Introducing A New Class Of Blockchain-Enabled Companies
It is one of the hottest — and most polarizing — topics in finance over the past few months. It’s talked about in the media nearly every day. Some have hailed it as the next “big thing,” while others have called it “rat poison.” Some believe we are just in the beginning of a bull market (despite its meteoric rise), while others relate it to the tulip mania bubble of the 1600s.
I’m of course referring to Bitcoin and other cryptocurrencies.
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Now before you roll your eyes and write off the rest of today’s issue — which is what I used to do anytime I read something with the word “bitcoin” or “cryptocurrency” in it — there’s something you need to understand about this new craze.
It’s not so much the cryptocurrency that I want to talk about. Instead, it’s the underlying technology that enables these currencies to operate that holds, what I believe, to be the real opportunity.
#-ad_banner-#Before I dive into this new breakthrough technology, let me back up and talk briefly about bitcoin… and why so many people believe it could represent a critical change in the way we think about and use money.
What Is Bitcoin?
First, let me get a little terminology out of the way. Bitcoin with an upper-case ‘B’ usually refers to the overall Bitcoin network, including the computer protocol and the community of users. On the other hand, bitcoin with a lower-case ‘b’ refers to the currency.
In January 2009, bitcoin was essentially born by a coder going by the name of Satoshi Nakamoto. Satoshi claimed to be a 33-year-old man from Japan… however, his true identity remains a mystery. But the basic premise behind bitcoin was a peer-to-peer cash system that is purely digital. Simply zeros and ones (known as “bits”) on a computer network.
In its most basic form, Bitcoin is a network with its own set of rules in computer code that controls how the system works. It’s similar to the internet, which has its own protocols that tell it how data and information are transferred. However, instead of data and information, the bitcoin protocol transfers value.
The popularity of bitcoin largely stems from the ability to quickly and easily transfer bitcoin from one person to another, regardless of where they are in the world. And this can all be done outside of the traditional banking system. It doesn’t rely on commercial banks to manage accounts or verify transactions. In other words, there’s no middleman.
This is vital, as many people around the globe — 2 billion adults, according to the World Bank — don’t even have bank accounts, either because they don’t have access or they don’t trust them. The key word here being “trust.” In today’s society, we must trust that the person or banks that we are dealing with can verify and will ensure our transaction. And sometimes this can be frustrating.
For instance, if you accept a check in exchange for a product or service, you must trust that there’s money backing up this check. Maybe you’ve had someone give you a “bad” check. With many financial institutions, YOU — the party making the deposit — get charged if the check “bounces” or doesn’t have the funds to back it up. Now you must track down the person and try to get your money, plus any fees you were charged, all because the bank couldn’t verify the funds behind that check.
Moreover, bank checks typically include a payer’s name, address, account and routing numbers, plus a signature… everything a ne’er-do-well needs to forge a check. Granted, checks are becoming less and less common, but the problem persists.
But with bitcoin, transactions and verifications happen instantaneously. In other words, if you don’t have the bitcoins in your account the transaction won’t go through (as opposed to a check, which can take at least a few days to verify). Plus, with bitcoin, these transactions are virtually impenetrable.
Bitcoin Is Only The Beginning
So what’s the secret behind bitcoin? How is able to verify and secure transactions immediately? In its most basic form, it’s actually quite simple… it uses a ledger to keep track of everything.
This ledger is the underlying technology that allows bitcoin and other cryptocurrencies to even be a topic of conversation today. This is the technology on which financial institutions, venture capitalists, shipping companies, states, counties and countries are spending billions.
Despite what you might hear from the likes of JPMorgan (NYSE: JPM) CEO Jamie Dimon, who has been a major critic of bitcoin, calling it a massive bubble, his firm is actually spending billions of dollars researching the underlying technology, called blockchain.
Blockchain is where the real excitement is. This technology has the ability to revolutionize entire industries… and not just in the financial space. In fact, numerous companies in the food industry have been using blockchain to track their food.
Frank Yiannas, Wal-Mart’s (NYSE: WMT) vice president of food safety, decided to run an experiment. He went to the nearest Wal-Mart, grabbed a container of sliced mangos, brought it back to his office and asked his team to find out where those mangoes came from.
Six days, 18 hours and 26 minutes later, Yiannas finally got his answer. Wal-Mart is known for its excellent supply-chain management, and it took nearly a week for him to figure out where these mangos came from. If there’s a foodborne illness outbreak and it takes a week to figure out the root cause, that’s a lot of time, energy and money. Not to mention they would likely have to pull every mango product off the shelves as a precaution. Farmers, distributors and Walmart would all take a hit.
So Walmart partnered with IBM’s (NYSE: IBM) Hyperledger Fabric — a blockchain system — to track food shipments. From the start of their journey at the farm, pallets of mangoes were tagged with numeric identifiers and every time they crossed a checkpoint it was digitally recorded via blockchain.
Back in his office, Yiannas grabs a packet of mangoes, types in the identifying number on the package and the entire journey appears before his eyes — when they were picked, sent to be washed, sliced, passed through Customs and Border Protection, and when they hit shelves.
It takes roughly two seconds for all of this information to appear. In the event of an E. coli or salmonella outbreak, the difference between two seconds and nearly a week is not only lifesaving but can save a company millions of dollars. Plus, the ability to quickly obtain these specific, secure records could help executives keep tabs on the flow of goods and prevent fraud.
Walmart is trying out a similar tactic with pork supply chains in China, but it’s far from the only company dipping its toe in the space. Other companies are testing blockchain’s potential for their logistics — everything from airplane parts, cargo shipments, medical records and even digital identities for refugees who lack official documents. Imagine no longer having a social security card, but a digital identity that couldn’t be hacked. We wouldn’t have to worry about data breaches like the recent one at Equifax (NYSE: EFX).
The possibilities for blockchain are endless… and many companies are embracing this technology.
How To Adapt Your Portfolio
We are still in the early stages of the groundbreaking technology so there isn’t a direct (and relatively safe) way to gain exposure to blockchain. Sure, many of the companies that are using blockchain to efficiently track shipments will likely benefit in the long run from this technology.
But as always, the implications of this emerging technology are impossible to predict. A new class of blockchain-enabled companies could be on the horizon. While we can’t know what they’ll look like, fortunes could be made piggybacking on the rise of these companies — but only for those who know where to invest. And when I find one, subscribers of my premium newsletter, Top Stock Advisor, will be the first to hear about it.
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