Thursday, December 7, 2017

Blockchains, Bubbles, and You

One of my technology obsessions interests is blockchain technology and how it will integrate itself into the world’s financial system. We’re still in the wild, wild west stage of the technology, but it’s not a matter of whether blockchain will be part of the future of finance – and therefore financial crime – but how it will manifest itself as the technology matures and becomes more widely understood and accepted by the general public. I started out as being deeply skeptical and borderline hostile to the idea of cryptocurrency, but I’ve long since come around.

We already seeing how Bitcoin has been used for criminal transactions such as B2B type transactions in the underground economy, good old-fashioned money laundering, or being used for victims to pay ransom as part of ransomware scams

Let me just start off with an acknowledgement that blockchain technology has many uses beyond payments.  There are nigh-endless possibilities on what can be done with a distributed ledger system well beyond exchanging payments and that is one of the reasons we’re seeing so much energy and funding being poured into the technology. I’m planning on devoting some future blog posts on explaining how blockchains are being used in innovated ways that aren’t just about exchanging payments and storing value.

If you read the blog in the past, you know that I like doing interviews.  I plan on starting them up again when I get the readership levels back to where I had them before I had to stop blogging. I’m basically starting from ground zero so I suspect this blog post is being read by, at most, a half dozen people and I don’t want to have an interview subject spend time on an interview that will be read by almost no one.  Thus, I’m going to just interview myself for a bit because it’s my blog and I can do weird things like that.

What is blockchain technology?

Great question, but one that I can’t answer better than what has already been done by others.  Head on over to Coin Center and read their excellent starter.  Take your time and click around the site while you are there. I’ll wait. You’re Back? Excellent! 

We’re talking about Bitcoin, right?

Bitcoin is “just” one of over 1,300 blockchains as I write this. That said, Bitcoin is the belle of the ball when it comes to media coverage, cryptocurrency advocacy, and public attention because it’s the blockchain that kicked this all off and because, as I write this, it has experienced a dramatic recent increase in its value. It has immense first mover advantage since it was the first to market and opened the minds of many to the possibilities of what can be done with a distributed ledger system. 

What exactly are we talking about? You’ve used the terms “blockchain”, “distributed ledger”, and now you just injected the term “cryptocurrency” into this.

It’s confusing, isn’t it?  I don’t think we’ve settled on the language aspect on this yet so I think we’ll see some language standardization as the technology continues to develop and gain public acceptance. I suspect it will be much like the term “APT” and “Cyber” in that it’s cute that the people who are deeply involved in a particular aspect of technology have an opinion on the terminology, but it’s the media and popular culture that will eventually define the language. 

The word blockchain is a good example.  The original white paper for Bitcoin used the term “Block Chain”, but the language evolved where it’s now one word.  Blockchain is one of the underlying technologies of cryptocurrencies like Bitcoin.

The Wikipedia entry on blockchain is useful.  It states:

blockchain[1][2][3] – originally block chain[4][5] – is a continuously growing list of records, called blocks, which are linked and secured using cryptography.[1][6] Each block typically contains a hash pointer as a link to a previous block,[6] a timestamp and transaction data.[7]By design, blockchains are inherently resistant to modification of the data. Harvard Business Review defines it as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way."[8]

Blockchain is how you get a distributed ledger system which is why I tend to just used the word “Blockchain” when I write about this sort of thing.

What I tend to stay away from unless I’m specifically writing about the currency related blockchains is the term “cryptocurrency”.   Wikipedia to the rescue again on this term.  The entry for cryptocurrency states:

cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets.[1][2][3] Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies.

I tend not to use the term cryoptocurrency unless I’m talking about a particular blockchain such as Bitcoin that is focused on acting as currency because there are so many different use cases for blockchains. That’s not to say that it’s not accurate to use the term for those blockchains and that’s why I’m curious to see how the language plays out in the end.  Ultimately, I’ll just adopt the terminology that ends up being established because I’ve long since given up swimming upstream against the language on these types of things.

Why should I care about any of this?

Back when dinosaurs roamed the earth and I was a recruit in a police academy, our physical fitness instructor told us that as soon as we signed up to be police officers, we lost the right to be physically unfit.  It’s the same thing with the situation with blockchains and crime.  If you are involved in the investigation of financial and/or computer crime, you’ve lost the right to be ignorant of this technology.

The burden of being good at what we do when it comes to law enforcement or information security is that we have to keep up on current and future trends otherwise we will be increasingly less effective at our jobs which makes us less valuable to our employers whether it’s a private entity or a law enforcement agency.

Fine. I care! I care! What’s the story with Bitcoin?

It’s the ground zero blockchain that kicked this all off.  Its primary focus is to act as a cryptocurrency and it has captured the imagination of countless people who are either still working on making Bitcoin better or have moved onto other blockchain projects.

Why has it increased in value so much so quickly?

Bitcoin is a nifty new digital currency technology, but the rules of economics still apply to everything. There is an increasingly scarce number of bitcoins because it’s become increasingly difficult to mine them and scarcity is built into this system.  Demand is driving a price increase.

The bad news is that part of the increase is a bubble. In fact, I think most of what we’re seeing right now is an old-fashioned bubble that will eventually burst in a pretty spectacular and healthy manner. The media attention of the sharp valuation increase is driving people into purchasing bitcoin who have no earthly idea what they are buying.

In other words, I think we have quite a bit of the greater fool theory going on right now.

What’s so healthy about a bubble bursting?

We’re in the very early stages of blockchain development and I think we’ll see blockchain mirror what we saw with the dot-com era where we have an immense amount of money, creativity, and, frankly, irrational hype mixing to get things moving. We’ll experience all of the talk about how this time things are different and the rules of economics don’t apply to technology right up until we have a massive bursting of the bubble.  The bubble bursting will result in marginal projects being swept away and a more mature approach that will drive capital and creativity into more viable projects.

We’re in the infrastructure stage of blockchain development where even the big names such as Bitcoin and Etherium still are struggling with issues such as control, scale, and how to truly become decentralized projects.  It’s an exciting time, but it’s also incredibly volatile and speculative. 

So should I be investing in blockchains?


Sorry, that was rude.

Seriously, I don’t give investment advice and what you shouldn’t be doing is taking investment advice from some random blogger on the Internet.

I will tell you my personal approach to blockchain investment which is to not do it.  It’s entirely too volatile of a market right now for someone like me to get involved in.  I’m not even thinking about touching any of this with a 39-and-a-half-foot pole until the after the bubble bursts and the market matures.

There are people who are putting money into this space and that’s great because there needs to be capital to spur innovation, but I’m leaving that up to the experienced sophisticated investors like various blockchain focused hedge funds, angel investors, and venture capital outfits who have capital, risk tolerance, and knowledge (like the ability to review code for the projects they are considering supporting) to make these calls.

There are some great projects that look very promising right now, some that look positively silly and/or mediocre, and some blockchains that are obvious fraud. 

I have a whopping 0.00203115 BTC left over some research I’ve done recently.  If I add anything more to that position, it’s only because I want to do more research. 

Fine. It’s a bubble.  Who are of the blockchain world?

No idea.  I’m guessing that just like the dot-com era, we’ll see only a few survivors who will go onto thrive and turn into something big like Google.  Most of the 1,300+ blockchains right now aren’t going to amount to much in the end and that’s just how the market works. 

For example, I doubt we’ll have more than a handful of successful cryptocurrencies once things shake out.   One of the people who I follow closely in this space is Naval Ravikant and I heard him recently speculate that we might end up with someone putting together a successful digital currency option that is based on a basket of cryptocurrencies.  If you have ten cryptocurrencies and one disappears overnight, you’ve only lost a fraction of value rather than everything.

So, I should be doing short selling to exploit this bubble, right?


This is a bubble, but we don’t know how long it will go on and how much capital will flow into it before it bursts or how a bubble bursting would look. It could be days, months, or years

Is it just one blockchain like Bitcoin or something more systemic?  Is it a one big bubble bursting event or a rolling bit of mini-bubbles? Will we see any bubble re-inflation?

I know I’m not smart enough to know when or how this it will go, but it will go.

What blockchains do you find interesting?

Bitcoin for obvious reasons that its blockchain prime and is the cryptocurrency that is getting the most attention from media and investors.  I am a bit of a cautious Bitcoin skeptic over the long haul for reasons I’ll address in a future blog post.

Etherium is super interesting to me since its a platform for decentralized applications fueled by tokens and that’s caused an immense amount of creativity both in that particular blockchain as well as many affiliated projects. 

Zcash and Monero are the most interesting crypto currencies to me other than Bitcoin at this stage because there have very serious financial and technical backing from various entities.  That’s the stuff of a future blog post also.

Cryptokitties is pretty cool because just reading the website alone is a great way to conceptualize the possibilities of how blockchains can be used in unique ways. Plus, cats.

Bananacoin is another one of those blockchains that can show the possibilities on how the technology can be harnessed as a sort of security. It also poses some interesting questions regarding how blockchains should be regulated.  Are they currencies, commodities, securities, or something else?  Fodder for another blog post down the road, of course.

There are more, but this is a good start if you want to do some reading and research.

Wait. There are fraudulent blockchains?

You’re not allowed to be surprised, but I followed one fraudulent initial coin offering recently that ended up with the fraudsters getting a reasonable amount of money for their efforts before closing up shop.  Bad guys are all about leveraging blockchain whether it’s just stealing token from people or setting up their own evil blockchains in attempt to con people into giving them money. 

Definitely the stuff of future blog posts. More to come soon!

Back In The Saddle Again

I spent almost the last six years working for one of the world’s largest financial institutions and it was a great experience where I learned more in that time than I think I would have learned in a lifetime with a smaller institution.  I’m very grateful for the experience, but one of the tradeoffs was that I had to put the blog on hiatus several years back after my employer implemented a pretty conservative social media policy.  It’s a decision that each organization has to make and like most things in life, it’s a matter of weighing different priorities.  Large financial institutions tend to be conservative when it comes to that sort of thing because of regulatory and reputational risk so it was a reasonable decision for them to make.

Now that I have left the financial industry and returned back to my roots in law enforcement as the Vice President of International and Strategic Initiatives at the National White Collar Crime Center (NW3C), I’m able to fire up the blog and I’m looking forward to being part of the discussion again. As always, what shows up on this blog are my opinions and aren’t necessarily those of my employer.

The rub is that I’m pretty much back to ground zero when it comes to followers for the blog and my twitter account so I’m grateful if people could spread the word that I’m back in action.

My twitter feed is @ericjhuber which has exactly 19 followers as I write this.  #sadpanda. Please help me fix that.