Market Memo: Bitcoin? Meh. Blockchain? Now we're talking

01-11-2018

Everyone is talking about bitcoin and why not? The price of the wildly popular cryptocurrency soared 1,400% last year. But research suggests that, when it comes to long-term investment opportunities, bitcoin mania may be missing the forest for the trees. The real value proposition arguably lies in the blockchain technology that makes bitcoin and other cryptocurrencies possible.

Indeed, for all its aura, bitcoin effectively fails the two primary tests of any currency: stored value and medium of exchange. Its highly volatile price can make a mockery of the former, while its relative obscurity presents significant limits to the latter, at least for now. However, the underlying technology that makes bitcoin possible opens the door to a broad range of applications. Blockchain acts as a sort of distributive e-clearinghouse, offering the potential to both speed and revolutionize the way business gets conducted across a range of industries.

A digital ledger
One way of thinking about it is this: if the first generation of the internet was the internet of information, blockchain represents the next generation, the internet of value. It’s the digital ledger for the internet of things. It allows for secure, almost instantaneous transfer of any digital files between both sides of a transaction without requiring a middle man, such as a bank. Arguably, bitcoin represents the expression of people’s enthusiasm for blockchain, i.e., without the technology, there is no bitcoin. Perhaps an even greater expression was last month’s debut of Long Blockchain Corp., the rebranded name of the former unprofitable non-alcoholic beverage seller Long Island Ice Tea Corp. Shares in the renamed company, which is seeking a partner to actually form a blockchain venture, jumped 200% at their opening.  This entire craze feels a lot like the early days of the online shopping era, during which such ventures as Pets.com, eToys.com and Webvan soared, only to collapse as their business models couldn’t match their promise.


How does blockchain work? Not to get too technical— I’ll leave that to the computer scientists—a person or business seeking a transaction makes a request that is encrypted and simultaneously broadcast to a network of computers all over the world. Using algorithms, these computers verify the information, which is then added to blocks of all other transactional requests—a blockchain, if you will. Because it is a decentralized system—every computer in the network gets a copy of the entire transaction history—there is no central control that can be hacked or single unit that can cause the transaction to fail.

Digitalization of trust
In effect, blockchain represents the “digitalization of trust”—it can verify every step in a business process—that can be applied to any supply chain, not just to an e-currency. Say, for example, that an ice cream maker’s product has to remain within a certain temperature range or it will spoil. With blockchain, if a sensor on the ice cream shows the temperature rising above that range, a “smart contract” built into the algorithm can automatically trigger a payment from an insurer to cover the spoilage.

Beyond cryptocurrencies, businesses testing blockchain technology include banks, insurers, securities settlement firms, law offices and cloud storage concerns. Central banks around the globe are also actively testing blockchain technologies, and exploring the possibility of their own cryptocurrencies. The possibilities are endless, as virtually anything that can be digitized—legal documents, contracts, processes, etc.—can use blockchain technology. History tells us anytime a business or industry has ignored a disintermediation technology, it’s done so at its own peril. Think newspapers and the internet, Blockbuster and Netflix, cab companies and Uber.

So go ahead and have fun talking about bitcoin around the watercooler. But long-term, blockchain may be the better story.