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First an update on Bitcoin.

I've written about how Bitcoin is coming for all currencies as global central banks enter the competitive devaluation Olympics. (They may get together and have a massive coordinated devaluation at some point, Bretton Woods-style, in order to pay off all their debts. In the mean time, they'll all lie about wanting to have a strong currency while doing everything they can to devalue theirs.)

For those who are in on the gag, Bitcoin, as the world's hardest currency, keeps looking better and better. Indeed, it can be though of as a reserve currency for individuals and entities that don't want to have their purchasing power tied to  central bank fail-upwards technocrats who ran out of ideas some 70 years ago and have but one lever to pull.

There have been some significant examples of this, including technology firm Microstrategy which bought 21,454 Bitcoin (worth $250 million) on August 11, 2020. It's up over 67 percent since then.

Bitcoin Performance over Microstrategy Holding Period

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Those opposed to cryptocurrencies will undoubtedly point to the two order of magnitude gain in Bitcoin from $200 to $20,000 over the 2015 to 2017 time period and then the crash back to $3,000. Yes, that was a retail investor mania and should have been sold. Three years later we have had significant regulatory advances and the very beginning of institutional investment. And yes, it will remain highly volatile.

In my writings on cryptocurrencies, I've predicted that heads would really explode when central banks started to hold Bitcoin as part of their reserves.

It's already happened.

At the end of October, Iran announced that it would be licensing 1,000 Bitcoin miners and would add part of the Bitcoin earned to its central bank reserves. This is a really smart move. Iran has one of the lowest energy costs in the world due to its huge reserves of oil and gas. Energy is the largest input into Bitcoin mining. Secondly, it allows Iran to avoid U.S. sanctions.

Like Iran, most Americans will want to avoid the U.S. "sanction" of a devaluing currency, which is sure to come.

Existential Risks for the Legal Services Industry

Whereas Bitcoin is the reserve currency of choice for discerning investors, Ethereum is the hedge of choice for anyone in the legal services industry.

As I've written, the legal services industry has been undergoing some significant disruption and it's going to get convulsive as nonlawyer ownership of law firms becomes widespread. Another change that could send the disruption into overdrive is the widespread adoption of smart contracts.

In short, these are contracts that pay when certain performance has been met or when certain events transpire. Almost all transactions could shift to a smart contract format. You can think of a smart contract as "programmable money". The money gets funded and when the criteria are met, the funds get released.

Where are the lawyers in this equation? Good question. Most of them can be replaced by boilerplate language that is programmed into the contract.

Think about title search in real estate transactions. This typically costs around $1,000 to $2,000. Once this is on the blockchain, the entire title search industry will disappear.

Paying that much for title search is already ridiculous. (The last time I refinanced my house, my bank tried to charge me $2,000 for a title search despite the fact that I had financed the house with them originally and still lived in it!) No one will weep for any middleman who is just adding transaction costs and no value.

Title search will become trivial and will cost 20 cents, as it will only require one line of code.

The Hedge

Software is eating the world. That's been true for 20 years. Ethereum is software, and it is coming for the transactional world. (See this simple introduction to Ethereum.)

If you are in the legal services industry, you need to think deeply about your business and where you add value. In the mean time buying some Ether is a good way to hedge the existential risk to the industry.

There will be tremendous opportunities for new firms and business models and a lot of money will be made as the world transitions to a blockchain future. However, many firms will not make it as the steady erosion of transactional business shifts to the blockchain.

In a world where trust of all institutions is disappearing, a trustless way to transact will be desired by all parties. Ethereum is the app for that.

Ethereum Chart

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Ethereum has just hit escape velocity. While the long-term prospects point to order of magnitude gains, forty to 50 percent drawdowns will be the norm along the way.  I believe it is appropriate to own Ethereum, it should only be a small portion of an investors risk assets, not their entire asset base. (Thus a two percent risk asset position would be one percent of a total portfolio divided equally between risk assets and conservative assets.)

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NOTE: Nothing in this blog post should be considered individual investment advice. If you need investment advice, please email Jack Duval at jack@bant.am or call 845.605.1007.