Sisu -the Finnish art of resilience

I was reading a BBC article on the Finish concept of sisu and I was intrigued by everything it stood for and decided it needed further exploration!

The notion of sisu was popularised in the 1920s and literally means ‘guts’ but often refers to a person’s courage, resilience, tenacity or just sheer doggedness.

Sisu as a concept has shaped the Finnish people and a whole nation.

These are qualities not unique to Finns alone but they have been able to articulate it as a concept and as a form of national identity to build their own narratives.

Ultimately, sisu is not about boasting about one’s bravado but rather the inner strength one needs in the face of adversity.

Sisu as a philosophy was instrumental in galvanising the Finnish nation in 1939 when it was overrun and invaded by the Soviet Union who had three times as many soldiers and over a hundred times as many tanks. In order to defeat a materially superior foe and regain their independence, the Finns had to call upon their spiritual abundance of sisu and a combination of tactical nous and mastery of the terrain.

 

“Rather than the stamina to run up a mountain, sisu is the strength it takes to put one foot in front of the other.”

–         Joanna Nylund

 

Sisu though is not just about the individual, but rather the collective. It is about communal strength; it is about equality, across genders and tribes; it is ultimately about collective unity and strength.

The Finns claim that it’s a combination of their weather, their stark landscape which they have survived over centuries and their sense of independence and purpose that has cultivated their sense of sisu.

Ways one can consider building sisu is through being one with nature, observing and appreciating the natural life around us; being comfortable in silence and appreciating the meaning of the gift of time; and ultimately being resilient by dealing with a difficult or uncomfortable situation in a positive manner.

So go forth with sisukas (full of sisu) and live life with sisulla ja sydämellä (with sisu and heart).

 

For further great resources on sisu, I will suggest some of the following resources:

Sisu – The Finnish Art of Courage (Joanna Nylund)

What is Sisu – by Emilia Lahti, a Finnish researcher and activist

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Book review – “Robot-Proof” by Joseph Aoun.

Robot-Proof: Higher Education in the Age of Artificial Intelligence by Joseph E. Aoun

This extremely insightful book by President Aoun of the Northeastern University in Boston on the future of higher education in an age of significant technological evolution driven through advances in robotics, artificial intelligence and data analytics provides much food for thought.

This (very) brief summary provides a useful overview of some of the points raised in the book which will be useful for educators everywhere to mull over. Anyone interested in the future of education and learning should get a copy and read it!

A key hypothesis laid out in the book is that we’ve reached an inflection point in time where machines (coupled with big data and underpinned by deep learning systems) have reached a position where their full transformational impacts will be felt by society.

There changing employment landscape (from the rising levels of automation and introduction of robotic algorithms) coupled with changing consumer behaviours will require higher education to introduce transformational changes that ensures relevancy and societal cachet.

The books lays out a new model of higher education that will ensure individuals progressing through the institutions will be able to thrive and prosper in an economy and society transformed significantly through technology.

President Aoun describes the need for higher education to “refit (their) mental engines, calibrating them with a creative mindset and the mental elasticity to invent, discover, or otherwise produce something society deems valuable.”

A framework for a new discipline called “humanics” is set out in this book which calls for education to develop individuals who can work alongside machines.

Humanics will consider the following two areas:

  • The building of ‘new literacies’ such as data literacy (the ability to read, master and analyse and drive insights from data); technological literacy (the ability to code and understand engineering principles); and human literacy (the development of what some consider to be ‘soft skills’ such as communication and design). These will need to add on from old literacies such as reading, writing and mathematics.
  • Development of cognitive capacities or higher order mental skills which will include: systems thinking (the ability to view businesses, technology and machine in a holistic way and considering them in an integrated manner); entrepreneurship (applying a creative mindset to an economic or business sphere); cultural agility (which allows for individuals to adapt to a global environment); and critical thinking (which fosters discipline, rational analysis and judgment).

President Aoun’s hypothesis is that this will enhance individuals’ ability to prosper in a world of highly sophisticated machines powered by AI.

The fourth transformational force

 The first three transformational forces that have shaped society and the economy have been fire (a point raised very eloquently by the good Bishop Michael Curry in his speech at the latest royal wedding!), steam and electricity.

The fourth transformational force shaping society is information (the life source fuelling the sophistication of machines and algorithms).

Aoun touches on the history of how technological advances have often caused great societal divisions and consternations, from the rise of the Luddites to John Maynard Keynes’ view that machines will cause “technological unemployment” to letters by academics to President Lyndon Johnson warning him that technology could undermine the value of all human labour. There is also a further description of how universities approach towards education has been shaped by societal changes from the rise of government funding to build a robust educational ecosystem in the 1800s to the introduction of the G.I. Bill (or the Servicemen’s Readjustment Act) to provide tuition support to returning soldiers from WW2 to the increased levels of federal funding to support university research and development.

There is also a good discourse in the first chapter to consider different views to how technology and automation may shape the future of work. Although the gig economy has been shown to be an increasing alternative to traditional work regimes, there is a suggestion that individuals who rely on the gig economy do not make enough to support themselves and only earn supplemental income.

Given this current state, Aoun postulates that it will be (wo)man’s innate ability for imagination and creativity that will help her/him in thriving in the new world and the power of higher education to further develop and build on this ability.

The view from employers

 With the rise of robotics and advanced machines, even traditionally ‘safe’ knowledge sectors such as law and finance are being impacted. However, despite the increasing demand for individuals with skills in computer science, algorithms and data science, one of the skills most desired (from a 2016 survey) by employers is that of leadership followed by ability to work with people – both very social skills.

Whilst companies need engineers, software developers and data scientists, the area where there will be a significant demand is for someone who has the ability to integrate all the various areas and adopt a holistic ‘systems thinking’ approach.

As employers expect the technical knowledge to be a minimum requirement, they look for other softskills or a high dose of ‘human literacy’ such as the ability to collaborate well, take a team-based approach to development, or demonstrate ‘deep listening skills.’

As professionals begin working with sophisticated algorithms and machines, there needs be a further demonstration of cognitive capacities by employees. Employees need to be able to better observe, reflect, synthesize and analyse information better.

Aoun’s conclusion is that critical thinking and systems thinking need to be instilled into the students of today and tomorrow to ensure they remain relevant for the workplace of the future.

A learning model for the future

A LinkedIn review shows that the top ten most desirable skills center around technology. Even though technology cannot provide jobs for everyone, it has also given rise to new industries and employment opportunities. Aoun argues that education has always had a central role in ensuring that people are elevated to the next levels of economic development. His view is that as the workplace of tomorrow demands more of individuals, there is a greater demand on how education supports people.

Aoun argues that the learning of the future needs to consider not just what technology can do but rather what technology cannot do and how a robot-proof education can further nurture’s man’s unique capacities.

There is a need for education to inculcate and cultivate the creative spirit of people. This necessitates an increasing focus on divergent thinking (as opposed to convergent thinking which leads to a single result). Divergent thinking focuses on the multiple outcomes to issues and stimulates creativity, curiosity and willingness to take risks.

Aoun states, “We need a new model of learning that enables learners to understand the highly technological world around that and that simultaneously allows them to transcend it by nurturing the mental and intellectual qualities that are unique to humans – namely their capacity for creativity and mental flexibility. We can call this model humanics.”

Here Aoun explores the new literacies that education should imbue into learners. Fredrick Douglas says that literacy is the path from slavery to freedom and Aoun argues that the deficit of literacy will lead to a slide into powerlessness.The new literacies include firstly, technological literacy (knowledge of mathematics, coding and basic engineering principles). He argues that as coding is the lingua franca of the digital world (a similar point was made by President Obama who incidentally was the first American President to write code) and the need to be conversant in the language of code.

Next the need for data literacy is made which is about the ability to understand, analyse and utilise data to drive insights. Finally, there is elaboration on the importance of human literacy which is about imbuing in learners the ability to collaborate, communicate and interact with one another and the world around them so that they make the right choices in life.

This chapter also considers how the new literacies need to be coupled with cognitive capacities that will help students participate more effectively in a digital world. These cognitive capacities include critical thinking, systems thinking, entrepreneurship and cultural agility. The role of educators in building these cognitive capacities is crucial.

Higher education provides an opportunity for learners to learn these cognitive capacities in a safe environment which allows them to understand context better and crucially fail and develop their resilience before they apply the lessons in the real world.

President Aoun stresses that the role of higher education is not to merely provide information and content but to help teach the new literacies and cognitive capacities. He argues that teachers need to be more explicit in what they are teaching to students and help students demonstrate to students how each area of their syllabi helps nurture each of the literacies or cognitive capacities. Students will need to be taught how these skills will support their own ambitions in life and contribute in the modern workplace.

A great quote from this chapter attributed to Desh Deshpande that bears thinking about is, “There are three types of people in the world. There are some people who are oblivious to everything, some people who see a problem and complain, and some people who see a problem and get excited to fix it. The difference between a vibrant community and an impoverished community is the mix of those people.” This is a quote that applies to any business as well!

Experiential learning

Here president Aoun underscores the need for classroom learning to be coupled with experience so that the learning retains its immediacy and relevance. Mastery of the literacies and cognitive capacities along will not help learners be robot-proof, they need to be able to synthesise humanics with experience. Students should be able to apply their knowledge in real-world situations and understand and reflect on the implications and outcomes.

In essence, Aoun describes this as flinging ‘open the gates of the campus and making the entire world a potential classroom, library or laboratory.’ It will be important for learning to follow a structured sequence and indeed the cognitive apprenticeship model describes how in order to master any complex subject, learners need to first acquire component skills. These skills must then be practiced in given context and finally apply them to different contexts.

This sequence of acquisition, integration and application leads to expertise. Aoun explains how students are first in a stage of unconscious incompetence (where they don’t know what they don’t know) to then progressing to a stage of conscious incompetence (knowing what you don’t know) to a stage of conscious competence (where they perform well but with deliberation) to a final stage of mastery (where they instinctively operate at the highest level in their domain).

Aoun shares how one of the most direct forms of experiential learning is “cooperative education” – an education model in which students alternate their classroom learning with sustained, full-time immersion in the professional workplace and then integrate with the two. The co-op model is different from internships in that it is much more sustained and go deeper into the learning by experience approach.

This model ultimately leads to greater employer satisfaction and there is a statistical significance in the levels of satisfaction displayed.

Educators also play a crucial role in helping students and learners understand their own experiential learning to maximise the impact of the lessons learnt through their experience in the real-world.

Aoun touches on the effectiveness of apprenticeship models (strongly prevalent in Austria, Germany and Switzerland) and how the education-employment collaborations have helped benefit both employers and learners.

Lifelong learning

President Aoun discusses how higher education can serve learners in a personalised and customised manner and will over time be compelled to serve people throughout their careers rather than at specific points in students’ lives. This will therefore require higher education to bring lifelong learning into the center.

Aoun also argues that it is lifelong learning that will help further drive down social inequality as it ensures everyone has the opportunity to develop and maintain valuable skills throughout their careers.

Higher education institutions need to see themselves as not just education providers towards undergraduate, post-graduate education or research but more as being in the business of lifelong learning. There has been a rise of for-profit education institutions and of “corporate universities.” These corporate universities have seen large corporate employers such as AT&T working with MOOC partners to deliver corporate training.

Aoun argues that these developments demonstrate that higher education is sidelining lifelong learning to its detriment. He also strongly encourages higher education institutions to partner with employers to create the relevancy required by the employment sector.

There will be a need for universities to customise courses to ensure they are designed and delivered in a manner that most appropriately provides education to learners, regardless of where they are on the career journey using the full extent of technology available to them.

The above developments will mean universities will need to consider how they package the content and learning and offer it in a way that allows for universities to consider how they award degrees or credentials. Universities may need to consider developing smaller blocks o knowledge that can be stacked in a way that may be suitable for traditional degrees but to offer it in a way that offers much more permutation, customisation and combinations.

There is also an opportunity for universities to consider how they should engage with their alumni and offer potentially subscription based opportunities towards learning.

Finally, Aoun discusses here the advent of multi-university networks which has universities adopting a multi-campus, multi-modal, multi-national approach to provide students with different learning experiences and environments, and enhancing their own cognitive capacities and contribute better to the world they live in.

Personal conclusion

The book touched on some of the important changes universities must consider as they seek to retain their relevance in being institutions that help societies adapt to an emerging and evolving world.

Education has a place in equipping society with the skills needed to thrive in a future which will look fundamentally different to present day. In a world where we see rising social and income inequality, education becomes a key driver towards social mobility and plays an instrumental part in alleviating the inequality we see in the world today.

The future of ABC (audit, blockchains and code)

The views and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.

The audit profession has undergone numerous iterations in the last few decades with the onset of greater regulatory requirements, stakeholder needs and technological changes.

There is also a greater level of concern being expressed across all quarters about the quality of audits. For instance, half of all audits monitored by global regulators had deficiencies according to the International Forum of Independent Audit Regulators (IFIAR).

In a world where trust is eroding, it will be important to understand what the introduction of blockchain technology coupled with AI powered by stable algorithms supported by machine learning could mean for the world of audit and assurance in a broader sense.

Without going too much into the description as to what a Blockchain is (essentially a distributed ledger that can only append and not delete transactions posted by different parties or peers in a network), I will attempt to provide a view of what the vision of the future could look like.

It will also be important to note that there are different types of Blockchains. You have on one hand a public or permissionless Blockchain which allows anyone to participate in it – Bitcoin runs on a public Blockchain. You also have a private or permissioned Blockchain which is only open to a defined group of individuals or entities (and where the consensus approach to proof of work may not be required).

You can read more about the underlying principles of Blockchain here or learn more about it here (edX).

 

Imagine

It is the year 2022 and the world’s largest FMCG company, Duopivot, has a permissioned Blockchain where all of its financial and operational transactions are recorded across all of its numerous entities globally.

Duopivot’s auditors, MonTian, gets its partner to run an algorithm, with a series of conditions, assumptions and principles, agreed mutually by Duopivot and Montian, on the permissioned Blockchain. Rather than a sample of tests, a complete test of all transactions is made by the algorithm resulting in queries or anomalies which are raised automatically by the AI built within the algorithm to Duopivot’s finance team

The finance team respond and make the necessary adjustments and the financial statements are declared true and fair and the audit is complete. Within 3 days. With no other interventions from auditors MonTian other than the audit partner running the code on the Blockchain.

In addition to a test of balances and figures provided by Duopivot, the algorithm also tests the stability of the Blockchain and detects any abnormal transactions raised across any of Duopivot’s entities by cross-referencing them to external datasets (such as consumer behaviour, sentiment, overall sales figures for the industry and GDP growth of the multiple markets Duopivot operates in). The AI is able to apply the principles of scepticism to the data provided by Duopivot using its own massive datasets and get a high level of assurance on whether the transactions recorded on the permissioned Blockchain is valid or not.

Following the review and sign-off by MonTian, Duopivot’s largest institutional investor WhitePebble, decide to run their own algorithm on Duopivot’s permissioned Blockchain to test the figures themselves and to also assess future investment potential in order to aid them for points to highlight during the AGM which takes place within 30 days of year-end.

MonTian’s algorithm and AI also are able to assess based on Duopivot’s data whether they have utilised the optimal tax channels to achieve greater tax efficiency, as the AI has access to the datasets of every single tax regulations globally and can therefore chart the route to ideal tax positions.

 

Implications

This is the world we could face where audit teams are reduced to individuals running code and managing code rather than managing audit team members and delivering results near instantaneously. It also allows for institutional investors to test the financial statements on their own without relying solely on auditors and also using the information for their investment decisions and approach.

The AI built within the algorithm could also provide recommendations for business decisions on areas such as game theory and provide a probabilistic approach to decision making that will be more attuned to market needs and conditions.

Changes in legislation or reporting standards can also be applied almost instantaneously (even where judgment is required) and be tested to a very high degree of certainty.

 

What is the likelihood of this?

Very high.

We already see how PwC’s GL.ai is an innovation made of algorithms. It analyses billions of data points in milliseconds and applies judgment to detect anomalies in the general ledger.

Northern Trust (Nasdaq: NTRS) also currently do this in a similar vein where they launched their Blockchain technology for private equity and allowing for audit firms to carry out audits through access on their own blockchain node, providing access to relevant fund data. Northern Trust currently allows for audit firms to obtain the master records to their own systems or to complete the audit on their blockchain itself. You can find out more here.

The ability of algorithms supported by machine learning , particularly augmented data learning and deep learning models that account for uncertainty (such as utilising the Bayesian approach to machine learning), the role, shape and future of audit and assurance as we know it will change dramatically.

 

Fakebook? The mystery of Facebook and their predicament.

A few months ago I was reading about an AI-powered bot called Aiera which downgraded Facebook’s stock (on behalf of Wells Fargo’s equity arm) but Facebook’s stock continued to rise which led to investors dismissing the bot’s capability.

It did set me wondering though. What if the bot, Aiera was actually right and making a long call (based on longer than conventional time frame)? What if one should actually be selling Facebook’s stocks?

Facebook has not had a good time lately: from accusations of being peddlers of fake news leading to congressional hearings; to major advertisers pulling their marketing spend on Facebook’s platform; to declining numbers of millenials on their platform.

However, the first thing I am keen to explore is Facebook’s purported reach.

Are Facebook’s numbers legit?

The first point of contention for me is Facebook’s claim of over 2.1 billion monthly active users on their platform [Link to Facebook’s media release].

Let us examine this figure in a bit more detail.

The world’s population, according to the UN, is 7.6 billion.

  • 26.3 % (according to the CIA Factbook) is under the age of 14. The minimum age for users for Facebook is 13. Therefore, let’s assume that we can exclude this group from Facebook’s reported figures. This means we can exclude 1.999 billion under-14s from the Facebook group.
  • The Chinese population of 1.4 billion based in China do not have access to Facebook. 83.5% of the Chinese population are over the age of 14. Therefore, we can exclude another 1.172 billion users from the available Facebook population.
  • This leaves an available world population of 4.43 billion who can theoretically use Facebook.
  • According to the World Bank, 767 million people live below the poverty line of $1.90 per day. These are our fellow people who do not have enough water, food or funds required to sustain themselves and Facebook is hardly going to be a priority. We can therefore make a broad assumption that they will not be using Facebook.
  • This further reduces the available world population to 3.663 billion users.
Facebook

If we believe this unrealistic figure of 2.13 billion Facebook users to be true, then we are assuming that 58% or over 1 in 2 of every single living person in the world magically logging onto Facebook on a regular basis despite war, famine, illness and no access to Internet or technology.

This does not seem to be a plausible statistic. As long as anyone of you reading this article on average knows at least 1 person who does not actively use Facebook, then it places Facebook’s claims under stress.

Just to set some further context, there are only about 2.1 billion smartphone users in the world and global literacy rate stands at only 83%.

Another way of looking at this is to consider the number of Internet users in the world today – there are about 3.2 billion Internet users in the world (source: https://www.internetworldstats.com/stats.htm), of whom 772 million come from China, leaving about 2.4 billion Internet users. If we believe Facebook, then we are effectively saying, almost 90% of every other user being on Facebook. This is hugely unrealistic

Facebook’s other quandaries.

Leaving aside the challenge of Facebook’s user figures, it has not been a good few months for Facebook.

According to various sources, the number of millenials (those under the age of 25) leaving Facebook is accelerating. Facebook itself has had to admit the mental health risks it poses leaving to more people leaving the platform altogether.

There is also an increasing backlash by advertisers reducing their marketing spend on Facebook. Unilever has threatened to cut its marketing spend on Facebook if it does not tackle extremist content. Proctor and Gamble also has reduced its social media spend by $200 million, including spend on Facebook, to reinvest in other areas with ‘media reach.’ Facebook also significantly overestimated various metrics, including key video viewing time figures, which will over time impact how much advertisers will be prepared to pay for advertising fees.

There is increasing regulatory scrutiny for Facebook, from Congressional hearings about the ‘fake news’ saga which also led to observers criticising Facebook, along with other tech firms, to be out of touchEuropean regulators are already deeming Facebook’s dominance to be monopolistic with talks of regulatory break-up being whispered in some circles.

There is another more pressing issue for Facebook. For a giant social network, the whole raison d’être is around users being ‘social’ or sharing data. However, Facebook is now facing a syndrome that has been labelled as ‘context collapse,’ or the idea that users on Facebook are sharing less of their lives and content with others. If this continues to peak, it will pose a much more structural problem for Facebook.

Facebook is also facing a backlash against the way it treats its employees. This includes claims of a ‘bro culture’ at Facebook and hypocrisy about their societal welfare they contribute to. Whilst Mark Zuckerberg is a committed philanthropist, vowing to donate 99% of his and his wife’s shares to the Chan Zuckerberg Initiative, stories regarding their cafeteria workers struggling to make ends meet and living in garages do not help their cause. Charity should ideally begin at home.

What does this mean for Facebook?

Everything that has a beginning has an end. This is the order of all things. At some point, perhaps now, perhaps in the next decade, perhaps in the next century, Facebook will disappear. However, the world as we know it will continue.

very interesting study 4 years ago by a group of Princeton researchers suggested that Facebook will lose 80% of its users by 2017 (or 3 years from the time of research). This, we know now, is not correct. However what makes the study interesting is how the researchers compared to the social network’s growth curve to that of an infectious disease. For those interested in reading the research, you can find it here.

Facebook still remains a hugely successful company by all financial metrics, but they may have peaked. In the short to medium term however, Facebook still has the ability to change things around. Some of them may require fundamental changes to their business model. In a world where their revenues are driven by data and content provided by their users, perhaps rewarding them in an appropriate manner for contributing the data which Facebook monetises may help address the fundamental issue of fairness.

If the world can survive the possible loss of Toys-R-Us, I am sure we will survive the disappearance of Facebook.

Reflections on the Singapore Budget 2018

It has been a week since the Singapore Budget for 2018 was announced.

Following further reflection, this is a budget that perhaps prepares Singapore the best for the future and remains cognisant not just to the opportunities of a rising Asia but also the very real challenges of inequality and an ageing society.

There is the notion of building society over self built into the Budget that remains hugely aspirational.

It remains hugely relevant to evolving needs and develops robustness and inculcates values of innovation throughout the various initiatives and interventions.

Social mobilily remains crucial and the interventions being proposed will help address social mobility through education and social support. Ultimately, this will help Singapore addressing the growing challenges income inequality presents.

This Budget allows Singapore to remain adaptable as a nation and as a people. The budget will allow Singapore to remain poised to take advantage of the opportunities and ride the challenges the future holds.

Below is a brief 4 minute summary of the Budget 2018 (which was perhaps one of the longest in recent times running to close to 2 hours)

The resurgence of the Indo-China education paradigm

A really important shift has just taken place in the world of international Indian students going abroad. For the first time ever, there are now more Indian students studying in China than in the UK! According to the Times of India (and other sources), there are now 18,171 Indian students in China against 18,015 in the UK, the numbers for 2016 reveal.

UK has always had a strong allure for Indian students (indeed the first Prime Minister of India, Jawaharlal Nehru attained his education in the UK). The strong historical, cultural and social links meant that UK was a favoured destination for Indian students pursuing their studies.

This has now changed. A combination of factors, from Britain’s immigration policies, Brexit, China’s emergence, and greater availability of information has meant Indian students are now taking a much more diverse approach as to where they obtain their education.

Indeed, Indian students are the fifth largest group of international students in China (after S. Korea, USA, Thailand and Pakistan). This number is expected to grow in the coming years.

India and China have both shared a close historic education link dating back to at least 1,000 BC from ancient Taxila (where Chinese scholars met to discuss and learn logic, mathematics, astronomy and science) to Nalanda (from around 5 CE).

Over time, it is through education and dialogue that both these historic neighbours will forge even greater collaboration and partnership. There is scope for greater learning of best practices to create a harmonious and progressive approach to education.

The Emperor’s New Coins – Don’t Let BaitCoins Lure You Down A Rabbit Hole

As the public discourse around Bitcoin reaches a crescendo, a number of learned commentators are comparing the current Bitcoin mania to the Tulip mania of the 17th century or even to the South Sea Bubble, where a great number of British people lost huge amounts of wealth in the 18th century as a result of purchasing the stock of companies that didn’t actually generate any value.

However, I beg to disagree. In the case of those who physically bought tulips (rather than the futures contracts attached to tulips), when the crash came, they at least owned a bunch of beautiful flowers. In the case of Bitcoins, people will be left with a string of 0s and 1s which will never be seen, admired, enjoyed or felt.

The Bitcoin high priests (because there is a certain level of almost theological fundamentalism one senses when one speaks with Bitcoin proponents) will argue and explain that Bitcoin is a fairer way of redistributing wealth and how it will be the currency of the world because it is free of central bank influence.

Except when you ask them to explain how:

  • There will only ever be 21 million Bitcoins – because that is the theoretical maximum limit
  • It can ever be a transparent when 1 million of those coins are owned by possibly one person or a small group of people (Satoshi Nakamoto) – who is unknown and whose origins are shrouded in mystery
  • It can be considered equitable when 40% of all Bitcoins are owned by 1,000 peoplein the world who are all linked to each other and can collude to move the Bitcoin markets at once.

There are some real fundamental problems with Bitcoins which I’m highlighting below and which I hope gives food for thought.

The real issues with Bitcoin and the arguments made by Bitcoin proponents

What is the intrinsic value of Bitcoin?

 The single biggest issue about Bitcoin is around what the intrinsic value of Bitcoin is. There will be any number of convoluted answers about what people think the inherent value of Bitcoin is, but it gained the greatest usage by merchants and purveyors of illegal merchandise on the dark web through sites like the Silk Road where you could buy anything from crack cocaine to knuckle dusters.

I was reflecting on the factors driving the valuation of Bitcoin valuation, 4 years ago in 2013 (when Silk Road was at its peak) and now and reflecting on the drivers leading to Bitcoins valuation. The figure below is my view of some of the factors driving Bitcoin valuation.

Figure 1 – Factors driving Bitcoin valuation

In the very early days, when you required a few Bitcoins to pay for pizza, the usage of Bitcoin was limited to a very small group of individuals who wanted an anonymous mode of exchange. The bearer nature of Bitcoin meant that it provided the level of anonymity that one requires in order to transact bravely in all forms of drugs (except it didn’t and a whole bunch of people were caught when Silk Road was shut down – and also because the founder of Silk Road, Ross Ulbricht aka ‘Dread Pirate Roberts’, chose to use his actual name to set up his anonymous site….and boasted about it in his LinkedIn profile!). Crime generates US$2.1 trillion worth of economic activity, or 3.6% of the world’s GDP. This suggests a sizeable market for anyone who wants to move on from transferring large amounts of US dollars physically or electronically towards a virtual, anonymous currency which can be transferred across borders through anonymous digital wallets.

There were also small groups of Libertarian vendors who were accepting Bitcoin as a means of exchange but Bitcoin’s perception, be it as a commodity or currency, was fairly limited. However, through the hype generated through the valid use cases of the underlying technology driving Bitcoin, Blockchain, Bitcoin hit the public domain in a much bigger way and a small group of individuals started creating the hype around it, which increased people’s perception of what the value of each Bitcoin should be.

That is what figure 1 above suggests – the value of Bitcoin has been driven by the irrational and exuberant perception of some of the market around what the value of Bitcoin ought to be, rather than on any sound fundamentals or basis.

This then leads to my original question: What is then the inherent value of Bitcoin?

Why should anyone consider it as a store of value and the most fundamental question of them all is, when all is said and done, what is a Bitcoin backed by?

Paul Krugman said it best when he explained that, “To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why Bitcoin should be a stable store of value.”Krugman’s interview with BusinessInsider is also hugely instructive for those interested in learning more about his thoughts on Bitcoin.

‘Ah,’ the Bitcoin high priests will exclaim, ‘what then is any currency in the world backed by?’ and use that as an argument to argue the value of Bitcoin.

Let’s be clear, a Bitcoin has no underlying value. It generates no value, except in its own exchange, and there is nothing to back the price of a Bitcoin, except only the trust of the purveyors of Bitcoins, which in turn is backed by nothing but hope and the promise that there will be another sucker who will come along to buy the coin at a price higher than they were duped into buying.

Other fiat currencies, say the US dollar, the Chinese renminbi, or any other national currency are essentially backed by the underlying economic output of the country. Governments are able to defend and protect a currency on the back of the strength of its reserves or economy. These currencies are accepted as a means of exchange and faith in the economic system is implicit.

If Bitcoin goes into a free fall, what authority or government is going to step in to prop it up and ensure the confidence within the underlying asset? What economic output does Bitcoin generate that underpins its value?

No underlying value – not like a fiat currency backed by the underlying economic output and governments are able to defend and protect a currency on the back of the strength of its reserves and the currency is accepted as a means of exchange and faith in the economic system is implicit.

The naiveté of Bitcoin high priests

Bitcoin enthusiasts proclaim how Bitcoin will become the de facto currency of the world.

Let’s be clear. The moment anyone or anything comes close to threatening the national sovereignty of a country, they will be shut down and shut out.

Over time, I foresee national economies and regulators killing Bitcoin outright (the way China banned it outright) or killing it through a thousand cuts (or regulatory burdens such as considering Bitcoins to be commodities rather than currencies and taxing holders of Bitcoins for capital gains – as the IRS are seeking to do in the US). The IRS in the US is also hunting down Bitcoin users and breaking their shield of anonymity so as to find them and tax them.

The British government, through the UK Treasury, is also looking at greater regulation of Bitcoin in an effort to bolster anti money laundering or the countering of the financing of terrorism (AML/CFT). Australia is following suit in a similar vein, and it’s a matter of time this becomes a wider campaign, driven by concerted regulatory authorities.

The moment governments introduce sufficiently high capital gains taxes – and they will because they will be able to justify it as a tax on something that has been made purely through speculative channels and with no underlying economic activity – and over time, this will destroy Bitcoin’s value?

The reason why governments will, over time, not allow for Bitcoin’s operations is because it threatens the sovereignty and integrity of their national borders. Governments will never cede their ability to use monetary policy to control and influence economic activity. This is precisely what Bitcoins do as they fall beyond the reaches of central banks and regulators and how can a country aim to control inflation, employment, underlying economic activity, if a currency that they cannot control is influencing their economy? This is the challenge economies like Vietnam or Indonesia face because of the pervasive influence of the US dollar on their economy and they are unable to exercise monetary policy tools.

The race to regulate Bitcoin has begun, and ultimately, this is what will lead to the moderation or possibly the demise of a currency that is not backed by underlying value, economic activity or output.

It’s all about finding the next sucker

The way the Bitcoin market is moving now, nobody is actually using Bitcoin as a medium of exchange or as a currency. It is a commodity or an asset that people are holding on to, and hopefully selling it off to somebody else before the whole thing implodes.

Since the start of the year, Bitcoin’s price has jumped more than 1,000 percent since the start of the year, and Bitcoin futures just began trading at the Chicago Board Options Exchange (what happens when you bring together a fake currency and a financial weapon of mass destruction??)

The shadowy nature of Bitcoin’s true controllers

The other real issue with Bitcoin is the completely opaque structure of Bitcoin’s ownership structure. Satoshi Nakamoto, the founder of Bitcoin, allegedly owns up to 1 million Bitcoins, or roughly 5% of the theoretical maximum number of Bitcoins (21 million). If and when Nakamoto chooses to cash out, it will lead to a collapse of the currency as we have it.

Another estimated 1,000 people own up to 40% of the total Bitcoins in circulation – most of them who are connected to each other. There is a persistent, and reasonable concern, that if these Bitcoin owners choose to ‘pump and dump’ the Bitcoins (given the lack of any real governance or regulation around Bitcoin trading at present), then those shouldering the fallout will be the investors who came in without understanding what it is and without an ability to influence the market or hope for some form of regulatory/governance mechanism to support them.

Collusion, which is generally illegal for almost any other asset class, can take place with impunity amongst the Bitcoin community (the majority of coins which are controlled by a very small group of individuals). The Bitcoin whales (or those who control significant portions of the Bitcoin world) are under (currently) no regulation, there is little anonymity, and there is no oversight – so how will this lead to the type of transparency that one requires in order to be the de facto currency of the world?

Bitcoin’s widespread acceptability isn’t all that it is cracked out to be

Bitcoin enthusiasts will claim that Bitcoin is going to be the new digital gold that will overhaul the existing global monetary system – overhaul to what exactly is not something they are able to answer. They will cite it’s widening acceptability as a medium of exchange – but it ain’t.

Bitcoin’s acceptance as a mode of exchange is still hugely limited. Last year, 1% (or 5) of the top 500 online businesses accepted Bitcoin as a medium of exchange. Given the fanfare Bitcoin has had, you would expect there to be an increase in its acceptability. But actually, only 3 of the top 500 (or less than a percent) online retailers are now accepting Bitcoin – so the number has fallen.

The single biggest traded commodity each given day, is oil. It is oil that drives the strength and value of the US dollar. There is almost never going to be a time where anyone will sell oil in Bitcoin. Nobody (sane) will seek to sell their home or property in Bitcoins. Everyday life will rarely include Bitcoin in its path – and it is not going to become the ‘de facto currency of the world’ which is part of the excuse individuals use to explain the current price levels.

Furthermore, it is also important to note that, even in the world of cryptocurrencies, Bitcoin isn’t the only non-value generating currency or show in town. There are numerous other cryptocurrencies (including DarkCoin – which has increased in value exponentially over the last few months, Litecoin, Ethereum, etc), all with the same level of vulnerabilities and issues. Why should any of the currencies be THE cryptocurrency of choice?

This is remarkably similar to the conditions that led to the South Sea Bubble, a period of history where even Sir Isaac Newton lost a fortune which led to his famous quote, “I can calculate the movement of the stars, but not the madness of men.”

Incidentally, Venezuela just launched Petro, their own national cryptocurrency – and to be fair, at least Petro is backed (allegedly) by the national oil reserves of Venezuela, which is more than can be said for Bitcoin.

It’s a secure trading currency

 The Bitcoin enthusiasts argue about the security Bitcoin offers. It doesn’t.

South Korean Bitcoin exchange was hacked and has gone bust in recent days – with North Korean hackers being blamed. There is a continuous stream of reports of digital wallets and coins being stolen and with little recourse for individuals who have lost their earnings. This is what happens in a world without regulation.

These are not isolated incidents either. In a report delivered in 2016, Reuters argued that a third of all cryptocurrency exchanges have been hacked.

The fact that authorities are routinely seizing Bitcoins (see examples of SwedenBulgariaUS) suggests that a concerted drive by determined individuals can also take control of the Bitcoins you think you own.

Beware and be careful

From the time I started on this article 3 days ago, to the current time, I note that the Bitcoin valuation has gone from close to US$20,000 to just over US$13,000, with no real change in underlying world economic conditions in those 3 days.

It just goes to prove my point that a currency based on nothing, will move due to anything.

Ultimately, one should never buy what one doesn’t understand. Of course, the likes of the Winklevoss brothers will argue that Bitcoin will grow by twenty times – but that’s of course only because they own a huge chunk of Bitcoins and will only benefit from a price increase.

I worry greatly when I see young people take out credit card debt to buy these coins or in some insane cases, take out second mortgages!As I’ve said earlier, nobody’s going to sell their homes for Bitcoins, so why bet your savings on it?

People are going to be at the mercy of forces they can never hope to control or understand, and should not be investing in what essentially a fad based on no real underlying value or economics. Aswath Damodaran’s (Professor at NYU Stern School of Business) warning about it being a potentially lucrative but dangerous pricing game with no good ending is one that people should do well to heed.

People also often make a mistake in assuming a paper profit translates to actual cash surplus. We already are reading about the lack of liquidity in the market place alongside cases of individuals who are unable to liquidate their Bitcoins for cash, especially during a downturn.

Nobel Prize winner Joe Stiglitz argues that Bitcoin should be outlawed because it doesn’t serve any real useful function but ultimately it may not require any legislative forms of control because it will disappear into the margins of society where it began once people realise the lack of substance or value that one can attach to it and after people realise in the end, it comes down to a bunch of digital bits they can never see or touch and which is not backed by anything real.