BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
March 25, 2019
Blockchain is suffering from a hangover of large proportions by virtue of its association with the cryptocurrency boom. Is it deserved? Yes, to some extent – cryptocurrencies use blockchain, but blockchain use is not in any way limited to cryptocurrency applications.
What is blockchain? Think of it as an immutable database that is distributed among many users. For example, if my home ownership is placed on the blockchain, or “on the ledger”, it becomes a registry of my ownership that is confirmed across all of the many users that exist on this chain. Each computer along the way is confirming that I own this home – think of all participants as “witnesses”. Why is it immutable? Because no one can change my home ownership without everyone else on the chain knowing about it. In other words, all of the participants are confirming that I own this home, and therefore an agreement is required along the chain in order to change that fact.
The non-centralized nature of the blockchain is meant to prevent any one entity from exerting too much power – one of the salient features of Bitcoin is that it is not beholden to any one nation. Yes, it is priced in U.S. dollars, but no government has issued the ‘currency’ of Bitcoin, per se. Therefore, in theory, it remains beyond any direct central bank and political influences. A downside is that blockchain currency transactions are slow, without consumer protection (e.g. the Quadriga scandal) and involve “coins” so volatile that few businesses accept cryptocurrency as payment.
So the question is: Where else can blockchain be used? Well, for one, as a management of records in other areas. A U.S.-based real estate technology firm called Propy is using blockchain to facilitate entire property transactions, from start to finish. Etherium cryptocurrency is used and the title deed gets recorded on Propy’s blockchain title registry. There are few chances of mistakes and no ‘slippage’ through potential pitfalls like wire fraud within the blockchain itself. It’s a simpler and safer process that avoids extra costs such as escrow services – it cuts out some of the middlemen and can save customers money (a very familiar technology refrain).
Because the blockchain is essentially viewed as a tamper-proof database, record-keeping applications across many businesses will be suited to the ledger. Trade finance is one area in FinTech (Financial Technology) that is going to use the technology – potentially allowing billions of dollars in savings in back-office costs.
The Bank of Canada and the Monetary Authority of Singapore are working on a blockchain solution for international payments. Banking enterprise Santander is already using a mobile app that employs a kind of blockchain system (operated by Ripple) to send payments.
Blockchain is still in its early stages of development, but semi-conductors, as in many areas of Industry 4.0, (the “fourth industrial revolution” – click on the preceding link for details) remain the heartbeat of the chain. We own a number of leaders in the space via our thematic Blockchain Technology & Hardware Index ETF (BKCH). Guess who’s there? NVIDIA Corporation (“NVDA”). As I’ve noted before, NVDA is at the heart of much of what’s going on in Industry 4.0.
What is also important to blockchain’s development are companies like Xilinx, which powers blockchain accelerators. Blockchain success is also about specific ledger technology, storage, hosting and datacentres. Dell Technologies is helping with end-to-end solutions and Interxion helps with encryption for cloud storage. BKCH owns the top datacentre “REITs” – Equinix and Digital Realty. The trend of data creation and subsequent storage needs is a decades-long one that has only just begun. Physical and virtual real estate expansion is happening and critical to the success of Industry 4.0 as storage needs expand. It simply has to happen and these REITs are aggressively expanding around the globe to satisfy this demand.
In many Industry 4.0 areas there is overlap, and I believe BKCH, despite its name, has a promising future because it is focused in the most cutting-edge semiconductor names and cloud/big data/datacentres. Xilinx is in there – it helps to build blockchain – but also applies heavily to machine-learning processes. As well, the stock has been making all-time highs regularly for the past two months.
As for blockchain’s future – according to the research company Gartner, business value enhanced by a combination of A.I. and blockchain will increase to USD $3.1 trillion by 20301. According to MIT Professor Alex Pentland,“The very internet itself is being transformed, evolving from a loosely structured communications medium to a trusted execution medium.” 1 In other words, blockchain combined with A.I. is expected to help to keep our new world honest and auditable.
The expansion of Internet of Things and online execution will ultimately require the most secure infrastructure. Healthcare, finance, manufacturing, education, energy – private and public blockchain networks could all play into it. Stay tuned.
1 Source: The New Power Duo: AI and Blockchain, Dell Technologies, February 18, 2019.