Soon it will be as easy for a large pension fund to trade bitcoin as it is to trade corn. The CME group announced last week it would open a market for trading bitcoin futures by the end of this year. It has already been possible, since October, to trade bitcoin options through a central clearinghouse called LedgerX.
But once an exchange with the size and reputation of CME Group gets involved, then a bitcoin — a unit of nothingness, representing no physical goods, no single nation’s faith and credit, nothing but the willingness of its users to operate its platform — could seem as “real” to certain investors as any kernel of corn or bushel of soybeans.
Bitcoin headlines are fun to watch, but they usually don’t mean much to grain market participants. Through 2014 and 2015, the price of a single bitcoin fluctuated anywhere from $200 to several hundred dollars. Since the start of 2017, however, when the bitcoin chart burst through $1,000 for the first time, the price has skyrocketed.
A bitcoin bought for less than $1,000 in January would have been worth $2,500 in June, then $5,000 in October, then $6,500 on Nov. 1, then over $7,000 once the CME announcement was made. To many people (myself included), that sounds an awful lot like a bubble. But that’s fine. Let the bitcoin speculators enjoy the excitement while it lasts.
For grain market participants, the most fascinating thing about bitcoin shouldn’t be the wild prices or the breathless headlines. Rather, it’s the technology behind bitcoin that should pique our interest. It could revolutionize the way grain transactions take place.
“Blockchain” has become an investment buzzword, due to the abundance of new cryptocurrencies (new competitors to bitcoin) making initial coin offerings to speculators who hope to get in on the ground floor of the next bitcoin phenomenon.
All these “coins” or “currencies” are based on blockchain technology, but it has come to my attention during several recent conversations — even with friends who own bitcoins — that a lot of people don’t really know what a blockchain is.
So forget about bitcoin. Wipe any thoughts of Beanie Baby bubbles out of your mind. Concentrate just on the idea of a blockchain, and you’ll discover something very powerful.
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A blockchain is nothing more than a shared digital ledger. All the individual nodes in any blockchain’s platform (all the computers of all the people who are participating in that platform) share and repeat one same database, which lists all the transactions that have taken place on that platform.
Any time a bitcoin is passed from one user to another, that transaction is listed on the ledger, and the blockchain gets a little bit longer. New transactions can always be added to the ledger, but the existing shared data on the blockchain can never be tampered with or modified, because so many versions of it exist on other computers.
That’s how the system keeps track of who owns how much value in the system; i.e. how many “coins” are in any one user’s “wallet.” The original appeal of using bitcoin may have been its anonymous nature (it was popular for online drug deals, for instance), but now even very sophisticated banks have recognized the appeal of recording trades in this permanent, immutable, blockchain style.
Doesn’t that seem like a nice idea for grain trades, too?
A blockchain simply transfers value from one party to another. That value can be expressed in bitcoins or in “ether” (another token on another blockchain platform) or in any currency, but ultimately, once the trade is entered on the ledger, a commodity’s seller knows he has been paid, and the currency is sitting there in a digital wallet, and the commodity’s buyer knows that he now owns title to those goods.
Trading this way can effectively remove the need to conduct due diligence on buyers — either the currency is there, or it’s not.
The first-ever successful settlement of a physical grain trade from a farmer to a buyer, recorded on a blockchain, was completed last December, so this is happening. It’s new, and it’s rapidly growing, but it is happening.
That first-ever blockchain wheat trade was done in Australia through a company called AgriDigital, whose software platform is built on the Ethereum blockchain network. (So, for anyone nervous about bitcoin, they don’t use bitcoins!)
Acknowledging that agriculture is probably “the least-digitized industry in the world,” AgriDigital’s co-founder and CEO Emma Weston sees great promise for using blockchain to manage ag commodity trades.
During an interview on the Ag News Daily podcast, she explained three main problems that AgriDigital’s blockchain-based platform can address:
- Sellers need better payment security. With a blockchain-recorded transaction, farmers and other grain sellers can immediately see that currency has been transferred (no need to wait 30 days for a check).
- Buyers need better access to the supply chain. Farmers may be reluctant to sell grain to any buyers who aren’t the largest, most well-funded companies. But by using secure blockchain transactions, an end user of any size can confidently originate grain.
- End users want more data from the supply chain. As Weston put it in her Aussie accent, consumers are looking for “paddock-to-plate” transparency, and with all the data available from transactions on the blockchain’s ledger, such transparency could finally be available.
It doesn’t matter whether the actual grain trade — the person-to-person agreement of price and terms — was done over the phone, or in person, or through a broker or on an online trading platform. AgriDigital’s use of blockchain technology focuses purely on the transactional parts of fulfilling the terms of any grain trade.
Weston clarifies this role: “In some ways, you could call that the unsexy part of agriculture — the contracts, the receivables and deliverables information, the payments, the invoices — all of the transactional bedrock that actually moves a commodity.
And not just the physical movement, but also the data movement of that commodity through a supply chain.”
That clarification makes the coming digital revolution a lot less scary. We may find it fascinating to watch the bitcoin chart skyrocket; we may ponder when will be the best time to short those CME-traded bitcoin futures; but we probably don’t really want that style of excitement in our grain trades.
Security is much more important to most grain traders, I would guess, than excitement. As it turns out, security may be just what that underlying blockchain technology can deliver.
To listen to Emma Weston’s interview on the Ag News Daily podcast, visit here.
Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at firstname.lastname@example.org or on Twitter @elainekub.