Fast-changing technologies represent both opportunities and threats for enterprises. Those companies that keep with the times — or better yet — are early adopters of cutting-edge technologies, can carve out competitive advantages and identify areas to develop highly profitable technology solutions. Those companies that don’t, risk falling behind.
Bitcoin emerged as one of the hottest technology topics of 2017 and many expect it to be disrupting 2018 as well. All-digital “alt currencies,” such as Bitcoin, Ripple, and Ethereum have created an entirely new industry with investors and businesses pouring resources into alt-currency startups and other ventures.
As interesting as these alt-currencies are, the technology that many are built upon — the blockchain — may turn out to be even more revolutionary. Blockchain has the potential not just to create its own industries, but to reshape the way both consumers and businesses engage with and process vast amounts of data. Many companies, from bleeding edge startups to hundred billion dollar tech and finance giants, are investing in blockchain development.
However, while there may be excellent opportunities, businesses will have to contend with the inherent risks that come with being an early adopter and developer. As with any business investment, business leaders need to understand what they are investing in and how to evaluate both risks and potential returns.
This is true whether a company is investing as an equity investor, or is developing blockchain solutions itself.
The blockchain refers to digital and distributed ledger systems that make it easier to record and verify transactions, and to compile data. Importantly, Blockchain allows for distributed processing. By verifying, and often making transactions public, the blockchain can be used to coordinate processing among dispersed parties and to increase oversight and transparency.
For companies and industries that must process huge amounts of data, such as medical records or financial transactions, distributed but verified data processing could be a game changer. However, potential will not automatically translate to success.
Decentralized databases promise to revolutionize medical records, but not until the healthcare industry buys in to the idea and gets to work.
The promise of blockchain is interesting, but so too are the reservations. With so much hype, a lot of companies are pouring huge resources into blockchain. Yet thus far, economical and profitable blockchain services have been few and far between. However, several financial service companies have found success by focusing on concrete, real-world use cases. To better understand blockchain’s potential and how companies can develop successful technologies, let’s examine where companies are currently finding success.
Several companies are now exploring blockchain solutions and products. Some major companies have even rolled out pilot programs. For example, Visa is testing its B2B Connect, a distributed ledger system that allows international companies to quickly facilitate international payments. So far, the early returns have been promising.
Cross border payments are notoriously slow, especially when large amounts of money are involved. B2B Connect aims to make the process quicker by distributing processing and creating a detailed, transparent ledger of every transaction. Via conventional channels, a cross border payment might take 3 to 5 days. This could leave suppliers without the resources needed to complete an order, or companies without the funds to pay staff. With B2B Connect, transactions have been reduced to less than 24 hours.
Other finance companies have been developing blockchain solutions as well. Goldman Sachs and JP Morgan worked with blockchain startup Axoni to track swap contracts. Equity swaps are a $2.8 trillion dollar market and generate vast amounts of data. With so much value at stake, tracking these complex derivatives is both necessary and complex. Through a six-month trial, Axoni’s blockchain-based system proved to be highly effective.
Investment banking has emerged as one of the most promising areas for blockchain. The number of transactions is high, as is the need to track and verify transactions. Blockchain technology could both speed up transaction time and reduce costs. Accenture estimates that investment banks could save a total of $8 to $12 billion dollars by using blockchain technology.
Blue chip tech companies have also been investing in blockchain and alt-currencies as well. Google has invested in a Bitcoin wallet, the alt-currency Ripple, and other blockchain related enterprises. Overstock.com was one of the first major retailers to accept Bitcoin, and currently holds a large portfolio of blockchain/Bitcoin investments. Overstock also held its own Initial Coin Offering (ICO) for tZERO, using digital coins as preferred equity for its own cyber trading platform.
In total, the number of unique Bitcoin investors jumped from less than 20 in 2012 to over 200 in 2016.
Several companies, mostly startups, are working to disrupt the ad market with blockchain tech. Blockchain could be used not just to process and deliver ads through distributed processing, but to also verify clicks and impressions, manage budgets, and gather data.
Waste and fraud is a huge concern in digital advertising. Juniper Research suggests that roughly $19 billion dollars will be wasted on fraudulent ads in 2018. Much of the fraud is generated by bots that can mimic online behavior, such as clicks.
Startups are working to apply the decentralized validation methods offered by blockchain to combat such fraud. Basically, blockchain would be used to both record and verify transactions and data. Blockchain may be able to increase the efficiency of the digital advertising market as well. Currently, as much as 40 to 70% of money spent on ads go to intermediaries. With blockchain, the middle-men could be eliminated.
Contracts are difficult to write up, manage, and track. Who owns the rights to what? Who is due what? Managers and corporate legal departments have to deal with these headaches all the time. With blockchain, the contract could be written up as a simple software ledger program. Smart contracts can be set up to automatically track, record, and then act upon data.
Consider royalty payments. A smart contract could be used to automatically pay licensees what they are due. With a blockchain-based contract, the transactions could be recorded and put in the ledger. Then payments could automatically be settled. With both sides verifying the transactions, both parties will be able to rest assured that terms are being met.
Given the potential for blockchain, investments have been rising. Five years ago, few major companies, investors, and business leaders were taking Bitcoin seriously. It was, at most, an interesting anomaly. Back in 2015, JP Morgan & Chase CEO Jamie Dimon said that digital currencies would be “stopped” and later called Bitcoin a fraud.
How the times are changing. In Q3 of 2016, blockchain equity investments (i.e. venture capitalists) totaled just $122 million and investments were trending downwards. By Q3 of 2017, investments had jumped to nearly $260 million.
Billions more are being raised through “Initial Coin Offerings” or “ICOs”. Basically, investors can buy into in a new digital currency before it is released to the public. Some of today’s Bitcoin millionaires secured their wealth by mining Bitcoin early on, when Bitcoins were worth only fractions of a penny. In fact, the first Bitcoin transaction involved buying a pizza for 10,000 BTC. Today, those 10,000 Bitcoins would be worth more than a hundred million dollars.
Many investors are trying to jump on the next alt-currency train before it ever leaves the station. So far, no alt-currency has approached Bitcoin in total worth. Some, such as Ethereum and Ripple, have shown promise.
It’s important to remember an important investing maxim: the higher the risks, the greater the rewards. This is generally true not just for stocks and other financial assets, but also for investing in technology. Many developers and companies are working to create blockchain solutions. The risks are high, but so too are the potential rewards.
Some companies and entrepreneurs will create revolutionary products and services built upon blockchain in the years ahead. However, many projects and startups will end in failure as well. Mature technology fields are easier to predict and use-cases are often more tangible. For newer technologies like blockchain, understanding use cases can be more difficult.
This was observed during the early years of the Internet and the subsequent “dot com” bubble burst. A lot of ideas came to the market. A lot of money then poured in, propping up bad ideas and inflating evaluations. Then the dot-com bubble burst. Many poorly managed companies collapsed, but some of the modern tech giants, including Google and Amazon, not only survived but eventually thrived.
It’s fair to wonder if both Bitcoin and blockchain are experiencing a bubble. Bitcoin skyrocketed from under $1,000 at the start of 2017 to over $19,000 in December. Since then, prices have trended back towards $10,000. Meanwhile, blockchain startups and initiatives are popping up like daisies. Quite likely, some of these startups will grow into million and perhaps even billion dollar enterprises. On the other hand, many will wither and die.
Over-capitalization is a genuine risk and could result in bubbles forming and subsequently popping. On the other hand, there will likely still be opportunities for companies to develop groundbreaking blockchain technologies and for investors to generate huge returns on their technologies.