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The Private Equity for Families Blog

The Golden Crumbs

In Bonfire of the Vanities Thomas Wolfe’s main character is a bond trader named Sherman McCoy. When Sherman’s daughter, Campbell, asks her father what he did for work and Sherman fumbles the reply, his wife, Judy, delivers the now famous golden crumbs analogy:

“Just imagine that a bond is a slice of cake, and you didn’t bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that. […] If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a giganticake”…Golden cake. And Pierce and Pierce collects millions of marvelous- she shrugged- “golden crumbs.”

The financial industry is highly mediated which means there are many people in between capital flows that lend their expertise and reputation (but not necessarily their balance sheet) to trading in securities. Those intermediaries are everywhere on Wall Street and they are necessary to vouch for the authenticity of the transactions they arrange. Those firms own the Depositary Trust Corporation which records transactions in securities and also warehouses securities that underpin products like ETFs. There is a huge amount of profit in being an arranger, verifier and custodian. Bitcoin and the Blockchain technology may be about to challenge that proprietary system.

I liked the idea of Bitcoin when I first read about it, but I had no idea that the Blockchain technology that validates it as a means of payment could revolutionize the mediated world of high finance. Then I had the opportunity to talk to a fellow Board member in San Francisco who not only owned Bitcoin but also was extremely excited by the Blockchain technology that powered it. That was five years ago and many things have happened to Bitcoin since that time. Most recently it went mainstream with a favorable article in The Economist .

Always Play With Live Ammo

Over the past year I have been experimenting with Bitcoin (always play with live ammo) and here are my observations and opinions:

  1. The Blockchain technology on which it is founded may be truly revolutionary. As I understand it, this is a peer to peer community based on open source software which means that no one owns Blockchain. A group of computer guardians (miners) earn Bitcoin for performing a search function for every Bitcoin transaction. If you send 1 Bitcoin to Amazon to pay for a new grill (approximately $400), one or more of those computer guardians will research the chain of title by which you acquired the Bitcoin you are using to buy the grill. It is like doing a real estate title search on EVERY Bitcoin transaction. Think of a computer verifying the serial number of every dollar bill to prevent counterfeiting. The guardians will be able to discover if there are irregularities in the chain of title and will invalidate the transfer. If there are no irregularities, the transaction goes through. The guardians do not know who sent the Bitcoin or who received it. But they do know that a 64 digit account validly acquired Bitcoin and a 64 digit account became the new owner of that Bitcoin. When Amazon wants to convert that Bitcoin to cash, it will convert Bitcoin to cash through web sites that act as a clearing house like And the interesting part of that whole sequence of events is almost no fees or commissions- NO GOLDEN CRUMBS.
  1. The Blockchain technology is being reviewed by NASDAQ for a trustworthy record of the ownership of private securities like warrants in a private company that plans to go public. Right now validating ownership of private securities is cumbersome and expensive.
  1. The integrity of the Bitcoin system is not foolproof. One of the biggest Bitcoin exchanges, Mt. Gox, was hacked and millions of Bitcoins were stolen. Currently, a former Bitcoin official is under indictment for manipulating the system by stealing Bitcoin. Also, your digital ownership is subject to theft depending on how you record your ownership. A paper vault or “wallet” is considered the safest way to own Bitcoin but it is also the most impractical. The system is also vulnerable to one computer mining a majority of the Bitcoin transactions (it is like cornering the market for gold or silver) but other participant miners who are paid in Bitcoin have a vested interest in not letting that happen.
  1. You can get started with Bitcoin by going to web sites like Circle or Coinbase . Those sites now sync with banks like US Bank to allow limited weekly purchases of Bitcoin ($2500.00/week). The price at which you purchase swings from minute to minute. There is high volatility so it is not a stable source for retail or commercial transactions yet. These sites serve as a custodian for your Bitcoin. There is tight security for accessing your account that requires two factor authentications. You enter your user name and password and the site sends a 6 digit code to your cell phone which you must enter as a second password for each transaction. The second code changes for each transaction. In order for someone to hack your account, the hacker needs your user name, primary password and your cell phone.
  1. Because a hacker can attack custodian sites or obtain your cell phone and primary password, you can also store your Bitcoin in a paper vault. The paper vault is much safer because it is completely anonymous. It has a public code and a private code. The 64 digit public code is your receiving address and your 64 digit sending code should be hidden and kept secret. If someone gets your private sending code, they really control your Bitcoin. I have been successful in sending Bitcoin from my custodian web site to my paper wallet. However, I have not tried to buy anything yet from either source. The paper wallet is impractical. You have to have both the 64 digit receiving and sending codes. Storing the receiving code on a device is not a problem. If someone hacks your device, they can only deposit Bitcoin. But you also need your private (sending) code in order to transact in Bitcoin. It is impossible to memorize the code. You can carry the code in your wallet or carry the digital signature QR Code which you can scan from your cell phone using a Bitcoin app. But if you lose the code or if it is stolen, it is like losing cash. In some instances you can recover Bitcoin if you lose the sending code, provided they have not been stolen in the interim.
  1. You can validate the balances in your accounts by going to Blockchain is a second by second transaction recorder. It reminds me of a ticker tape and the transactions are fast and furious but not as fast as credit card authorizations. You can see blockchains transferring in all denominations second by second. There are other sites like Blockchain where you can verify the balances in your various Bitcoin accounts.

Highly Disruptive Business Model

When you read objections to Bitcoin they usually focus on the fact that it is a private, peer to peer system and is not backed by the full faith and credit of any government. The early users were drug dealers, arms dealers and other criminals who wanted anonymity. The founder is a guy called Satoshi Nakamoto and no one knows who he is. These factors made Bitcoin way too scary as a mainstream medium of payment. Today it is extremely hard to live on Bitcoin because very few retailers accept it.

But the recent article in The Economist, “The Trust Machine; How the Technology Could Change the World” opened my eyes to the opportunity in financial services. In a low return environment the cost of friction (the cumulative Golden Crumbs) becomes really important. If you are only receiving a 2% return on 10 year treasury bonds, the cost of trading those bonds becomes relevant. The current system is proprietary meaning that the securities industry controls the costs of friction. Goldman and JP Morgan control the ledger process and they can set the price for being validated by their system. If there is an alternative way of getting the same verification for almost no cost, someone is going to use it as long as it is as trustworthy as Goldman’s or JP Morgan’s system. It also impacts the TOO BIG TO FAIL institutions by removing sole reliance on their validation of digital entries.  CryptoSecurities could replace physical stocks and bonds.

Stay tuned and dig into this exciting, potentially game changing technology. Hundreds of millions of golden crumbs could be in play.

Your insights are welcome

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records. Founder and chairman of CW Industrial Partners (originally CapitalWorks, LLC), he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CW Industrial Partners or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.