Morningstar Magazine - February/March 2018 - 56

Investors

Morris: A good analogy would be China's filtering
of the internet. China has banned a substantial
number of websites from U.S. companies. However,
it has developed its own internet giants, like
Tencent TCEHY and Alibaba BABA, as well as some
pretty sophisticated workarounds of this
firewall. Banning bitcoin would be similar to
banning the internet: extremely difficult to pull off
and incredibly unpopular.

Wu: That's the risk that I should say is most likely
to happen. In terms of the underlying technology,
bitcoin is starting to lag behind its various
competitors-ironically, due to its decentralized
nature. Because there's no central group
guiding its development, there is infighting among
folks developing the protocol.

There are a number of coins that have emerged
recently. The most prominent is Ethereum,

which is built to host not just a cryptocurrency
but also act as a platform for the decentralized applications on top of it. Not only that,
but the actual bitcoin coin has been
forked-you can think of it as "spun off"-
into other coins called bitcoin cash and
bitcoin gold, which have different takes on the
same underlying protocol. Bitcoin as the
original protocol is struggling to keep its technological edge.

Wu: After China banned cryptocurrency exchanges,
informal over-the-counter markets appeared
within various WeChats. There are always ways
around these types of regulations, given that this
currency exists purely digitally.
Sinegal: What could happen if one miner were to own
more than 50% of processing power? It's a majority-rule
system, is that fair to say?

Morris: If one miner owns the majority of
the network, they are essentially able to write their
own record of who is transacting with
whom. So, they could overwrite transactions
and otherwise manipulate the veracity
of the bitcoin network. There are some adverse
incentives to control more than 50% of the
network. One of the core features of blockchain
is its trustless nature.2
Sinegal: If people knew that the blockchain had
become co-opted, or nefariously altered, that would
destroy the value of all bitcoins.

Wu: Yes, if one company controlled everything,
that would fundamentally change the value
proposition of bitcoin. You'd essentially just have
a central protocol for processing transactions
no different than Visa V or Mastercard MA. The risk
with China is that, even though there are different
companies processing these transactions, if China
someday decides to take over all these miners,
then they could forcibly take over the network.

Rising Competition
Sinegal: One of the risks that I see is that bitcoin could
be supplanted by a similar but better alternative.

2 That is, the blockchain eliminates "trusted" third parties
such as payment processors.

56

Morningstar February/March 2018

[T]here are features about bitcoin that
make it interesting according to our economic
moat framework.
Jim Sinegal



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