The quote “A Solution still seeking a Problem.” is taken from the Barclays Equity Gilt Study 2018 and summarises succinctly theirs, and a growing number of other institutions’, view of Blockchain technology.
Putting it another way, the technology involved in Blockchain is both impressive and potentially useful, if we could only find a suitable use – the inference being that cryptocurrencies are not a suitable use.
This strikes at the heart of the issues surrounding Bitcoin and other cryptocurrencies and begs the question as to whether it is Bitcoin or the Blockchain technology where the real value lies.
Certainly, the hype around Bitcoin and the fervent defence put up by cryptocurrency enthusiasts would have us all believe that the value lies in the currency. The reality of the performance is however plain for all to see (Fig 1).
If cryptocurrencies are not where the value lies, is Blockchain technology where the real investment opportunity is?
To understand the answer, it is necessary to understand the technology and why anyone should consider it as useful.
So, what is Blockchain technology?
It is a digital ledger maintained on a peer-to-peer network that provides a secure method of making and recording transactions, agreements and contracts. Because it is operated on a peer-to-peer network it does not require a central clearing point and therefore allows the parties to a transaction to trade or exchange information with each other directly. More importantly, it allows each party to see all new updates or changes to the transaction or information simultaneously.
An often quoted, good analogy of what this means would be to compare the traditional way of agreeing a document between two parties or using cloud document collaboration systems.
In the traditional method, one party sends a document to another recipient and asks them to amend it. The sender, however, has to wait for the document to be returned before they can review the changes made and/or make further changes – they cannot see or make changes as they are effectively locked out of the document until the other party has finished making their changes.
Using a collaboration system however effectively makes the document available to both parties at the same time allowing either or both of them to amend or update it and validate the amendment or update immediately.
The traditional method is akin to how banks make money transfers; they prevent access to accounts whilst they send a wire communication to initiate a transfer of funds, then they update the recipient side once verified, which then accepts or amends it and sends it back to the originating bank, allowing the originating bank to effect settlement via a network of correspondent banks.
With Blockchain both parties simultaneously agree and validate the transfer directly with each other, (potentially) removing the need for the intermediary bank.
It is this decentralisation and removal of the requirement for an intermediary or third party to control and update the central record that makes Blockchain so potentially attractive.
Imagine now expanding the network from two users to an infinite number of users. In this scenario, for example, a seller of shares in one particular company could offer these and be matched with a buyer, at an agreed price and the sale and purchase would occur simultaneously with the ownership change visible to all as soon as it occurs.
Alternatively, documents pertaining to ownership of property could be adopted into Blockchain thus enabling property conveyances to complete more efficiently and without the need for Land or Title Registries.
This same process could be applied to any activity that involves the exchange of data be that in the form of money, documents or information.
Returning to the title of this piece, the current problem is that these capabilities remain potential capabilities, and the only seriously adopted application has been with cryptocurrencies like Bitcoin. Because of this, Bitcoin and Blockchain have largely been synonymous with each other, in much the same way that e-mail and the internet were often perceived as being the same thing in the early days of the internet revolution.
Whether or not Bitcoin becomes a stable and widely used currency remains to be seen – the volatility shown in the earlier graph suggests that we are a long way from achieving that.
What is absolutely clear is that Blockchain development is gathering a huge amount of momentum, with serious players such as IBM investing USD200m in a Blockchain programme and PWC estimating that around USD1.4bn was invested into Blockchain businesses worldwide in 2016. [source: First Trust]
Blockchain may well currently be “a solution seeking a problem”, but in my opinion, it is surely only a question of time before it becomes the solution to a number of problems, which would then make it a viable investment proposition.
Download the article: Weekly Comment – June 28 2018 – AB