You hear the word ‘cryptocurrency’, and I bet, two things flash in your mind.
- Jamie Dimon admitting Bitcoin isn’t a fraud and Barclays seeking to use digital currencies.
- And/or Warren Buffett asserting cryptocurrencies won’t end well.
Either way, you’re thinking of cryptocurrencies as an asset class. Why wouldn’t you, given its dazzling appreciation (vs the USD) over the past few years.
However, your appreciation must not end there. Cryptocurrencies do present exciting opportunities for investment – Bitcoin over the last three years could easily kick any multibagger’s ass – but that’s not all they do. One popular (and related) use would be of course the ‘smart contracts‘ Ethereum is so famous for.
Consider the following proposition – Wholesaler A agrees to buy corn from Farmer B 3 months from now at $5 a bushel if the market price falls below that. A kind of hedge contract.
This can easily be done via an Ethereum ‘smart contract’ using the logic If (market price of corn <$5 a bushel) Then (the agreed money gets transferred from A to B). And once struck, the contract is irreversible. No muss, no fuss.
But even that’s not all.
Consider this. In 2015 during the Greek Financial Crisis, as the Greek Government imposed capital controls and banks tightened conventional financial transactions, Greeks made a beeline for Bitcoin, the fairest cryptocurrency of them all. Bitcoin had established itself as a prime anti-government, anonymous system.
In fact, there is evidence that libertarians are among the strongest consumers and supporters of cryptocurrencies. But, does the claim hold? Are cryptocurrencies really anonymous? If you think about it for a moment that might seem a completely erroneous assertion. What is the key logic of cryptocurrencies and blockchain technology?
It’s a public and permanent record. New transaction requests are verified against existing records and allowed or rejected accordingly. The entire thing is based on transparency. How then can it be secret or anonymous?
The answer: Bitcoin in particular is pseudonymous. That is, you identify yourself on the blockchain using keys (which will not be your name and street number obviously) so it’s kind of anonymous.
However, it is possible to track your transactions back to you. Pierre Gerard, CEO & co-founder at SCORECHAIN, puts this beyond all doubt. You can try to make it difficult but ultimately your transactions can be traced and your identity unearthed.
So, does that scupper it? Do cryptocurrencies not guarantee privacy? It depends on what cryptocurrency you are thinking of. Some cryptocurrencies do guarantee privacy. The question really is, was the cryptocurrency designed keeping ease of transactions in mind or was it designed keeping privacy in mind?
Of course, the base technology of blockchain will remain, a permanent and public record. However, individual cryptocurrencies may introduce logical structures designed to make it difficult for non-parties to trace transactions. For example the cryptocurrency Monero uses Ring Signatures and Ring Confidential Transactions.
A Ring Signature is one that any member of a group can perform. An outsider should not be able to determine which member of the group performed which signature; guaranteeing anonymity across the group. A Ring Confidential Transaction masks the amount of a transaction to outsiders, offering additional privacy.
To summarize, should you see cryptocurrencies purely as an asset class? Absolutely not. First of all there is the ‘smart contract’ concept that has a variety of real-world applications beyond investment.
Then there is the issue of privacy. Are cryptocurrencies anonymous? Yes and no. It depends on the cryptocurrency. It may be designed completely open like Bitcoin…or it may mask information like Monero.