Products and companies with sustainable competitive advantages and low capital requirements often make for attractive investments, provided they’re acquired at the right price. So where does this leave blockchain?
Blockchain technology—public, decentralized ledgers that record transactions in an efficient, verifiable, and permanent way—represents an exciting new frontier. Like the internet in the mid-90s, the potential to transform a variety of industries seems promising. On the flip side, it will likely be years before its benefits are fully realized, and the winners and losers will include both incumbents and disrupters alike.
Blockchain’s Tangible Benefits
Blockchain technology holds the potential to dramatically improve the speed and lower costs for complex payment activities or supply chains. Many established financial, technology, and industrial companies are already using blockchain technology—and the possibilities seem endless.
Consider a national grocery chain facing a listeria breakout. Speed represents an overriding concern as they race to pull tainted tomatoes from their shelves. Customers’ lives may be at stake, along with the store’s reputation. The problem? Identifying the contaminated tomatoes will take several days and could result in a substantial amount of waste as some good tomatoes are discarded with the bad.
With blockchain technology, this scenario could look very different. The entire chain of custody of the tomatoes—from the farm where they were picked until the time they were placed on the shelf—could be embedded in their QR code. A simple scanner could surgically pinpoint the tomatoes that need to be purged within a matter of hours.
A Solution in Search of a Problem?
Unlike the blockchain application mentioned above, cryptocurrencies’ value proposition seems more elusive. In other words, when we ask ourselves, “What problem does Bitcoin solve?” the answer isn’t as apparent.
Books and records aren’t particularly efficient even in digital form. In contrast, payment systems represent some of the world’s most advanced and fastest evolving technology. As a frame of reference, payment systems like MasterCard process more than 50,000 transactions per second while Bitcoin can process less than 10. That difference really adds up: in the third quarter of 2017, MasterCard processed nearly 17 billion transactions on its platform compared to just 22 million for Bitcoin (Display).
A Store of Value?
Cryptocurrencies seem to have significant shortcomings as potential stores of value. As noted above, the use case argument is not compelling. Nor do they generate any income for their holders—which rules out discounted cash flow analyses. Lastly, unlike gold or art, cryptocurrencies lack a tangible presence, let alone any aesthetic or cultural appeal. Until cryptocurrencies have established strong track records as stores of value, investors should be wary of embracing them for this purpose.
In spite of this, the popularity of early cryptocurrencies like Bitcoin has spurred the creation of many more—much like the dot-com boom in the late 1990s. Today, there are more than 1,000 different types of cryptocurrencies in the market. While one or more may endure, much of the current investment popularity tends to be speculative in nature. Even advocates can’t agree on how cryptocurrencies should be valued, as dramatic price volatility has made the idea that they are “currencies” less credible.
Necessity Is the Mother of Invention
Recent returns for anything coin related have been breathtaking and reminiscent of the dot-com mania a generation ago. However, there are too many questions without answers at this point for anything other than speculation.
That said, blockchain will likely be a technology game changer and early investors may reap outsized rewards. The key will be finding those applications that truly fill a widespread need—and identifying the first-movers who will capitalize on the solution.
The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.