Blockchain & Investment Opportunities.

 

Introduction

In short Bitcoin[1] is the first digital, not centralised (ie not issued by any government, and not controlled by any one entity), global, internet-based currency. It is also a payment network, open to use by anyone. By convention we refer to the network as Bitcoin, with an uppercase ‘B’. The unit of account, is referred to as bitcoin with a lower case ‘b’.

Blockchain

Bitcoin is however, just a first app, built on a new technology that, because of Bitcoin’s success does not get much attention. That technology is called blockchain. A blockchain is an append-only database of records, we can also view it as a chronological order of records. In Bitcoin’s case the blockchain is used to keep track of transactions involving bitcoins, tracking the movement of bitcoins from their creation until the end of time (or the end of the Bitcoin network). The most important part about a blockchain is its ability to establish consensus among mutually distrustful parties. As long as more than half of network participants are honest, things function as they should. Participants have economic incentives to be honest, and as a result Bitcoin has been functioning since 2009.

Blockchain uses

Blockchains can be used to build systems that were simply not possible before. Such systems would offer more security, they would be open to anyone, and they would be free of government control. Blockchains enable us to build applications that would be able to perform the same function as financial firms but at a fraction of their current fees. Any record keeping system such as real estate deeds, marriage licenses, history events could be kept using the blockchain technology and they would be tamper-proof. One could use the technology to prove the existence of any document at some point in the past. Start-ups are already at work on so called blockchain 2.0 systems that would allow for the creation and execution of smart contracts. A smart contract is a contract that is expressed as software, and is executed automatically as conditions change. For example, the simplest smart contract could be a sports bet, that pays out automatically after the results are known. Other examples are insurance contracts, business contracts, legal contracts, such as wills, and trusts, and virtually any other contract that can be thought of. Blockchains can be used for a variety of thiss. The possibilities are endless[2].

Disruptions

The blockchain technology will affect some sectors faster than others, and the impact will be of varying degree. Financial services is the first sector to be affected. Bitcoin has already had enough of an impact to attract the attention of some large financial players. In the near future Bitcoin can disrupt remittance providers (such as Western Union), to a lesser degree payment network providers (Such as VISA, Mastercard, and Amex). In the long term, blockchain technology can adversely affect the fortunes of almost all financial services firms such as banks, brokers, insurance, exchanges etc. If the blockchain 2.0 systems gain in acceptance and popularity, the technology can also disrupt the legal services industry, as it will offer a more economical perhaps better way to enter and enforce contracts. More importantly blockchains and services built upon them offer the chance to lift billions of people out of poverty by including them in the global economy. Blockchains can give the unbanked access to banking services, like never before. That is arguably the biggest benefit of this great technology.

Investment

There are currently a few ways of betting on this technology. The most obvious one is to purchase bitcoins, although for a novice this may require some learning. There are however services that make it easier and easier. A private company called Coinbase is one of such services. If the sidechains[3] proposal gains in popularity and usage it may cement Bitcoin as the major blockchain currency and therefore drive its price up. Then there is a planned Bitcoin ETF with the ticker COIN[4]. This ETF is not live yet, but it should be soon. Another investment vehicle would be The Bitcoin Investment Trust[5], with the ticker GBTC. For those who like to gamble, the penny stock of Bitcoin Shop BTCS could be worth a look into. If you’re into FX, you may try your luck at digital currency trading. By our count there are about a dozen or so cryptocurrencies worth taking a look into. Be warned, cryptocurrencies are extremely volatile and therefore extremely speculative. The most promising projects are the ones in the Crypto 2.0 or Blockchain 2.0 space. There may be no direct way to invest in them as most have raised private money. Some of these projects have issued their own blockchain tokens which may provide a way to invest. If a project succeeds and becomes popular the aforementioned token may rise in value substantially. Examples of such projects are Ethereum[6], NXT[7], Omni[8] and others. Ince again this would fall into the highly speculative category.

Even big, established companies are looking at blockchains, IBM recently admitted looking into the space. Intel is looking for a researcher who understands blockchains. Even Microsoft executives have made positive statements about this technology. Overstock was one of the first big companies to accept Bitcoin as payment and is also working on a blockchain related project that may be spun out as a separate business. Blockchains are also the focus of FinTech departments of various financial institutions. Recently, the British Banking Association released a report[9] warning that the technology behind Bitcoin may affect traditional banks. This does not warrant shorting banks for that reason alone, but it would be advantageous to watch which established players adopt the technology and bet on their stocks.

Conclusion

While still very young, and an unproven technology blockchain and its first app: Bitcoin offer tremendous potential. Blockchains are often compared to the internet of the early 1990’s. They offer opportunities for disruption in many areas, financial services are the most obvious sector that blockchain companies are going after, but other sectors will be affected as well. At present there are not too many ways to bet on this technology, but there are a few and more will be available as the world learns about this technology. Stay tuned, we will notify you as new opportunities come along.

References

[1] S. Nakamoto, Bitcoin: A peer-to-peer electronic cash system, 2009, https://www.bitcoin.org/bitcoin.pdf
[2] Swan, Melanie. Blockchain: Blueprint for a New Economy. ” O’Reilly Media, Inc.”, 2015.
[3] www.blockstream.com/sidechains.pdf
[4] https://winklevosscapital.com/
[5] http://www.bitcointrust.co/
[6] https://www.ethereum.org/
[7] http://nxt.org/
[8] http://www.omnilayer.org/
[9] https://www.bba.org.uk/publication/bba-reports/digital-disruption-uk-banking-report-2/

 

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