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Buy the Rumor, Sell the News

Updated: Oct 21, 2022

For those of you watching, I thought I’d come to you from the Adriatic Sea today here in Montenegro. You can see it behind me, pretty cool stuff. I’m doing a motorcycle trip through Montenegro and just having the time of my life, but I thought I’d take a second just to talk really quickly about something that happened last week. And everybody was waiting for it for like two or three years, some long period of time, and it happened. So there’s the saying on Wall Street, buy the rumor, sell the news, and I think this might have been a buy the rumor sell the news event. But in any case, the number two cryptocurrency, arguably Ethereum, just did what’s called a merge or a fork. Basically, there’s now a couple of theorems, basically, what Ethereum itself did is they transitioned from a proof-of-work system, which is, well, I’ll explain in a second proof-of-work system into what’s called a proof-of-stake system. And so, you know, there’s like 20,000 cryptocurrencies out there, Bitcoin being the only one so far that’s really a proof-of-work system and totally decentralized. And all the other ones are what are called Proof-of-stake. So, here’s the way to think about it. It’s essentially proof-of-work is basically like a de-centralized database. So, proof-of-stake is anything that’s centralized. So, if you think about Amazon, they probably have one big huge database that runs everything. Same as FedEx, they probably have one huge database that runs everything. Think about the federal government, they’ve got one huge database that runs the whole thing. And it’s centralized, it all happens out of Washington DC, the same thing is true with anything that’s proof-of-stake. So, anything centralized, I should say, is coming from one central place. Pretty, pretty simple, right? And then anything, that’s what’s called Proof-of-Work is decentralized. In other words, it’s coming from many different places, there’s no single point of failure.

So, what does that mean? Well, in bitcoins case, there are 21 million Bitcoins that will ever be made, that’s already written in the code. And everybody agrees on that. And what they do is they go around, and they prove it every single time they mine a block, it’s called proof of work, they prove that there’s actually some verification of the prior blocks, and they make a new block, then everybody proves that. And so there’s no “one” person, there’s no board of directors, there’s no “one” guy, there’s nobody pulling the strings, there’s nobody that can take control. And that is the first time in history that’s ever happened. And now it’s got so many million nodes, that there’s no way they can coordinate any kind of attack on Bitcoin, and make it fail. On the other hand, anything that’s centralized can fail. And so Ethereum just became centralized. And when they became centralized this week, they went to proof-of-stake. Basically, that means that anyone with 51% of the control of the theory becomes their tokens, the coins, has control of the entire ecosystem.

And so, what essentially has happened is everybody was excited about this. And I think it’s got a lot of utility other than currency, it’s got utility as a smart contract platform, which basically means you can build lots of utility on top of it, which is great. It’s a different thing. It’s like the HTTP that you put in front of the website. You know, when you type that into your URL, that’s the protocol. Well, Ethereum has kind of a similar protocol, which is cool. But I think they blew it. They went to this proof-of- stake. And they basically made it centralized. And everybody thought, well, Ethereum, which was about $1,800 per token, right before the merge is now $1,300 a token. So, everybody kind of selling the news. And basically, people are saying, “you know, what, we’re not so sure that this proof-of-stake, centralization of this coin is a good thing, because the people that control 51% of it now can ruin it, they can send it to zero.” So, a lot of people think in theory, the Ethereum could go to zero now, and so you’re seeing a lot of selling and selling the news. So, I don’t know what’s going to happen with it. I still think it’s the number two. But I think the king mac daddy is Bitcoin. It’s been around for 13 years, and it’s not been breached. And it’s the other scarcity to it and there’s a whole bunch of really cool things. You probably heard me talking about Bitcoin before. Ethereum was number two, but I think they kind of blew it. And so, I think by going to that proof-of-stake away from proof-of-work, and you’ll hear a lot more about this in the future, it kind of sealed their fate as just one of the other typical cryptocurrencies. And now they’ve got some utility, but now they’re also proof-of-stake, not proof-of-work, so maybe not the best thing that was possible.

Anyway, I thought you might want to hear a little bit about what’s happened in the Ethereum in the cryptocurrency. world you’d normally hear me talking about Bitcoin but in this case, you should know what’s going on in Ethereum. Hope it helps you to understand this complicated little cryptocurrency market. And I’ll see you on the next edition of the wealth architect podcast. T

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