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Blockchain, Cryptocurrencies and the Future of the Universe
Last week we hosted the latest event in our Strategic Discussions series featuring Chris Solarz of Cliffwater LLC. Chris is a Managing Director with the Hedge Fund research team, covering global macro and relative value strategies. We asked Chris to join us and offer his perspective on, as our title implies, Blockchain and Cryptocurrencies.
Thankfully, Chris began by addressing some of the most basic questions, namely: What is Bitcoin, what are cryptocurrencies and what is blockchain?
Although this brief summary of the discussion could never do justice to such a complex topic, Chris described Bitcoin as a decentralized, digital asset that is controlled collectively. It has gained widespread popularity partly due to the lack of intermediaries and partly due to its limited supply. (Unlike fiat currency, there is no central government that can just print more money.) Bitcoin exists as a piece of code not a tangible object; Chris showed us the actual computer code that is a Bitcoin (see image below). And, while Bitcoin is the most well-known, (and has seen the most remarkable rise and fall in value) there are no less than 1,500 different cryptocurrencies in existence today. Chris believes in the end, somewhere between 1-5 of those cryptocurrencies will "win" while all the others will cease to exist.
But behind Bitcoin and Cryptocurrencies, lies the technology that Chris is particularly excited about: Blockchain. He provided a historical perspective of disruptive technologies in an exhibit he called
From Gutenberg to Zuckerberg
. He made the point that human societies have evolved right alongside technology and that we are now standing on the precipice of the next technological revolution.
Chris described how "blockchain technology"
utilizes a peer-to-peer model as opposed to a client-server model.
In an office environment, data is held on servers, and whenever you log in, you access that server data, even if via the 'cloud.' Most of the internet is currently client-server - an efficient, traditional computing model.
But peer-to-peer models are more like a gossip network where each peer has 100% of the data (or as close to it as possible), and updates are shared. Each peer is independent, and can continue operating to some extent if it loses connectivity to the rest of the network. Because there is no central server, it can not be easily controlled. Closing down peer-to-peer networks is harder.
Chris showed the progression of the Internet from Web 1.0 (a mostly read-only platform), to Web 2.0 (a more interactive experience, with blogs, social media and user provided content), to a future Web 3.0 (a virtual blending of our on- and off-line worlds) that takes advantage of blockchain technology.
How to Invest
This technology was described as "still in its infancy," and cryptocurrency prices could prove to be just another bubble. Attendees were reminded that the four most expensive words in the English language are, "This time it's different." However, while the downside is real, the upside has real potential. Bitcoin is simply the first attempt at maintaining a decentralized, public ledger with no formal control or governance. But in the future, Blockchain technology could go well beyond cryptocurrency to impact all the ways we do business (similar to the way email changed how we communicate with each other.)
Chris commented that Cliffwater has not yet seen big demand from their institutional clients, primarily because of issues surrounding custodianship, regulation and volatility. But as these issues get sorted out, he believes a market cap weighted ETF will emerge, which may be the most prudent way to access this new opportunity.
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Equity indexes ended mixed last week as investors worried about increasing trade tensions, but saw good news on the earnings and economic data fronts. Stocks started the week slow as the deadline for an extension on the steel and aluminum tariff waivers loomed. The Trump administration extended the tariff negotiation deadline, but it's unclear if any progress was made in direct talks with China. Tech stocks rallied after Apple beat earnings expectations, and unemployment dipped to 3.9% in April.
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> Unemployment:
The April unemployment rate came in at 3.9%, its first sub-4% reading since December 2000. The unemployment rate fell because the labor force participation rate slipped.
Of note in the report, 7.6 million workers held multiple jobs last month, up slightly from a year earlier, and higher than it was in December 2007. Workers typically hold multiple jobs when no single job is sufficient to provide them with a decent income. The continued high level of multiple job holders over the past several years creates considerable doubt on the strength of the economic recovery or the thesis that the US is at, or near, full employment.
> Interest Rates:
The Federal Reserve held interest rates steady (1.50-1.75%) at the conclusion of its two-day policy meeting last Wednesday. The committee acknowledged rising inflation, but gave little indication that officials are worried about a sudden, rapid escalation in prices or an abrupt slowdown in economic growth - either of which could alter their gradual pace of rate increases.
> Inflation:
Last week the Bureau of Economic Analysis released the monthly reading of personal consumption expenditure (PCE) inflation - the Fed's favored measure of inflation. Core PCE (which excludes volatile food and energy prices), showed an increase of 0.2% month over month, and a 1.9% year over year increase, edging closer to the Fed's 2% target.
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Apple is closing in on a trillion-dollar market capitalization
Last Friday, Warren Buffett announced that his company, Berkshire Hathaway, had
upped its holdings of Apple stock to 250 million shares, making it Berkshire's largest holding. This sent Apple's stock price skyrocketing, and the momentum has ca
rried into this week. (As of yesterday, the stock was trading around $185, up from $176 last Thursday.)
That bump, along with the boost Apple's stock price received early last week when the company posted
another massive earnings report, means that Apple is close to becoming the first public company valued at $1 trillion.
At $933 billion, it's "just" $67 billion short of that milestone. If/when it reaches $1 trillion, Apple would be the 17th-richest country in the world!
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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