There’s a piece of technology you should get to know. This tech is only about five or six years old now. That makes it new, confusing, exciting, scary, and a huge opportunity. But not everyone is quite sure what to make of it just yet.
A mysterious and unknown inventor created this tech. This inventor goes by the name Satoshi Nakamoto. The world knows very little about him (or her). Hence adding to part of the uncertainty.
You might have heard the name Satoshi Nakamoto before. This is the inventor of Bitcoin. And by now you should almost definitely have at least heard of Bitcoin.
Bitcoin isn’t the focus of today’s Money Morning though. Today’s focus is on the tech behind bitcoin.
It’s the foundation of this ‘cryptocurrency’ where the real potential lies. It’s also where some big investment opportunities will appear. Right now it’s early days. Most companies working on this tech are private and early stage start ups. But soon enough there will be an opportunity, and that’s when you’ll need to know about how important this is.
I’m talking about the ‘Blockchain’.
What is Blockchain?
Blockchain and Bitcoin go hand in hand. Every time you buy, sell, swap or trade a bitcoin, it makes a transaction. The blockchain is a public ledger that shows every bitcoin transaction.
If I send 0.1 bitcoin to a pizza shop as payment for a large BBQ pizza it will show on the blockchain. But you won’t see it as ‘0.1BTC for 1 large BBQ pizza’.
Instead you’ll see it as, 13U87M9Sd4RUvQiGQNSdvEaRSWpQvwQzJF à 152f1muMCNa7goXYhYAQC61hxEgGacmncB = 0.1 BTC.
That transaction identifies the two bitcoin wallets. It also identifies that 0.1 BTC went from one to the other. You don’t know who sent it, you just know it happened. And the blockchain records it all.
Without the blockchain you can’t validate a transaction. If you can’t validate a transaction, the network won’t allow it.
It’s simple. No blockchain, no bitcoin.
But as I mentioned earlier, bitcoin isn’t the focus here. It’s the blockchain that’s the important part.
You see if you take away the ‘bitcoin’ you’re left with this public ledger system. And you can use this system across a whole range of industries.
It’s got the finance world very excited. So excited that Visa Inc. [NYSE:V] just led a $30 million round of investment into a blockchain company.
Like the internet was in the 90s
As an investor you should view the blockchain like the internet. Not that long ago the world wasn’t really sure what to make of the internet. Even as recently as 1995 there were people who doubted the future of the internet.
I know it’s hard to believe. But in 1995, Newsweek published an article titled, ‘The Internet? Bah!’
Here are two quotes from the article,
‘The truth in no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.’
‘How about electronic publishing? Try reading a book on disc. At best, it’s an unpleasant chore: the myopic glow of a clunky computer replaces the friendly pages of a book. And you can’t tote that laptop to the beach.’
That’s true you don’t see many people with laptops at the beach. But then again I bet the idea of a tiny pocket computer at the beach was just as crazy, right?
The way many people see the blockchain now is how people saw the internet in the 90s. Some people see a big future. Some couldn’t. And we all know how that one turned out.
The blockchain has enormous potential. For example, in January IBM and Samsung unveiled a proof-of-concept project. The name of the project was ‘Autonomous Decentralised Peer-to-Peer Telemetry’, or ADEPT for short.
The ADEPT project is about how the ‘internet of things’ could work using the blockchain. An example they use is a simple washing machine that’s connected to the internet.
‘Right from the time a product completes final assembly, it can be registered by the manufacturer into a universal blockchain representing its beginning of life. Once sold, a dealer or end customer can register it to a regional blockchain (a community, city or state).’
The paper goes on to say the washing machine (using the blockchain) could automatically update its firmware. It could perform self-diagnostics. It could even book itself in for a maintenance call. And if it was running low on detergent, it could order more and pay for it.
With the ‘ledger’ of transactions, this whole process would be automatic. The network would validate all transactions. And ultimately it means a safe, secure, efficient and low cost system.
But that’s just one example of how the blockchain can work.
The biggest opportunity over the next decade
Financial companies are investigating how the blockchain can help their businesses. They have no doubt this will disrupt the banking system. They just can’t quite figure out how yet.
But that’s not stopping them from investing in and developing the technology.
For example a new start up, Chain is developing ways to use the blockchain in global finance.
One of the uses is for regard to securities.
Chain explains that,
‘Securities issued on a blockchain network can be controlled directly by brokers. This allows trades to be settled between counterparties without third-party intermediaries, dramatically increasing speed while reducing costs.’
This is a big deal. It’s so big that this November the NASDAQ (an early investor in Chain) will be testing blockchain trading of shares. The test will be using pre-IPO private companies like Uber and Airbnb.
Speaking to Forbes, NASDAQ Chief Executive, Bob Greifeld said, ‘[Blockchain] is the biggest opportunity set we can think of over the next decade or so.’
Even the Aussies are getting in on the action
And that’s also why two of Australia’s biggest banks, Westpac [ASX:WBC] and CBA [ASX:CBA] are looking into how the blockchain can work for them.
They’ve both been working with an exciting start up, Ripple Labs. Ripple is a ‘payments protocol’ system. Its purpose is to help financial companies develop new, efficient, secure and open systems. It also leverages of the blockchain protocol.
In a few weeks time I’m heading to SIBOS. This is the world’s biggest banking and finance conference. While I’m there I’ll be talking one-on-one with the CEO of Ripple Labs. I’ll be asking him about Ripple, and why the Aussie banks are so interested.
As I see it, blockchain technology will ultimately streamline and improve the efficiency of banks and the financial system. But it will also cost a lot of jobs. It’s a double edged sword for the banks. Cut jobs but improve speed, efficiency and profits. One is a PR nightmare, the other a shareholder’s dream.
And as for companies like Chain and Ripple? Well you’ll start to see more of them. And you’ll see them working with the world’s big banks. Eventually these little start ups turn into public companies. And with the right ones it could be an opportunity like there was in the 90s to invest in internet companies. In other words, a once in a lifetime chance.