The Rise of Bitcoin

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TTP January 2018

Braden W. Just, Investment Analyst

Bitcoin is the first of many various types of cryptocurrency. Cryptocurrency is an alternative method of exchanging wealth via a decentralized digital platform. Digital currencies are not controlled by a governing entity, unlike the U.S. Dollar which is controlled by the U.S. Treasury. There are currently four major types of cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum and Litecoin. There are hundreds of other “alt-coins” in existence, but the focus is on the four main types.

Bitcoin is built on an underlying technology called Blockchain. Blockchain is a digital ledger that records all transactions occurring on the network. Once a transaction is written and confirmed on the ledger, the transaction cannot be modified or removed. This technology has become increasingly valuable for keeping track of bank records, customer reward points and other financial transactions. The transactions on Blockchain are confirmed by mathematically hashing the transactions that are occurring.

Hashing is an alternative way to describe mining bitcoin. Mining is the action of using software and hardware to support/confirm Blockchain transactions. People who use their computers to mine Bitcoin are rewarded for their portion of solving the mathematical hashes. The majority of the current mining facilities (similar to data centers) are located off-shore, due to the lower cost of electricity. However, in the past weeks China has been shutting down crypto miners as they are using disproportionally large amounts of electricity and creating shortages.

Cryptocurrency has the potential to create an alternative way to raise capital for real estate transactions. An investor or developer can have their own coin created and then marketed in an IPO type platform (called ICO “Initial Coin Offering” for cryptocurrency). The coins however, are meant to be traded on a secondary market, which allows for quick entry or liquidation of a position in a real estate investment. Cryptocurrencies will have an additional impact on the leasing market. Companies that are entering the mining market have special needs to operate their businesses such as: sufficient power, HVAC, security and insurance. Landlords should be wary that the mining machines consume a very large amount of electricity and produce an excessive amount of heat. For example, it requires 215 kilowatt-hours of electricity for each transaction and currently there are over 300,000 transactions per day. Each transaction uses enough energy to run a house comfortably for a week.

The largest pitfall to these decentralized currencies is the government’s need to have oversight over financial institutions through regulation. While China has attempted to regulate bitcoin by limiting its citizens’ access to exchanges, it has proved difficult, if not impossible for a governing entity to do. This is largely due to the fact that there are hundreds of exchanges located all around the world that will allow someone to purchase bitcoin. Most of the regulation we will see regarding bitcoin and other cryptocurrencies will largely be tied to how financial institutions are able to use them.

 

KEY POINTS:
  • A new way to transfer money. Cryptocurrency is an alternative method of exchanging wealth and other financial transactions via a decentralized digital platform.
  • Blockchain is valuable to financial institutions. The technology has become increasingly valuable for keeping track of bank records, customer reward points and other financial transactions.
  • A new way to fund. Cryptocurrency has the potential to create an alternative way to raise capital for real estate investments.