We're. Here with Professor, David, Yermak who runs the FinTech specialization. At the NYU Stern School of Business where he also chairs, the finance. Department, and chairs, the effort around law, and. What. Is this business law, and business, thanks. A lot of credentials in there anyways all, things crypto, one of our most popular segments. Was talking to Professor uremic about. Trends, in cryptocurrencies, it's been about five months and we wanted to check in please respond. In our comments, if you would like to see something like this every, week we. Get a ton of interest in crypto so with that since, we last sat down professor uremic give us some of the updates, or what's happened, in the world of crypto well, there was a spectacular run-up, in the fall that culminated, in Bitcoin, briefly, trading, for about twenty thousand dollars shortly before Christmas then. It dropped, 70%. Now. It's doubled, it's in other words this has been a very wild ride but Bitcoin as we, do this is trading above 11,000. Which, is a very high value compared. To it was you. Know a year ago so the rates of return for investors have been very high, probably. The biggest news event, was the listing, of futures, on the commodities, exchanges, in Chicago, there are now Bitcoin. Derivatives, that are very much part of the financial mainstream now, that they're on places, like the Chicago Mercantile Exchange. And. This. Was I think, an act of regulatory forbearance. By the commodities. Future Trading Commission the US regulator, had, umpteen, ways they could have prevented this from happening but, ultimately let. The product take hold and even. Though there were some people predicting. Catastrophes. And glitches in the markets, none, of that has come to pass its legitimacy. A huge an EpiPen of legitimacy, to crypto it has, you, know really traded, in a very ordinary way, and provided. For the first time really, a product, that allows you to bet against, these, things that up until now you, could own them and expect. Them to go up but there was really no way to predict, and bet against them dropping.
In Value once. Those futures were listed I think it's no accident that Bitcoin, dropped 70%, in the next month or so but. The market has on now seeing some stability I would expect, you're going to see many, many more of these derivative, products not, just around Bitcoin but on many of the kryptos coming, in the months and years ahead, does, being. Traded on a futures exchange decrease, volatile, years I've known it's, meant to it's, the, the, ideal futures. Contract. Is first something that has a lot, of volatility that people are looking to manage so in that sense the crypto currencies, are absolutely, ideal and it's. Too soon to know but if you look at the last month or two a trading it does seem that there's been less volatility, than, there was in the fall when it was spiking up really to crazy levels, and as Rubin or institutional. Investment, is there more is there greater, clinical. Credibility. I thought Jamie Dimon, went from saying it was a fraud or it was illegitimate to all of a sudden softening. His stance on it any additional, signs of legitimacy, or entering the mainstream, there. Are not any, investment. Companies, that are putting, products out in the market for, regular consumers, this. Really, hasn't been permitted, yet by the SEC. And other regulators. There's. A lot of interest in this and I, think you're. Going to eventually see this happen in another country, if it doesn't happen in the US but the big asset management firms still. Don't, have products, on the market that are directly. Based on crypto, I think, the best you can do is indirectly. Invest by looking at the companies in the mainstream that, are vendors, who are making the, mining, equipment the special chips or who, are introducing, blockchain. Enterprise, Solutions to people in the logistics, business you can earn their stocks, and that. Probably makes a lot of sense if you're a believer in the underlying technology. So. Let's, talk about the ratio of legitimacy. And value, of bitcoins. Sort of the Big Kahuna versus, the altcoins, what are the trends, so. For example I saw Bitcoin was up 6% today but aetherium was down 1%, and, I think a light coin was down so it seems like there's a bit of a diversion well, they are not particularly, correlated. With each other this. Is surprising. Because you, would think that these would more or less move as a group but each has its own business case and. Even. Last year when Bitcoin was way up there were others that rose considerably. More, Ripple, for instance was one of the big success stories and also I think, a theorem rose by a factor of 30 last year some ungodly, return, but. At. Any given time there, are issues, of Technology and regulation, that may apply more, to one coin or token than, to others and so you're not going to see the move in lockstep and they, don't necessarily serve, as hedges against each other either, so, if bitcoin is meant to be a store, of value and, a means, an. Alternative, currency, aren't. Some of the alt coins for example if theorem, aren't they in addition to being a store, value and a new-age currency, don't they also have some underlying intrinsic. Technology. Valued I've heard, a theorem is for contracts, so. Give, us a rundown on the biggest altcoins, and what the underlying. Technology. Or intrinsic value, is and any, viewpoint you have on those you, know how much of it is where.
Is There they're there around some of these underlying technologies. You, have at, this point more than 1,500. Tokens, and there are more almost, every week coming to the market the. Clear number two is a theorem. And, aetherium. Like bitcoin, is a blockchain, based, token. But, it's meant to execute, smart contracts, that you can essentially, give contingent. Instructions. For insurance. Products, and for. The execution of, promises. That depend on each other so if you. Don't make your car payment, your, car will automatically, be shut off and then you, use the ether tokens, to provide, what's called the gas to make that contract, execute. In the background, or you can use the ether tokens, as payment. To fulfill a commercial, promise maybe as a bond or a collateral, payment. For people who stipulate. That they'll perform some act and then either do or don't do it so, a theorem, is a very ambitious language, that's meant to create this really, new framework, called the smart contract that. Would be, a self executing self, verifying, contract, in other, words a contract, that doesn't need lawyers to enforce it when things go wrong and, it. Raises, many, novel, legal problems, but at the same time will solve many others, and in particular, you don't have to go to court and get a lien when people don't keep their promises these, smart contracts, just automatically. Execute, with certainty and you have to live with the consequences, so cut out the sheriff cut out the repo man exact. Just something happens and maybe you figure out a signal, that turns off the Tesla whatever it is and you can no longer or. It cuts off your cave whatever no that's, the classic, example, as it shuts off the ignition of your car remotely, and these days the car could probably drive itself, back to the lot so no, more repo, man the, costs of dispute, resolution in, other words are driven down and the, cost of verification. If you can somehow, use sensors. Remotely, to the. Internet of things as it's sometimes called to police. People's behavior, in compliance, you, can really eliminate, an awful lot of costs related to verification, and, enforcement, and the. Real point of this is to solve, moral hazard problems a lot of people don't pay their car loans because, they know it's costly to foreclose, and so I can miss a couple payments. They. Won't think that way once they know with certainty some. Machine in the background is going to shut off their car then you'll get much not, only better compliance, by borrowers, but people may stay out of the credit. Pool entirely and so, you'll improve the quality of the people who do show up to borrow so. The in, theory that sounds outstanding. I've also read that the number of companies actually, using, underlying, aetherium technology, is not that great have has this been adopted, by a lot of firms there's a lot of beta testing going on and the, insurance industry looks, like really, the place where this would have the most long-term impact, a. Huge. Amount of interest but other. Than some niche products, like there's an aetherium flight, insurance contract, that you can buy so, if your flight is delayed two hours it pays over the ether to you into your digital wallet without. Anyone having to verify, this and so forth these are really, proof of concept, at this point and I think in, the. Long run they may play a really important, role but not until some legal issues are clarified, you know it's possible that you and I could have, a smart contract that actually violates, consumer, protection, law and, then how does this get sorted out in court when a lawyer goes for an injunction but it's impossible, to shut the contract, off and it's, not located, in anyone's jurisdiction. You can imagine, in the long run this would make more work for lawyers rather than less because so many novel, problems, might be created, so, so, aetherium smart, contracts, what's. The next one the, next one is probably ripple, and ripple. Is a little different than the others it's some not, a public, blockchain, so much as a conduit. For payments, and ripple. Has positioned, itself as an alternative, to the Swift Network for. International. Money transfers so. You know, if you're in London and want to send money to your bank account in New York it'll, take you three days and a 7%, fee and you, wonder like why so much why you know it seems, unnecessary. Ripple. Will do it in the blink of an eye for free, and the. Swift Network has been notoriously. Insecure. Because there are tens of thousands, of banks linked into it and the weakest link in the chain is where, the thieves enter. In and very. Famously, hack the system. Ripple, I think the security is the real point of differentiation, but also the speed and cost so the, Swift Network now, has been forced to reconsider its own technology I think competition, is very good and probably long overdue and, I.
Think The ripple people were very shrewd, to identify, this one, use, case for their coin and to. Try to build up a critical mass of business, which they have. Litecoin. Litecoin. Is a, knockoff, of Bitcoin. It's. Still, unclear, to people what like coin is good for although you do see more and more people accepting, it as payment like. Coin is easier, to mine than Bitcoin and, it. Is, blocked. Four, times faster so in the case of Bitcoin, you have a new block roughly, every ten minutes in the case of light coin the cycle is set to two and a half minutes so you get quicker confirmation. Of transactions. Like, coin looks and in most, other ways a lot like Bitcoin, but it has its own, blockchain. Its own history, and. Ultimately. You would think that if Bitcoin is valuable light coins should be valuable for the same reasons, but you would also think that maybe like coin is unnecessary. That it you know it's just sort of looks like Bitcoin, divided by four. But it doesn't trade, for, 1/4, of Bitcoin it trades for a pretty significant, value but nowhere near a quarter of a Bitcoin litecoin is. More democratic in, the. Sense that the hardware, that works, on their blockchain, is not. The same hardware that works for Bitcoin and most of the other Kryptos in other words you can't just bring more, horsepower. Into the race and get an edge against other people they've preserved an element of randomness due. To the fact that they have this s crypt, mining, protocol, that relies on a different, part of your machine, instead. Of the Bitcoin. Technology. That just really relies on who has the fastest, processor, another. Big trend forking. Explain, what forking is and why there's so much of it right now a fork. Is where a blockchain is adding blocks every, 10 minutes say in Bitcoin and then. Basically. It diverges. And this can happen sometimes, spontaneously. Because two miners, win. At the same time and they both. Continue. To mine in their own direction, those are resolved, basically, by a process, of consensus, usually in a few minutes but some Forks are deliberate, where people will upload an alternative, version of the software and invite. People to opt out of the old code and to adopt theirs, so. This, is sort of like a group of the shareholders, of a company, saying, we don't agree with management, we have a different strategy and, as many people who want follow. Us in this direction and then they're able to maybe divide, the stock and take some of the assets with them so. This, has happened now once, with aetherium and twice with, Bitcoin, and what. It's led to is competing, versions where, they have a common, history up, to the point of the fork in the, case of aetherium you have still. Something called a theorem but the original one called a theorem, classic, it's like a schism, where they both claim to be the Pope and, you. Have in the case of Bitcoin, there was a fork called Bitcoin cash, that occurred last August, Bitcoin. Cash was meant to increase, the block size. Multiplied. It by a factor of eight so that Bitcoin, could accommodate, the, growing number of users who wanted to use it and. Not. Long afterwards, in October something called Bitcoin gold, was, a second, fork. That went, in the other direction it made it you know essentially reinforce, some of the orthodoxy. Of the original, Bitcoin and would these are all catering, to. User, communities, who fundamentally. Have different, visions of the future of the coin so. It's. Interesting because forks are about governance, and discipline, of the people in charge what is the governance who gets to make these decisions yeah there is nobody in charge which, is why it's interesting and. When. Bitcoin was launched, there was a folklore, that. When you had disagreements. Anyone could put out a new, version of the software and if they got, 51%. To run that software that. Would become the new code so. Could we start could, we do, Bitcoin, Stern and eventually, try and come up so we'd have to come up with some, sort of code that said this is an enhancement, and then we go out and lobby Bitcoin, owners, Diggs Ryan yeah, and it turns out you don't need 51%, you. Just need enough enough. To sustain a blockchain, you, know to mine it regularly, and so forth so, it looks like rather. Than two, versions, you might have many versions of Bitcoin if it keeps growing and whether, this is a good or a bad thing remains. To be seen it's certainly something very new and financed and it's, a very organic, bottom-up. Form of governance, where people who disagree, if you can get enough of them together they, go off on their own Fork with their own version of the software, ultimately. They have to convince other people that this is the best way you know to people who might accept, the.
Token And so forth the the. Bitcoin, cash was, thought to be almost a joke that wouldn't have any value, but it's trading right now for about fifteen, hundred dollars, and the. People who got it if you, own Bitcoin before August first which was the date of the fork you now own both you, still have your original Bitcoin, but you have the fork and today. You have a choice if you want to buy into it you could buy either good, buy both but if you, happen to have owned it before the fork occurred you get both versions. So. Seven. Hundred billion dollars, total market cap for all coins and I know you don't like to get into business of coin picking but. If you were to guess in five or ten years are we more likely to see the total market cap of kryptos at a hundred billion or. Do trillion. What. Do you are you because it sounds like you're definitely bullish on the blockchain but. Your measured and your thoughtful around. The. Value, of the specific coins, but taken is the market cap of the whole sector. Trying. To time. Is a fantastic. Smoother. Of. Modulation. Or way our great modulator, of waves but, as the regression line upward, here for crypto over the next few decades I think it is but I say this partly because I think a lot of the mainstream financial. Technology. Will cross over that in ten years I think all the stock markets, will be using these digital assets, with blockchains, to clear transactions. I think, the sovereign, currencies, will, be moved on to block chains controlled, by central, banks this. Will get to the point where this. Actually becomes, the mainstream, financial system where you, recognize that this technology, is so valuable that it shouldn't just be for these private coins and tokens but. The real. Institutions. They're the foundations, of the economy the central banks, and stock markets, and so forth will, find ways of co-opting, the technology, and integrating, it into people's routine. Daily business, I. Fully. Expect, that cash physical, cash will be gone probably, within ten years and in most parts of the world and I, think all of the financial, records on stock, markets bond markets, derivative, markets will all be kept on blog chains but. Whether these will be private, blockchains where, people compete on a decentralized. Basis, and there's no central. Authority i'm skeptical. About that because i think for, a lot of people the, comfort. Of a central authority of, political, oversight, is still, going to be very important, doesn't. This and maybe this is a utopian. Or a glass-half-full viewpoint. But doesn't this hopefully, bring down taxes, while increasing, tax revenue because the government should have an easier time taking. All revenues from the shadow economy into the legitimate, taxable economy that's completely, correct the, attraction. Of this technology essential, banks is that you can completely defeat, money, laundering and tax evasion and, it's. Actually a lot of money at stake just in those two things even in the United States and much more in other shadow economies, so. Go back to the. Notion of mining. And environmental. Concerns around, the notion that I think I read somewhere that the carbon gas carbon. Emissions from Bitcoin might, might. Be equivalent, or rival, a medium-sized. Country in Europe at some point there, are estimates, of how many computers, are hooked up to the Bitcoin network in doing the work of mining, and as. The value of Bitcoin, increases. More computers, come on line, because a reward. Is given every ten minutes to whomever solves, the block and the reward is, twelve and a half bitcoins, which amounts, to one hundred thirty hundred forty thousand dollars so. People. Do the math and they say if. There's, a hundred forty thousand, dollars reward that's. Equivalent to, five, thousand, gallons of gasoline that, are, used to mine every Bitcoin they just do the math of a price of a gallon of gas and they think that there must be a first-order, condition. Where, people will enter into the mining business up to the point where the cost of the energy equals. The value, of the reward that they hope to get now. It's hard to verify this exactly. There's, no question bitcoin burns a lot of energy and you, can do the math and say it's more than Ireland, it's more than Denmark, but. We don't really know that and the, one thing that's obvious is that Bitcoin miners tend, to locate, where energy is cheap and abundant so. Many, of them have been in Iceland. In Inner Mongolia lately. Quebec has become so there are no carbon emissions from hydropower so if you're mining, Bitcoin based on hydropower, you're not adding any carbon exactly. And you're, cooling your stuff for free can just open the window in Quebec or Iceland, and it keeps the computers, nice and cool so I think a lot of the people who make these back-of-the-envelope estimates.
Are Greatly exaggerating. The end of the power consumption, but. I think the bigger point they're making is a lot of computer, resources that, could otherwise be doing good work somewhere in the world are being, diverted. To the guessing, of random numbers and, wouldn't. It be better if the work and the proof of work system and, mining wouldn't it be better if that work could be useful, to society like doing weather, forecasting, or cancer, research or something like that anything, that requires. A lot of parallel processing, or is. There may be a better way besides proof, of and there's other systems, being proposed such as proof of stake, proof, of space proof of importance, which, are interesting, and it, looks like even a theorem maybe transitioning. To proof of stake and many of the other coins being designed, or tweaking. Or even junking, all together the proof of work for some alternative I think, this is why the main design, issues facing the whole area. Is is proof, of work really the, best and only way to go about it I. Don't, think you'll ever have the problem though bitcoins, soaking up all the energy in the world if this. Ever became a real issue that there was so much demand for electricity, the price of energy would go up and the market would clear where a supply would equal demand and. For. People to say it's not socially, useful I think we could make this criticism, of teenagers, playing video, games of maybe best and brightest or at Facebook and not an asana I mean we could be a same argument but, isn't what you're saying somewhat of an endorsement of altcoins, versus Bitcoin because. All coins the human capital going, in or the IQ, energy going into that have some underlying intrinsic. Value versus mining, Bitcoin is just chasing, chasing. The reward, I think, Bitcoin was an extremely, clever combination. Of a verification protocol. The proof of work with, a database technology. Which is the blockchain and the use of financial, incentives, to draw people, onto the onto, the net worker caused. Them to leave at the right time so it's, a really clever combination. Of technology, and incentives, but it was a first cut, at an extremely, ambitious problem.
And You've, seen in the nine years since Bitcoin, went live a ton of innovation I think. This will continue for the foreseeable future so the fact that bright. Young people are working for some of these other startups, looking to improve on this this is what makes, ultimately. Innovation, and economic growth occurs when smart people invest. Their human capital and solutions, to important, problems, and I think it's exactly what you're seeing here it's a great example of, people responding. To signals from the marketplace and markets, allocating. Resources both. Physical, and human in ways. That you really couldn't do nearly, as well through any kind of central planning or rules-based system and. As. Someone who studies this which. Of the coins. Have an underlying, technology. That. You are most bullish on what, I can tell you from the history, of tech, innovation, is that these things tend. To get overtaken, pretty, quickly that even, if you and I could identify the best, token, today you know somebody, could come up with something better six months from now there are no barriers, to entry we. Saw this with the internet with things like the browser wars where people, would get a hold, on the market briefly, but. In the end innovation. By outsiders, will, make their products, shrink away look at how Yahoo, was overtaken, and searched by Google. You, look at the music business with iTunes, and then Spotify. That young more clever. Platforms. Come into use almost, without warning, and they, don't really require a lot of capital, to get going they just require excellent. Design so. Given, the number of people who are active, in this space I think the best coins have not yet been invented they're, not you're, gonna see a lot of enhancement. In product, improvements. You know probably for the foreseeable, future an Amazon, Apple Facebook Google, or Netflix, who would, who foots best in terms of their business to issuing.
A Coin if, you'd heard one of these companies but you didn't know which one had issued a coin which one would you guess it would be I would guess it would be Amazon, because they're moving into retail so, aggressively, that you know it just seems like a natural platform. To have Amazon, coin that, could be used to shop at Whole Foods or, at the online bookstore, at, the same time giving the customers, a stake, in the business that if Amazon ends. Up ruling the world their Amazon tokens, will be more and more valuable so, private. Currencies, you know dedicated to companies is started with video gaming and, there. Are all these world of warcraft, games that have internal economies, where the tokens, actually, trade outside the game you. Could replicate this, easily, with Amazon, and Facebook and it's a little bit of a puzzle that they haven't so, you know large numbers of users in a variety of retail, platforms, seem to be the. Optimal, conditions for this to become valuable, so, finally, tell us about the t-shirt this. Is hold on for, dear life this. Is the investment, mantra, that it's a wild ride to own these assets, so you really have to feel, like you're riding roller coaster and this. Is the etherium. Token, symbol here so that was introduced, by a theorem that's just uh that's just a funny. T this is for the crypto, community, and I wore this through the San Francisco, Airport where all the Silicon, Valley people were changing planes to get the big thumbs up, people. Know what this means if they're connected to the crypto space my, wife found this from me online it's a good t-shirt good stuff, professor, David uremic head of the finance department at NYU and also oversees the FinTech specialization. At NYU Stern School of Business please. Let us know if you'd like to see this weekly or, bi-weekly professor. Thanks for your time thank you Scott. Like. Bubble gum just, made a mill woman pocket Shamu wreck, about to go into our, game.
2018-04-02