You’ve probably heard all about bitcoin before.
You may even have had a dabble speculating on the ups and downs of the world’s first cryptocurrency. It was only a couple of years ago that the bitcoin was in full on, red blooded boom and bust mode. Take a look at this chart. It’s pure speculative mania stuff:
Price action like this is eye catching.
It’s what makes headlines. On the way up you get stories of teenagers becoming millionaires due to their speculations in the cryptocurrency markets. On the way down, you get the reverse. Both make for good copy, of a sort.
But it all blinds people to the really significant development. In this case, it wasn’t bitcoin at all.
It was the innovation that bitcoin is built upon – called the blockchain.
Bitcoin’s big brother
Until now, blockchain has been bitcoin’s quieter little brother. I think 2016 will be the year it steps out of the shadows… and the world wakes up to the huge potential of the blockchain at last.
That’s because the uses of blockchain are far wider ranging than simply the basis for a currency. In fact many of them aren’t even financial. Once people start to realise this – and there are signs it’s happening already – the entire blockchain industry will explode.
So what makes the blockchain so special?
Blockchain is a way of recording and sharing data.
It’s what’s known as a public ledger. That means it’s great for recording transactions.
Here’s an example. Let’s say I find a nugget of gold and decide to make a coin out of it. Then I give it to you in exchange for some goods. Who records that transaction? Well, no one except you and me. If we wanted to verify the transaction had taken place, it would be your word against mine.
We could get around this, though. We could conduct our transaction in a busy room with 20 other people. They could witness it taking place and verify it. But that isn’t exactly practical. If every transaction had to be verified and reported by a group of twenty strangers, the wheels of commerce would grind to a halt.
The blockchain takes this principle and amplifies it to world changing proportions.
Imagine the very same transaction, except it is authenticated by thousands of different computers all over the world, and then recorded in a ledger anyone can see. The whole world would be able to see that the transaction had taken place and that the coin had changed hands. We would be anonymous; the ledger would record that the coin had changed hands.
And each time it was exchanged again, the ledger would be verified and updated… until we’d have a map of transactions stretching back into time authenticating every single exchange.
My colleague Dominic Frisby described this as a kind of “digital doomsday book”. Or to put it another way (and to paraphrase another colleague, Charlie Morris) it’s a kind of “family tree” of transactions.
There are several benefits of doing things this way:
1. It’s secure. The transactions are verified and encrypted by a worldwide network of authenticators.
2. It’s decentralised. This network means that recorded data itself isn’t kept in any one location – making it essentially unhackable.
3. It’s public. Having security doesn’t mean you can’t store data on the blockchain. If you want data to be open to the public, it can be. It simply cannot be altered or added to without the authentication of the network. (Although the data doesn’t have to be open.)
And it is these qualities that give the blockchain its potential. It is not just a store for financial data. It’s a way to store and share any form of information safely and securely.
That could have some profound effects on the world. Two of the world’s most important innovations of all time have enabled the world to share information more easily – the printing press and the internet. The blockchain could be the third.
Take Gutenberg’s printing press. It was the catalyst that began many of the defining trends of the last millennium. When Martin Luther posted his 95 Theses attacking the Catholic Church on the door of a church in Wittenberg, he was doing something others had done before.
What was different, was the fact he was able to print and distribute his ideas across Europe. The ideas spread like wildfire. The movement began the Protestant Reformation. This would not have been possible without the printing press.
The same is true of something like the Renaissance. For new scientific ideas to spread and advance, you need a way of transmitting them quickly and easily. Copying scientific tomes out by hand restricts that process. The printing press removed those restrictions.
The internet has done a very similar thing – albeit on a much wider scale and at much greater speed. Today you can expect to learn about a scientific breakthrough in Japan within hours of it happening. The transmission of ideas, and data, is almost instantaneous.
So what more can the blockchain add?
Backing blockchain today is like investing in the internet in 1994
The internet is like an iceberg: only a small amount of it is visible to us.
The vast bulk is out of sight underwater.
Yes, all the things we see when we open up a browser – the news stories, interviews, videos, pictures, everything – is only a fraction of the true amount of data created every day. According to IBM:
Every day, we create 2.5 quintillion bytes of data — so much that 90% of the data in the world today has been created in the last two years alone. This data comes from everywhere: sensors used to gather climate information, posts to social media sites, digital pictures and videos, purchase transaction records, and cell phone GPS signals to name a few. This data is big data.
You’ve probably heard the term before. We’re living in an age where the amount of data we’re creating every day is astonishing. The problem is, this data is either unsecure… or it’s very difficult to share easily.
On the security issue, the problem is really one of centralisation. The world might churn out data at an incredible rate. But storing it generally involves keeping it in one place and trying to keep criminals away. Your bank keeps your details – your transactional history, recurring payments and the like – somewhere on an encrypted file inside your bank. So is everyone else’s.
They’re centralised. And therefore they’re vulnerable.
But as I showed you earlier, storing data on the blockchain means it is decentralised. It cannot be changed or altered without being authenticated by thousands of other computers.
Which leads to a second huge benefit. Blockchain doesn’t just make data more secure. It also makes it easier to share. I’m talking about the kind of data that can’t just be published on the internet (and there’s a vast amount of this).
For example, in America last year I listened to a talk from someone who was heading up a division of the Massachusetts Institute of Technology dedicated to exploring the uses of the blockchain. One area they were exploring was people’s medical records.
The thinking made sense. If you’re anything like me you’ve never actually seen your medical record. It’s something your doctor may have access to. But it’s not open to you, despite the fact it’s data concerning your health. The blockchain would change that.
But the bigger benefit would be the opportunity to add huge volumes of other data about you that doesn’t appear on your record right now.
For instance, I have an iPhone and a Garmin running watch. These two devices hold a huge amount of data about me: my resting and active heart rate, the quality of my sleep, what I’m eating… the list is endless. But does any of that information end up on my record or in the hands of my doctor? Nope.
The blockchain could – could – solve that problem. It’s certainly something that smarter people than me are working on.
And it just serves to demonstrate a point. If the world is generating more data than any time in history – much of it of vital importance, one way or another – we need a secure, decentralised system for storing it and sharing it, in a way that allows us to capitalise on it.
The blockchain could be that method, just as the printing press did before it.
So how do you invest?
How to play the rise of blockchain
When I want to turn a big idea like this into something actionable for investors – an opportunity – I turn to our Investment Director Eoin Treacy.
Eoin’s job is a tough one. In a world of seemingly limitless progress, how do you sort the sound opportunities from the hype? That’s not a job I’m smart enough to do.
Luckily enough, I have someone like Eoin to add the rigorous financial analysis you need to figure out how to position your money. When I spoke to him last night about blockchain, I mentioned the names of a few companies I’d heard about who were developing the technology in interesting ways.
“Don’t touch them with a bargepole,” Eoin said.
“Seriously, most of them are going to zero. Your flat is probably worth more than their entire businesses. If you want to make money from blockchain, you need to think a little more deeply.
“There are three ways I’m looking at investing in to play the rise of blockchain.
“The first is to look at the big boys in the industry. Have a look at what a company like IBM is doing. It’s partnered up with bunch of other companies (including start-ups like Digital Asset Holdings) to develop its own blockchain technology. That’s definitely something to watch out for.
“The second is to look at what a company like Overstock is doing. Last year it got backing from the US Securities and Exchange Commission (SEC) to issue public securities using blockchain technology.
“That’s an interesting situation. And it’s likely to garner plenty of press as it develops through 2016. Again, one to keep your eye on.
“Then there’s number three. That’s perhaps the most promising set up I have my eye on. It involves a start up here in California and one of the biggest tech initial public offerings (IPOs) of last year.”