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Blockchain Offers Risk and Reward to Investors

Major corporations and venture capital firms are throwing their weight behind the technology that powers bitcoin, but it has limitations

Jim Sinegal 9 May, 2018 | 10:31AM

bitcoin blockchain has the potential to disrupt economic activities ranging from simple payments to the structure of a corporation as it currently exists

Blockchain, the digital ledger behind bitcoin, currently attracts billions of dollars in investment. Large corporations, venture capital funds, and initial coin offerings (ICOs) are funding projects. Blockchains have the potential to disrupt economic activities ranging from simple payments to the structure of companies.

Cryptocurrencies began as a threat to the payment industry, but it is becoming clear that blockchain technology and cryptoeconomics could someday threaten a wide variety of business models, and conceivably the traditional means of corporate organisation itself.

Companies that engage in these functions are seemingly at risk, as blockchain technology can potentially lower transaction costs as well as the costs of recordkeeping.

Bitcoin uses a distributed peer-to-peer network to authenticate and record all transactions in the order they occurred, eliminating the need for intermediaries. In this way, participants can verify a clear chain of ownership for digital funds without relying on a trusted third party. The peer-to-peer network maintaining the digital ledger is known as a blockchain — a decentralised record of transactions across a network of computers.

Finance, Tech and Retail Join the Rush

Among existing firms, several industries are dominating early experimentation with blockchain technology. Blockchain was invented for payments, so it's no surprise that the financial services sector has taken an interest — Bank of America (BAC) and Mastercard (MA) have filed for dozens of patents between them. The technology sector also got in on the act. Applications are not limited to these two sectors, however. Retailers and big industrial firms have joined in the rush to create proprietary blockchain applications. 

Most of the activity is happening in the world of finance, where transactions involve trust, recordkeeping, and the transfer of information and value. Financial institutions around the world need to reconcile thousands of transactions across a wide variety of markets. Shared, verified ledgers provide an obvious solution.

Wide-Moat Firms Face Down Blockchain Threat

The source of a company's competitive advantage – or moat – plays a role in its susceptibility to disruption by decentralisation. Efficient scale moats are created when centralisation is needed to attain satisfactory returns on capital.

Cost advantages often stem from larger scale production – a clear benefit to centralisation in most cases. Retailers such as Amazon (AMZN), Costco (COST), and Walmart (WMT) use scale to procure goods at low cost and to distribute them cheaply. Similarly, providers of cloud computing such as Amazon, Microsoft (MSFT), Google parent company Alphabet (GOOG), and Alibaba (BABA) spread the large costs of hardware, software, power, and staffing across a broad base of customers.

Blockchain technology has plenty of potential, but there are still obstacles to world domination: security and trust remain an issue in the cryptocurrency world and decentralisation is not always better. Without a chain of command, central authority or trusted middleman, there is the potential for disputes and fraud.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Alphabet Inc Class C1,334.87 USD1.79
Amazon.com Inc1,739.49 USD-0.86
Bank of America Corporation32.93 USD0.70
Costco Wholesale Corp303.66 USD-0.31
Mastercard Inc A280.78 USD0.41
Microsoft Corp149.97 USD1.29
Walmart Inc118.87 USD-1.48

About Author

Jim Sinegal  Jim Sinegal is the associate director of the financial team at Morningstar.

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