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What you need to know about Blockchain

About 12 months ago, you could hardly pick up the Fin Review without finding an article about cryptocurrency. People across the globe were whipped into a frenzy over exponential return graphs. Everyone knew someone who knew someone who’d made millions.

It was making us all a little uneasy around here. At Baillieu’s we’ve been working in the markets since 1889 and we’ve experienced these cycles many times. After the boom, there’s a bust. We weren’t surprised by what came next.

But while cryptocurrency might have become yesterday’s news, now is not the time to switch off your attention. There’s an exciting story behind cryptocurrency, and that is blockhain – the technology that enabled the obscure and slightly radical cryptocurrency investments.

Blockchain could absolutely become a game changer in the way we do business in the future – and for an investor, this means there could be great opportunity.

What is blockchain?

Trying to explain blockchain is probably what it must have been like explaining how the internet works to someone 25 years ago, when the never-seen-before technology was emerging, and its likely impact was only a glimmer of possibility. And up front, we do want to say that blockchain has the potential to be as revolutionary to the way we make transactions, as the internet has been to the way we communicate. That’s the upside potential we’re talking about here.

In a nutshell – and let’s stick to basics because adding details opens a complex can of worms – blockchain works by connecting different parties over the internet with a secure and trustworthy record of their transactions without giving control to a third party.

This means cutting out the middleman, which opens realms of possibilities by removing transaction costs (and there are forecasts for cost-savings to be huge – possibly 20%, 30% or even higher in some industries), as well as increasing efficiencies in transactions. There will also undoubtedly be novel revenue streams that have yet to be created or even dreamed of, that will spring from what this technology enables.

How does blockchain technology work?

Again, we’ll keep it broad stroke.

It is known as a form of distributed ledger technology, which means it records the details of each transaction in thousands of individual devices (including computers and smart phones) across the world, known as nodes.

The transaction is robust and transparent because all of the thousands of nodes interact with each other, and only when these multitudes of sources are in consensus will a transaction be confirmed. Series of transactions are then united to form one block, and that block is then locked to a chain of blocks (or blockchain), which is secure and can’t be altered.

It is this combination of all the nodes being accountable to each other and needing to match, with the system of uniting transactions into blocks to form a blockchain, that ensures the records cannot be compromised or corrupted.

Technology futurist and author, Ian Khan, who has also made a soon-to-released documentary “Blockchain City”, says this technology removes the opportunity for error or fraud.

“Blockchain is truly a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done without the consent of the parties involved,” Mr Khan said.

What will blockchain mean in the real world?

While this may all sound intangible, and largely it is, there are many real world applications that will benefit from this technology.

ASX

The Australian Stock Exchange (ASX) is the highest profile example close to home. In April, the ASX announced that by 2020-2021 it intends to replace its 25-year old CHESS exchange system with a new system enabled by blockchain technology.

While delivering the ASX’s full year results in August (2018), ASX chief Dominic Stevens says this move will reduce risk, cost and complexity to Australia’s stock market.

“New world participants have access to the source of truth in real-time (via a node) and can prove to themselves they have the correct data without having to ask ASX,” he said, adding this streamlined data processing means the reconciliation process will become obsolete.

Mr Stevens also heralded the transformation that he expects will follow. “This will not only accelerate the efficient delivery of existing services, but also unleash service innovation across an ecosystem of interconnected users.”

Overall, at this early stage of understanding blockchain’s potential and likely influence, we expect that the finance industry will be most impacted by this technology. Today, when money is transferred, we need a middleman (the bank) to house individuals’ financial data, and then verify and record transactions. Blockchain has the potential to remove this necessity.

IBM and Maersk

Another blockchain-enabled project in the wings is a joint venture between global shipping group Maersk and IT giant IBM. Earlier this year (2018) the two multinationals announced their intention to build a platform using blockchain technology that will remove the inefficiencies and errors of the existing paper-based processes, which will ultimately reduce the cost of global transport and give instant secure access to trusted data to everyone in the supply chain.

Supply chain logistics is a low-margin business, with every party along the chain (and there are sometimes 15 steps along the chain) charging small transaction fees that quickly build to make many logistics decisions unfeasible. Removing these transaction fees could transform possibilities in global trade and transport.

How will blockchain benefit individuals?

If blockchain is as good as everyone says it’s going to be, it will transform many parts of our lives.

Estonia is the first country to use blockchain at a national level for their E-citizenship identity system called ID-kaart. The Baltic nation introduced it after cyber attacks a decade ago, and almost all services now provided by the Estonian Government are based on advanced encryption technology that has two-factor authentication.

Other uses may be through secure voting systems to stop counterfeit votes, through smart contracts to remove the need to pay third party commissions, through international money transfers and share trading to remove transaction costs, and file storage and web hosting.

What are the investment opportunities created by blockchain?

So by now, as an investor, you might be wondering what opportunities there are for you to be there from the ground up if blockchain lives up to its full potential.

We see two tiers of opportunity.

First, global leaders will emerge that have successfully harnessed the commercial potential of blockchain. There’s every chance in 15 years that the name of a global blockchain company will be as recognisable as Google, Yahoo, Microsoft, or Netflix. We expect everyone will be exposed to it, and we’ll know about these companies that are doing the work behind it.

The second tier of opportunity will lie in the industries that are transformed by blockchain technology – either through dramatic cost reductions or enhanced efficiencies.

What can I do now?

In the wake of the cryptocurrency boom and bust, it may feel like we’ve heard all we need to hear about blockchain, but the reality is we are only at the very beginning of this journey.

It might be two years or it might be 20, but with the amount of investment being poured into exploring its potential, we don’t expect blockchain will be a flash in the pan.

While there are no obvious investments in this field just yet, we’ll be keeping a close eye out for developments. And if early indications are anything to go by, it could be a game changer on many different levels and those are precisely the types of investments we work hard to uncover for you.

It might be two years or it might be 20, but with the amount of investment being poured into exploring its potential, we don’t expect blockchain will be a flash in the pan.

 

Other uses may be through secure voting systems to stop counterfeit votes, through smart contracts to remove the need to pay third party commissions, through international money transfers and share trading to remove transaction costs, and file storage and web hosting.

What are the investment opportunities created by blockchain?

So by now, as an investor, you might be wondering what opportunities there are for you to be there from the ground up if blockchain lives up to its full potential.

We see two tiers of opportunity.

First, global leaders will emerge that have successfully harnessed the commercial potential of blockchain. There’s every chance in 15 years that the name of a global blockchain company will be as recognisable as Google, Yahoo, Microsoft, or Netflix. We expect everyone will be exposed to it, and we’ll know about these companies that are doing the work behind it.

The second tier of opportunity will lie in the industries that are transformed by blockchain technology – either through dramatic cost reductions or enhanced efficiencies.

What can I do now?

In the wake of the cryptocurrency boom and bust, it may feel like we’ve heard all we need to hear about blockchain, but the reality is we are only at the very beginning of this journey.

It might be two years or it might be 20, but with the amount of investment being poured into exploring its potential, we don’t expect blockchain will be a flash in the pan.

While there are no obvious investments in this field just yet, we’ll be keeping a close eye out for developments. And if early indications are anything to go by, it could be a game changer on many different levels and those are precisely the types of investments we work hard to uncover for you.

 

This information is a statement of personal opinion only and is not intended to constitute general or personal advice to any person or entity.

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