- Sean Snaith – Director, UCF Institute for Economic Competitiveness
- Honghui Chen – Director, Master of Science (M.S.) FinTech Initiative at UCF
- Jim Balaschak – Principal, Deanja, LLC
- Mike O’Donnell – Executive Director, UCF Center for Innovation & Entrepreneurship
- Alexander Golding – Founder and CEO, HelpedHope; Bitcoin Investor
- David Metcalf – Senior Researcher and Director, Mixed Emerging Technology Integration Lab (METIL), Institute for Simulation & Training
- Jim Adamczyk – Senior Executive VP / CLO, Fairwinds Credit Union
Paul Jarley: This episode has bank robbers, bitcoin, blockchain, and bacon. Maybe those are the four Bs of Fintech? As it turns out, not all of them are a thing.
Paul Jarley: This show is all about separating hype from fundamental change. I’m Paul Jarley, dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, “Is this really a thing?” Onto our show.
Paul Jarley: I have a murky past. I paid my way through graduate school by teaching macro and micro economics to inmates in a federal penitentiary. How I got that gig is a story for another day. Suffice to say, it’s not easy to get into a facility like that. Most of my students were drug dealers, counterfeiters, or tax evaders. My best student was a bank robber.
Paul Jarley: When I first heard of bitcoin and its alleged underworld origins I thought, “Yeah. Government’s gonna shut that down right away. It’s not going to be a thing.” Some South American countries like Bolivia and Ecuador have shut down bitcoin; many countries in the Muslim world have too.
Paul Jarley: Countries like China have made it difficult to trade, others like India and Canada have safeguards that keep it out of its banking system. But, here in the United States bitcoin is legal. Why? To answer that question I went to my resident hater of all government regulation.
Paul Jarley: Well, that’s a little harsh. He’s the director of the UCF Institute of Economic Competitiveness, Dr. Sean Snaith.
Paul Jarley: Hey, Sean. Got a couple of questions for you.
Sean Snaith: All right.
Paul Jarley: Sean is one of the most recognized people at UCF and his office is just down the hall from mine.
Paul Jarley: Why are cryptocurrencies like bitcoin legal? Doesn’t government have a monopoly on money production?
Sean Snaith: They do. The thing is, with bitcoin and other cryptocurrencies they really haven’t infringed greatly on the role of money as the medium of exchange that is official government money.
Paul Jarley: It’s not really legal tender is what you’re telling me?
Sean Snaith: No. I can’t be forced to accept bitcoin in payment. Now, if I was willing to, then we do see transactions where bitcoins functioning as the medium of exchange. But, it’s not widespread and that’s why I think the government is not sort of clamping down on bitcoin in a forceful way.
Sean Snaith: It’s not taking revenue away from the government that the government accumulates by being able to create money, which is a significant amount.
Paul Jarley: But, what about using bitcoin on a day-to-day basis?
Honghui Chen: From the time it started, initiated to it really is completely verified is an hour of wait time.
Paul Jarley: That’s Honghui Chen, UCF finance professor and leader of our emerging Fintech program. Hong is explaining that your typical bitcoin transaction takes about an hour to process; too long to pay for gas at the pump or your groceries in the checkout line.
Paul Jarley: He goes on to note that bitcoin has other draw backs as a medium of exchange, especially for small transactions.
Honghui Chen: The transaction cost is too high, because the cost to recall a transaction … doesn’t matter whether it’s one bitcoin or a Satoshi. Right?
Paul Jarley: By the way, a Satoshi is named after the alleged founder of bitcoin. It’s the smallest unit of bitcoin, it’s 100 millionth of a single bitcoin.
Honghui Chen: It’s the same record, same amount of work. I think maybe in the future if it happens it will be for large transactions, not for small transactions.
Paul Jarley: I just don’t see bitcoin becoming such a common medium of exchange that it’s going to worry the US treasury or the Federal Reserve. It’s more likely to be a niche product reserved for very large transactions, but even here price volatility may limit its usefulness.
Honghui Chen: There’s huge volatility. Another thing is people’s willingness, of business willingness and individuals’ willingness to accept bitcoin as payment.
Paul Jarley: Case in point, over drinks the other day two of my friends talked about the guy who mowed their lawn. He had worked for a person a few years back who had paid him in bitcoin, he later cashed that bitcoin into the tune of 250 thousand dollars.
Paul Jarley: Those turned out to be really expensive lawns to mow. Imagine the windfall or loss that might come from a much larger transaction, but where there is price volatility there is also speculation. I sought out a few of my investor friends to ask them what they think of bitcoin and whether they held any as part of their investment portfolio.
Jim Balaschak: Well, bitcoin is highly speculative.
Paul Jarley: That’s Jim Balaschak, principle at Deanja LLC and a hall of fame member. Jim’s not buying bitcoin.
Jim Balaschak: I think that it’s been driven up by a lot of people just following the trend and there’s no real, underlying earnings factor. No PE, no forward growth that you can measure, and I think that just makes it too speculative to me.
Paul Jarley: Is there another kind of crypto currency that you prefer that you think is a worthy investment of one kind or another because it’s backed by something? Could you give me just some sense of what that is?
Jim Balaschak: I haven’t really looked at detailed … There was one that came out from Oscar Mayer a few weeks ago called “Bacoin”, backed by bacon. That seemed to at least have something-
Paul Jarley: Like, linked to the commodity market for pork?
Jim Balaschak: I think just linked to … I think it was just really a promotion thing.
Paul Jarley: Now, bitcoin backed by bacon. That’s something I can get behind, but Jim’s main point is that without something tangible backing bitcoin it’s just too speculative for his blood.
Paul Jarley: My friend Mike O’Donnell on the other hand does invest in bitcoin. Mike, like Jim, is a member of our college of business hall of fame and is a serious investor.
Paul Jarley: Mike, why invest in bitcoin? Why not just invest in gold? It seems like a lot of work.
Mike O’Donnell: Well, the reason I invested in it really was because there was a guy who was one of the original people in Facebook and a really smart guy. I think the longest executive and he’s now maybe one of the top experts if not the top expert in the world in cryptocurrency.
Mike O’Donnell: He said it took him 18 months to understand it and he said, “I don’t know for sure …” Because, nobody does, “Whether or not it’s gonna succeed or not succeed, but I’m recommending that anybody with wealth invest 1% of their assets in this asset class.” Because, it had a high potential for a massively high return in these early stages.
Paul Jarley: Mike’s willing to devote a tiny part of his portfolio to a speculative investment and let it ride. He’s not worried about whether people can predict day-to-day or even annual fluctuations in price, but other people like David Metcalf are.
David Metcalf: There’s been two [inaudible 00:06:47] that I’ve watched.
Paul Jarley: David is a senior researcher for the institute of simulation and training here at UCF.
David Metcalf: Of course, just general supply and demand and hype being put on something like Gartner’s Hype Curve and kind of see where it falls in the now. But, the other thing that I’ve watched closely is when there’s been currency destabilization.
David Metcalf: Like right after Cyprus and right after the austerity movements in Greece where there was flight of capital. Safe places for some people to put and store their wealth, versus the fee at currency. That was one of the main uses for other cryptocurrencies.
Paul Jarley: In this sense, cryptocurrency may act a lot like gold, which is also seen as a hedge against currency risk. This flight to safety is also emphasized by Alexander Golding, a serial entrepreneur and thought leader on crypto currency and social enterprise.
Alex Golding: A safety play, I definitely see that. I think that the 10% daily price range we see here in bitcoin is much less than the devaluation of the Zimbabwean dollar or the Venezuelan bolivar or some other currencies.
Alex Golding: Furthermore, in terms of how do we measure and devaluate the price of bitcoin? There are some people who are trying to do that and they produce institutional grade research. They’ve figured out how some of these scientists are modeling the price of bitcoin and how people are coming to these price forecasts.
Alex Golding: I personally think that a lot of it is driven by hype, I don’t think anyone can deny that a lot of it’s driven by hype. But, I still believe in it though. I still think that the acceleration of wealth that has happened because of cryptocurrencies will inspire a huge amount of innovation, and scientific, and entrepreneurial experimentation.
Paul Jarley: Alexander’s faith in bitcoin as a source of inspiration strikes me as a very long play. Bitcoin’s not the sort of investment I’m planning on including in my retirement portfolio.
Paul Jarley: If bitcoin isn’t likely to be a significant medium of exchange and it’s too speculative for most investors, what problem is bitcoin really solving? Back to Honghui.
Honghui Chen: The main problem it solves is the trust problem making a transaction. Usually when two parties are doing transaction, if they are not face-to-face usually they need an intermediary.
Honghui Chen: With bitcoin you do not need the intermediary, because it has a shared network. The system can provide the trust that we usually need to find from an intermediary.
Paul Jarley: We’ve heard a little now about blockchain, it’s the technology that powers bitcoin. But, what exactly is it? Jim Balaschak had a pretty good explanation.
Jim Balaschak: Block chain is a distributed ledger that goes back to verify a transaction publicly across many computers, no one person can-
Paul Jarley: Erase things from the ledger.
Jim Balaschak: … erase or validate all by themselves. It’s a distributed ledger. The blockchain technology is good, it eliminates a lot of middle men, it could save more fees for transactions in the futures that are needed for bankers or lawyers to let’s say, transfer a title of a house down in the future.
Paul Jarley: It has applications outside of finance? Like voting?
Jim Balaschak: Yes.
Paul Jarley: For example, in voting systems. That you could verify that people voted and there wouldn’t be questions about who voted and did they vote multiple times and what not?
Jim Balaschak: Right. The company I’m invested in, their blockchain technology that they’re using is on facial recognition. So that they will have an algorithm for everybody’s face that buys a token and that can be used to validate their ID for different transactions.
Paul Jarley: If bitcoin promotes transparency, why is there this perception that bitcoin protects anonymity and that it was used by drug dealers to mask their transactions?
Honghui Chen: I think there’s some misconception of the bitcoin. Actually, it can be traced. If I were a drug dealer I don’t want to use bitcoin, because they’ll trace.
Honghui Chen: In the bitcoin network, every money goes into an address, public key. Every transaction where the money goes in the future, you can trace out. There is a tree.
Paul Jarley: It’s actually more transparent?
Honghui Chen: Yes. Very transparent. While you do not know exactly the identity that is behind each so called public address, but with Big Data I’m sure it’s very easy to figure out who is doing what.
Paul Jarley: Mm-hmm (affirmative). Security, transparency, trust, elimination of the middle man. There’s a lot to like there, but even sophisticated technology like bitcoin and blockchain can’t save people from themselves.
Paul Jarley: As Honghui explains, there’s the issue of keeping track of your 64 digit random key that gives you access to your bitcoin wallet.
Honghui Chen: You can write it down. It’s silly. You can store in a digital wallet. You have to have a wallet to access your bitcoin. It has to reside on a computer or your smartphone. Have a disk failure could cost loss as well. So, yes.
Honghui Chen: But, I think for many individuals it’s really, how do you remember your private key?
Paul Jarley: Does that explain … I thought I read an article, maybe it was a month or so ago about the first theft of bitcoin. That somebody had engaged in a bitcoin heist.
Honghui Chen: Yeah. So-
Paul Jarley: They must have stole their key. Is that-
Honghui Chen: Yes. Stole your key and they hack into your-
Paul Jarley: Computer or cellphone?
Honghui Chen: Yeah. Yeah. Exchanges can be hacked, because with lots of exchanges you just … For us, we just store our wallet remotely and if they have a … To access the wallet you have to have some password. Right?
Paul Jarley: Right.
Honghui Chen: Maybe some people store it in your email account. The email is not so secure. Right?
Paul Jarley: Right.
Honghui Chen: You get into your email account, your computer, and then it can be gone.
Paul Jarley: And then, there’s this warning from Sean Snaith.
Sean Snaith: You have a bitcoin purse and their exchanges, but one of those disappeared in Japan and guess what? All the bitcoins are gone. There’s no FDIC for bitcoin, your deposits are not ensured.
Paul Jarley: We’ve covered a lot of ground in this podcast and it’s time to get to the bottom line, is bitcoin really a thing? Will students need to know something about bitcoin and block chain to be considered financially literate in today’s world or can they just skip it?
Honghui Chen: In two or three years I think, “Hey, you are a finance major. You don’t know FinTech?” (laughs)
Paul Jarley: Sean agrees.
Sean Snaith: I think bitcoin and the technology that’s behind it is something that students should learn about.
Paul Jarley: From Jim Balaschak.
Jim Balaschak: I do think that it is a thing, because there are a lot of people who are putting their money it.
Paul Jarley: From Alexander.
Alex Golding: I’m a longterm believer in bitcoin as an investment.
Paul Jarley: From Mike O’Donnell.
Mike O’Donnell: I don’t want to learn about cryptocurrency at this point in my life. You’re gonna have to, because it’s happening.
Paul Jarley: From David.
David Metcalf: We’ll see if they still know the name bitcoin, but I think they’ll definitely know blockchain and cryptocurrencies in general.
Paul Jarley: It’s my podcast, so I get to go last. Let’s be clear, bacon is most certainly a thing, bitcoin on the other hand might be to blockchain what Netscape was to the internet.
Paul Jarley: In the early days, if you wanted to get on the internet you used Netscape. It was the browser, but Netscape couldn’t keep pace with upstart competition and was eventually replaced by better browsers. I suspect the same will be true for bitcoin, it’s an early adopter of blockchain that will likely give way to more sophisticated cryptocurrencies and platforms.
Paul Jarley: Blockchain most certainly appears to be a thing, bitcoin? Not so much. What’s your take? Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show.
Paul Jarley: Special thanks to my producer Josh Miranda and the whole team at the Office of Outreach and Engagement here at the UCF College of Business. Thank you for listening. Until next time, charge on.