Early Investing

Mailbag: Open-Source vs. Private Blockchains, SEC Delays

Mailbag: Open-Source vs. Private Blockchains, SEC Delays
By Early Investing
Date November 11, 2018

Editor’s Note: Welcome to the Early Investing Mailbag. Each week, we answer questions we think will help you learn about investing in pre-IPO startups and cryptocurrencies. If you have any questions for us, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.

Q: Many companies are already building new blockchain environments. Isn’t there a very real possibility that blockchain becomes fully embraced, while crypto gets completely left behind? – Pete

A: Blockchain tech was built for one purpose: to allow the secure, peer-to-peer transfer of value (money). While I do believe there are other legitimate uses for blockchains, right now they are extremely limited.

Private blockchains have some promising uses, like financial settlement between trusted parties. But they will never have the potential of a public, decentralized and open-source project like bitcoin.

Blockchain tech thrives when it is open-source and decentralized (as it is in bitcoin/crypto). There are many thousands of contributors to these projects, and nobody owns them. They run on computer networks spread around the world, with tens of thousands of nodes. Participation is voluntary, and most people who contribute are really excited about the idea of independent, decentralized money. They’re driven by passion.

Many crypto developers are also driven by self-interest. They own the coin. So, naturally, they want to make it work better. This can be a powerful motivator too. You simply can’t incentivize people that way with a private blockchain project.

There’s another good reason why 99.9% of cryptocurrencies are open-source. Nobody trusts coins that keep their code private, because there could be a back door coded in or a bug that nobody spotted. If they’re not open-source, they’re assumed to be hiding something (even if they’re not).

The beautiful thing about open-source is that you can copy any code you like from any coin. Whatever you’re trying to code, there’s a good chance somebody else has done something similar, and you can use it as a base to start from.

Plus, if an open-source project catches on, it will have dozens, hundreds or even thousands of developers working to make it run better and more securely. And if the coin gains broad public appeal, it spreads in an almost viral way. It catches on, people buy, the price goes up and more developers start contributing. A virtuous cycle.

When a single corporation or group creates a private blockchain, its potential cannot be fully realized. A private blockchain almost certainly won’t be as secure as an open-source project, because there aren’t thousands of people reviewing the code.

So yes, I do see some quite good uses for private blockchains. But crypto? We’re talking about a potential financial revolution in the making here. Of course, it is possible that the revolution will fail at first. But people will keep trying. The code is out there now. Everyone has the blueprints to create digital currency, and hundreds of thousands of people are working around the world to improve them.

+ Early Investing Co-Founder Adam Sharp

Q: I recall you thought we would see a big event take place September 30. What happened, and do you think bitcoin will see a resurgence to maybe $10,000 before year end? – Bob

A: We believed the SEC would approve the proposed VanEck SolidX Bitcoin ETF on September 30. VanEck, which trades more than 55 ETFs in the U.S. market and has more than $34 billion in assets under management, is a major player in the ETF space. And we believe it had addressed all 18 of the SEC’s concerns regarding how the ETF should operate.

But with the SEC, you never know what will happen. And 10 days before the September 30 deadline, it delayed a final decision.

Were we disappointed? Sure. But let me be clear here: The SEC did NOT reject the VanEck SolidX Bitcoin ETF application. It delayed making a decision.

So what’s next?

With the delay, the SEC gave itself until December 29 (more on that in a moment) to make a decision. A couple of things you should keep in mind as we approach the end of the year…

Nothing is preventing the SEC from making a decision sooner, if that’s what it wants to do. The SEC could announce its decision tomorrow. But I’m not holding my breath.

The SEC has given no hints that a decision is imminent. On the contrary, it has given every indication that it will take its time. And it has 1,400 comments to digest before coming to a decision.

The SEC has yet to approve its first bitcoin ETF. When it does, it wants to make sure it gets it right. Once you approve an ETF, you can’t un-ring the bell.

On the other hand, it could keep kicking the can down the road. So the opposite might happen. Instead of an early decision, the SEC could decide to delay again, putting off a decision until the first quarter of 2019. (That’s the last “timeout” the SEC can take. By law, the SEC has to make a decision by the first quarter of 2019.)

It wouldn’t shock me to see this happen. But there’s good news.

Between now and then, another significant catalyst is expected to take place.

Bakkt is scheduled to go live on December 12. What is Bakkt?

Bakkt is the brainchild of the owners of the New York Stock Exchange, and it will allow investors to buy, trade and store bitcoin and (eventually) other cryptocurrencies on a federally regulated market. Its first offering will be daily, physically settled bitcoin futures contracts.

And it doesn’t depend on SEC approval. The agency overseeing it is the Commodity Futures Trading Commission. The CFTC is more receptive to crypto initiatives than the SEC. The creators of Bakkt don’t expect approval to be a problem.

That should open the floodgates to institutional investment dollars… finally. Will it be enough to push bitcoin’s price to $10,000 before the end of the year? That’s a jump of more than 50% in four to six weeks’ time. That’s probably a bit too much to ask.

But it does set up bitcoin for a dynamic 2019… after a forgettable 2018.

An ETF approval from the SEC would add to the fun. Sooner would be better than later, but much of the infrastructure and necessary groundwork for institutional investors is either under construction or has already been built. Further delays are not going to spoil the fun.

Does the SEC know it’s in danger of being left behind?

If that doesn’t bother it, it should.

+ Early Investing Co-Founder Andy Gordon

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