The future of…

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Technology has been disrupting every facet of our lives.

What will our future look like, how will it change and what are the things that we can do to embrace this change.

Whether you are building a business or just going about with your job you will be affected by these changes.

How will we transact in the future?

How will our food be produced in the future? Is what we do with food today sustainable?

If every house has solar cells, do we even need power plants?

Some of the things that this video series published by Quartz makes you ponder. I would really encourage you to take one hour out and watch all of the videos.

If the embed below does not work just click here.

 

Bitcoin is a bubble – I will tell you why

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Humans are considered rational beings. Every once in a while greed and exuberance trumps rationale we end up with a Bubble. Bitcoin is a bubble and it will fall precipitously. Here’s why…

Some Economics

Value of any product is arrived at through a process that matches demand and supply. If there is a lot of demand for a product and few people offering it, the price go up. There is a greater perceived value for it since the supply is limited – Everyone who wants it, cannot have it. The vice versa is also true. But as with most things in life there are certain exceptions to this rule

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High-end luxury products have an aspirational value and hence the higher the price the higher the demand tends to be. These are called Veblen goods. There are also Giffin goods where this effect is seen with inferior goods.

Either way, in all of these cases price is a consequence of consumption.

There is another case where prices can be made to rise artificially, through hoarding and creating artificial scarcity. The hoarder buys large quantity of a good and waits for the price to rise high enough before beginning to sell it slowly to the actual consumer at an elevated price.

Markets play an essential role is matching demand and supply, which results in price discovery. Markets are the price discovery platform that most of us depend on. We have markets for everything, stocks, currency, commodity, bonds, etc. Most of these trades take place through instruments that are representative of the same. Stock is a company is represented by shares – Stock here represents the assets of a company and the ownership is attributed through shares. There are similar trading instruments for everything that is traded.

The place where this trade is managed, which I referred to an a market earlier, is known as an Exchange. An exchange is where trades are executed and the instruments change hands between the buyer and the seller. The job of an exchange is to provide a framework, to regulate and enable the trade to take place.

Blockchain

Let us say you have a Rs. 10/- currency note. You take this note and buy tea from a tea stall. He in turn takes the note and pays for the fuel bill. He in turns takes the note and pays the school fees for his child. The note has been used for several transactions but we do not know where it originated from and how many hands it changed. If this note were an online token we could track it all the way through.

If there are a set number of tokens in circulation and each of the token can be tracked, there is no way that any fake token can be introduced without changing the total number of token in the system. Furthermore if an anomaly is found, it can be quickly tracked back to its origin.

A Blockchain is a chain of records which are called Blocks. Each block represents one transaction and hence the entire history of an single instrument can be tracked from beginning to the end. A blockchain is what makes it possible for us to track every token. Research on blockchain began in 1991 but the distributed blockchain, which is the basis of all modern blockchain was invented in 2008. The distributed blockchain kept the block of records on every computer that is a part of the system. This redundancy is the secret sauce that make blockchain a phenomenal technology.

This makes it near impossible to fake any transaction because that fake transaction. It is not enough to enter a fake transaction in your own block, the same transaction needs to exist in every copy that is part of the system. Each copy is protected by public key encryption on each user’s system (If you wish to know how encryption works). If any anomaly is found, it can be quickly localized and eliminated.

Bitcoin

Bitcoin is one of the implementations of blockchain as a currency. Bitcoin tokens can be mined by solving mathematical problems, but the total supply of bitcoin available is limited by the algorithm. The more bitcoins get mined, the harder it becomes to mine further. The mathematical problems are solved using the computer but the problems take longer and longer to solve as times goes on.

Now, once you have these Bitcoins, you need a way to transact, for which bitcoin wallets exist, where these coins get stored. The wallet is your copy of the blockchain.

Some people thought, “Hey! Why not trade bitcoin?” and they created Bitcoin exchanged. Just like a stock exchange, Bitcoin is bought and sold on Bitcoin exchanges. There are several across the world and they execute bitcoin sale and purchase.

Individuals and companies have been mining bitcoins since it was introduced. Today this mining has assumed industrial scale with more and more people getting interested and mining becoming harder and harder. There are entire server farms that are being committed to mining bitcoins and in all likelihood these are being hoarded for a future date when it would likely be sold.

Value of any product finally lies in its consumption

The value of anything is down to consumers finally adopting the product and using it. This is where demand invariably arrives out of. Whether it is businesses or individuals, utilisation is the key. Keeping something does not create value unless it is an antique. Bitcoin is definitely not an antique.

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Source: https://blockchain.info/charts/n-transactions

The graph aboves shows the confirmed Bitcoin transactions per day. At its lowermost it is about 130,000 and at its peak its at about 365,000. It averages out at about 275,000 per day.

Let me just add some perspective. Visa processes about 24,000 transactions per second. So in about 12 seconds Visa does the entire days worth of transactions on Bitcoin!

Although this is not a straight comparison since Visa is a method of exchanging money while Bitcoin itself is a store of value. The market capitalisation of Visa as a company stands at USD 230 Billion while that of Bitcoin stands at USD about 70 Billion dollars. A third of the value of Visa??

Comparing it with gold, which is a store of value unlike Visa which is a transaction mechanism akin to Blockchain; Comex which is a commodity exchange based out  Chicago (one of many across the world) does about 289,000 gold contracts per day. The number across the world would probably be in the millions, not to mention the transactions that take place through stores, banks and other means.

There are about 16,500,000 Bitcoins available today. Out of this only about 640,000 is exchanged everyday.

Hoarders will dump

I think the value ascribed to bitcoin given its abysmally small circulation is purely due to the hoarding that many are engaging in. Most of the people just buy bitcoin for the purposes of speculation.

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People buy bitcoin and then they keep it.

Since nobody is selling (Would you, if you know what you have is doubling in value every 6 months?) – Prices rise.

People hear prices are rising – They clamor to buy

Demand rises – Price rises

Some of the early hoarders keep releasing small amounts of it

The above graph illustrates how this works. For price to rise, the demand has to be high; this demand should be powered by consumption and not hoarding.

My take on this is that the price rise of Bitcoin is fake. It is powered by speculators who are willing to pay more and more in the hope that prices would keep rising. The limit on the supply is additionally helpful in driving the prices up and keeping them there.

Looking into the past

There are plenty of cautionary tales of bubbles but for me the one that most closely matches this is – The Tulip Mania.

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Tulips by themselves had no great value.

Tulip was a unique flower and was used for royal gifting. The prices of tulips shot up suddenly on speculative purchase of tulip futures. There were, many who made money during the upsurge. After a couple of years of frenzied buying, the demand for buying newer and newer contracts seemed absent. There was no inherent value in it. Panic set in and ultimately it suddenly collapsed in Feb 1637. Within 3 months all of the value was wiped out, because there was none to begin with!

The same is true of Bitcoin today. Its not like Bitcoin is the preferred currency for transaction or that people are switching to transacting through bitcoin at unforeseen pace. A crazy number of speculators are buying into it for the sake of speculation. There is no inherent value and one day in the not so distant future people will realise it.

Knowledge fuels Ego

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As humankind evolved, so did our curiosity. Curiosity led us to question. The process of answering any question often begins from what we already know. The trouble with most things we know is that, every one of those things are based on certain assumptions.

Knowledge is often passed on in the form of frameworks. This make it easier for people to understand and assimilate what is being passed on. Most frameworks have gaps and holes. The implicit assumptions are not always (almost never) spelt out. What we know for a fact today can be completely undone by a discovery tomorrow. We have always got to be prepared for this.

There was a time when the brightest men in the world thought that the Earth was flat. They had sufficient evidence to back it up!

Have you seen anything stick on a round object? Their belief in the flat earth was so strong that they were willing to behead those who claimed otherwise. Giordano Bruno was burnt at a stake in Rome in 1600 for claiming the Earth went around the Sun. Galileo was imprisoned, threatened of torture and forced to recant his claims.

These people at the time, thought they knew better; and were willing to bet on their knowledge.

Their assumed knowledge led them to a place of inflated egos.

I often see this in action in startups.

Let us assume there are two co-founders in a company; one specialising in marketing, while the other in Finance. In the event that the marketing specialist came up with some ideas with regards to finance, would the same be readily embraced? There tends to be a certain amount of prejudice that tends to creep in when such a situation normally arises. The knowledge of the knowledge makes the finance specialist assume that he/she knows better.

There can always be a different perspective.

I was thinking about co-founder conflicts and the methods to resolve them. Often the kind of conflicts that become impossible to resolve are the ones where ego is involved. More often than not, when one of the founders feels that he/she is armed with some knowledge which the other is not, their ability to put ego aside becomes greatly diminished.

The ability of the one armed with facts to listen to the one proposing without, is the cornerstone of great co-founding teams. Incidentally, it also the greatest trait most successful leaders possess. Listening.

Irrespective of what you know and what you may have experienced; always listen. Perspectives make a great difference, none of us know everything. And even within the things we think we know, newer perspectives, or discoveries can emerge. So always keep an open mind. Don’t assume that you know everything that there is to know.

The real challenge often is to keep knowledge from turning into belief.

 

Subtlety

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Subtle changes have the power of making a huge difference. People don’t realise it at the time, but it does.

To Illustrate:

Take a point and draw a line. Now take a 1 degree deflection from the starting point and draw another line. Initially the paths of both lines seem similar but as you go on extending the line the divergence is apparent and huge. And the longer you draw the lines the more the deviation.

Let us assume you are flying a plane from Bangalore to Delhi. If you have a 1 degree deviation in your route, you will find that you land up in Haryana instead of Delhi. The same plane, if it was flying from Delhi to New York would end up in Washington DC with such a small deviation.

Even in absolute terms the difference is subtle but the outcome is wildly different.

Planes do not fly in straight lines, and neither is life a straight line.

Like a deviation can make a huge difference in the long run; so can a nudge or a learning born out a conversation. The effects of these subtle changes can make the difference between success and failure.

Surround yourself with people who can give you the right nudge and push you in the right direction. Gather diversity of thought from a variety of people. They average themselves out and you tend to arrive at good decisions.

A nudge, a push, a casual conversation can change everything.

Rationality and Randomness

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When you look up at the sky in the night, you see constellations. Constellations are human inventions, an attempt to ascribe pattern to a random gathering of stars. Why do we do that?

The human brain is tuned to find patterns, it is not tuned to understand the concept of randomness. When you find something which is completely random, you still try to find patterns therein. This is because randomness as a concept is extremely hard to grasp. How can you describe randomness? There is absolutely no model through which you might be able to understand randomness. It is therefore impossible to understand.

Randomness is a part of all of our lives. On a certain day you leave at 8:30 and get to the office at 9:00, while on another you get there at 9:20. Let us say on your first day to work, you left at 8:30 and reached at 10:30 because there happened to be an random accident that happened to block off the road. You would certainly leave early the next day, but it may not be needed.

Which brings us to rationality.

Human are supposed to be rational creatures. We look at all of the information that is available to us and make a rational decision based on the information that is available. At least, in theory that is how we are supposed to be. Having said that almost none of our actions are truly rational.

The stock market is described as a place where all publicly available information about a company is assimilated to give the stock a value, in theory. And, what drives the market – Sentiment!

Rationality is about being able to follow a pattern, model or a rule. A rational decision by design can be deconstructed and the reasoning is apparent. 

Millennia of practice has taught us that the rationality and randomness do not work well together.

One of the experiment often cited is – would you take $50 today or take $100 in 5 months. Often taking the $100 is shown as a sign of patience and rationality; but life is full of random nonsense. What if this person who was offering you the money, got angry with you? Or if they decided not to give after 5 months? Or they died? So, now what would a rational person do?

For all that we may claim to be rational, we are conditioned to think and do things based on past experience rather than pure rationale. 

The randomness of life makes the irrationality of our behaviours just. 

First Times

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One of the things that is true about human nature is that our ability to face a situation improves if we have  faced such a situation already.

The first time you change your job, you find the transition a lot harder than thereafter.

If a family has had a case of cancer once, their ability to deal with another member suffering it is much improved.

The first child is always an experiment. Parents don’t worry as much about the second child and the second child also benefits from the best practices learnt from the first.

As an entrepreneur you have to deal with many first times. Keep them coming thick and fast. Face the unknowns as soon as possible. It won’t be the last time you will face it.

Straight ‘A’ students are highly disadvantaged in the real world. A life where you have never faced a calamity, a failure, a disaster leaves you ill-prepared to face it.

Some day you will have to face it, probability has a way of catching up!