve takes a fresh look at cryptocurrencies and digital payments with Christian Magoon, a veteran in the exchange-traded fund (ETF) arena.
How Blockchain Works
Blockchain, the foundational technology of cryptocurrencies, is a decentralized digital ledger—think of it as a massive spreadsheet—with identical copies on multiple authorized computers, so data is decentralized, verified, and secure.
Essentially, new data is entered into the blockchain as an encrypted block appended to the chain of blocks that came before it; this new block of data is then verified by an algorithm shared by all the other computers on the blockchain network, which ascertain whether the new block of data is valid. This verification process is called data mining.
Once the new block is authenticated by all authorized computers, the block gets chained to all previous blocks of data in its group— hence the name, blockchain.
A unique aspect of blockchain is that there is no one central entity or computer that stores the data and determines what to add to it; instead, authentication is distributed across multiple computers, making blockchain-based applications hard to counterfeit.
What Is Bitcoin?
Bitcoin was the first application to use blockchain to offer-up a transactional digital currency as a store of value, something you can use to, say, buy pizza or pay for a yacht. In one famous case, someone paid 10,000 Bitcoins for a pizza when Bitcoin was nearly worthless.
Other cryptocurrencies represent stores of value with a unique purpose, such as the ability to borrow computing power to solve a problem or the ability to transfer money.
Bitcoin Vs. Gold
Gold is a store of value because it is a tangible and limited resource, is desirable for jewelry and other uses, and is the most widely accepted precious metal. Bitcoin is an intangible store of value because, like gold, it is limited in number and is the most widely accepted cryptocurrency worldwide. Just as you can take a gold coin and exchange it for goods or fiat currency anywhere in the world, Bitcoin too has that fungibility for cross-border transactions.
However, Bitcoin is far more volatile and speculative than gold because it’s a new and untested store of value, and no one really knows how it’ll hold up through various economic cycles.
Kodak Leverages Blockchain’s Ledger System
With blockchain’s secure digital features in mind, Kodak has developed a blockchain application for photographers. A digital photograph is a form of intellectual property that can be sold to others for use but is easy to replicate and hard to prove ownership on. Kodak plans to treat each photograph like a unique Bitcoin, to use blockchain technology to maintain ownership and digital rights, and to funnel licensing and use payments back to original owners.
In Kodak-like applications, blockchain’s big promise is that it eliminates the middleman and associated transactional friction, inertia and cost, and improves trust, security, and transparency.
The worst that can happen with blockchain is that someone hacks into one computer, steals its cryptographic key, and accesses blockchain data associated with that one key, a single point of attack that cannot bring the whole system down. These security features make it very attractive for other innovative applications.
Magoon’s Blockchain ETF
To get ordinary investors involved in blockchain innovation without speculating on applications like Bitcoin, Christian Magoon’s company created a blockchain exchange-traded fund (BLOCK) that invests in publicly-traded companies developing blockchain infrastructure across banking, stock exchanges, logistics, record keeping, computing, and media. He likens it to investing in the Internet 20 years ago where you don’t know who the winners will be but participate in the evolution of the blockchain industry as a whole.
While everyone is excited about blockchain, technology investing is fraught with risk because, for every Internet phenomenon, there are hundreds of tech fads that quickly faded. So, do your homework before you jump in!
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
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.