December 7, 2021

When it comes to “investing” in Bitcoin, I say buyer beware. In just the last 5 years, we’ve seen Bitcoin rise from a few hundred dollars per coin, up to twenty thousand per coin, and then fall back down under ten thousand. That’s pretty extreme volatility, and I think that crypto-millionaires are basically speculators who guessed right. But luck can change.

That said, blockchain, the technology that underlies Bitcoin, could have long term staying power. This tech allows computer algorithms to replace people and institutions that are today’s trusted intermediaries in transactions. Normal money is valuable because it’s backed by a government guaranty. Cryptocurrency, and other blockchain-based contracts are valuable because the underlying math limits the risk of counterfeiting, enforces scarcity, and can trigger conditional events without requiring any human judgement. These features have a lot of potential to change the way we do business.

One of the main ways blockchain is looking to disrupt traditional finance is by removing the need for intermediaries, like banks, in many transactions. Blockchain-based “smart contracts” could even eventually replace some traditional contracts. They could be designed to automatically execute provisions when certain conditions are met, removing the need for human judgment. It’s mind-bending stuff, and not many people understand it deeply, but I think it’s likely that blockchain offers the potential to one day significantly reduce friction and costs in business transactions.

On the whole, blockchain is an important technological development that could bring new value and new ways of doing business. Still, I think we need to be patient. The current system of contracts and finance has evolved over hundreds of years and is pretty effective at producing wealth. By disrupting the financial system that has served us well, we risk inadvertently disrupting the stability of our legal, political, and defense systems too. We should be cautious about rushing to reduce transaction costs and make sure that we don’t lose needed functions, like the ability to track criminal activity through financial flows.

I see long term potential for blockchain as a technology, and for one day using smart-contracts in real estate, and I suggest monitoring technological progress here closely.

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