Prior to 1913, cashing a check in the United States was a hit-or-miss proposition. Many larger banks refused to clear checks from smaller, less well-known banks for fear that the originating bank might not be solvent. This was especially true in times of economic distress, such as the financial panic of 1907.
Many Americans would be surprised to know that the check-clearing system created in 1918 is still in use today. It's called the Federal Reserve Wire Network (Fedwire, for short). And it's truly massive.
Fedwire processed more than $835 trillion worth of transactions in 2015. In 2016, the value of the transactions dipped by 8.1% to $767 trillion due to a slow economy. Even so, that's still more money changing hands every nine days than the entire GDP of the United States.
But Change Is Coming
Fedwire's telegraph lines lasted into the 1970s. But as computer technology progressed, the Fed started using electronic transfers -- increasing both speed of transaction and safety for member banks.
But the Fed has been tasked with clearing checks in a single day while providing increased fraud and counterfeit protections. This will require a change in how Fedwire operates and result in an overhaul that will completely change its infrastructure.
The Fed's new solution is called "blockchain" technology. Blockchain is a database that maintains a growing list of records called blocks. Each block is time-stamped with a link to the previous block. The timestamp and link make changing or forging the data virtually impossible -- effectively eliminating theft and fraud.
This technology will bring Fedwire into the 21st Century. Tentatively called Fedcoin, this Federal Reserve cryptocurrency could replace the dollar as we know it.
Where Should I Invest?
The problem with trying to invest in a new technology like blockchain is the sheer number of companies with competing versions of the technology. In fact, the platform specializing in startups, AngelList, lists more than 500 blockchain startups.
But no sane investor looking to mitigate risk could invest in any of these companies -- roughly 98% of these companies will never see the light of day. It's also true the Fed wouldn't use a start-up company to design a check-clearing database that moves upwards of $800 trillion annually.
But that doesn't mean investors have no chance to grab some of the profits of this amazing trend.
In fact, I have listed five companies below that are on the cutting edge of the blockchain revolution. Better yet, these are all well-known companies with long histories of growing revenues and earnings.
1. The technological leader with the greatest likelihood of profiting from the blockchain trend is Microsoft Corp. (Nasdaq: MSFT). Microsoft shifted its focus to cloud-computing services after the departure of Steve Ballmer. This change allows businesses to use Microsoft's servers rather than build their own.
Cloud revenue has now reached $25 billion per year and accounts for nearly a third of Microsoft's operating income. Cloud technology is Microsoft's entry into blockchain.
Market research firm Markets and Markets estimates the blockchain market will grow from $210 Million in 2016 to $2.3 trillion by 2021. That's a compound annual growth rate (CAGR) of 61.5%.
Even for a company as large as Microsoft, hundreds of billions in market potential can make a real difference to revenue, earnings, and shareholder returns.
2. While Microsoft leads the industry in blockchain technology, they aren't the only huge company getting behind the trend. IBM (NYSE: IBM) will be another major player in the blockchain market.
IBM used to make personal computers. But it is no longer in that business. Today, it is a consulting company that helps others businesses create the technology they need to run their businesses. While Microsoft's blockchain is more user-friendly, IBM's technology is geared towards building big, secure blockchain projects -- like Fedcoin.
The company claims to have more than 300 blockchain projects with customers already in progress -- including one of the largest banks in Thailand for its credit approval process. IBM has also partnered with Wal-Mart to use the blockchain in its food tracking and transportation.
3-5. Microsoft and IBM are clearly the "Big Two" in terms of actually collecting revenues to build blockchain technology, but are in no way the only companies that stand to profit. The three remaining companies don't design blockchain databases. Rather they benefit from facilitating blockchain technology or profit from the implementation of it.
The companies/stocks are:
-- Fiserv (Nasdaq: FISV)
-- Skyworks Solutions (Nasdaq: SWKS)
-- PureFunds ISE Mobile Payments ETF (NYSE: IPAY)
Now, the opportunity to profit from blockchain technology is still early -- but not too early. And while many have heard of blockchain, few understand the full impact this new technology will have on our culture.
Investors can safely be a part of a tectonic shift in technology with each of the investments outlined above. Better yet, after other investors are scrambling to find profits from the implementation of the technology, you'll be a giant among your peers, sitting on years of gains.
Risks To Consider: The federal government is very slow to implement new technologies. But the Fed has been tasked with clearing checks within a single day, meaning the move to blockchain will move forward -- although the speed of the change might seem glacial at times. This risk will be mitigated to some extent by the move to blockchain by for-profit enterprises over the next few years.
Action To Take: The move to implementing blockchain technology throughout the Federal Reserve and the banking industry proper will be a years-long trend. Dollar-cost average into each of the five stocks outlined above over the next 12-18 months to lower your overall cost. The holding period for each of these stocks is more than five years.
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