For those ‘in the know’ a common piece of insight during bar or dinner table discussions on the cryptocurrencies phenomenon goes something along the lines of:
“Yes, cryptocurrencies probably are in a bubble. They almost certainly have some kind of future but exactly what that is, how regulation will impact things and whether the current big cryptocurrencies will remain so is very hard to tell at this point. The recent publicity and Butcher, Baker and Candlestick Maker all suddenly buying Bitcoin, Ethereum and ‘the next big cryptocurrency’ points to a bubble. However, whatever happens with cryptocurrencies, it is the underlying Blockchain technology that is really the big thing. It’s going to change the world”!
There’s an oft quoted output from a 2015 World Economic Forum survey that provided the headline ‘10% of Global GDP to Be Stored on Blockchain by 2027’. Cloud computing giant Oracle made a very similar forecast, using the same 10% figure in October of last year. 10% of global Gross Domestic Product being stored on Blockchain platforms within 10 years would be a huge shift. It would mean a huge overhaul of legacy IT systems used by the public and private sectors, with the new generation being built largely on Blockchain technology. It would be a development akin to the digitalisation of record keeping and administrative systems over the past few decades. A process that is still not entirely complete the world over.
What is Blockchain Technology?
Before looking at whether the hype and investment into Blockchain companies might also be considered a bubble it is sensible to start with a brief overview of what the technology actually consists of. Bitcoin, the first and still biggest cryptocurrency by market capitalisation, was launched in 2009. The raison d’être for Bitcoin, outlined in the white paper published prior to its launch, was to address perceived deficiencies of the incumbent fiat currency monetary system.
A major problem with fiat currencies, in the eyes of Bitcoin’s pseudonymous inventor Satoshi Nakamoto, is the necessity for third party central authorities to regulate digital ownership, transfers and record keeping. This both gives banks and other financial services companies incommensurate economic power as well as generally being inefficient in the time and cost their role involves.
The idea for a superior digital currency was that it had to be more efficient while circumventing accusations of vested interests and potential manipulation or corruption. All of this had to be achieved while also ensuring accurate record keeping of ownership and transactions, a level of security that made malicious hacking close to impossible and prevented the ‘double spending’ problem (the same currency owner paying two different parties simultaneously with the same currency units).
Blockchain technology was created as the answer to these challenges. It’s a self-sufficient software system that once ‘launched’ manages itself without the requirement for any third party central authority. Blockchain is an immutable decentralised digital ledger system which records transaction history, verifies ownership and facilitates ongoing transfers of ownership.
The decentralised aspect means that a copy of the digital ledger is held by each user and a majority of copies must agree for the wider system to update. This means there is no one point of weakness where records can be corrupted with sophisticated cryptography adding an additional layer of security and meaning past records are close to impossible to alter after they have been verified – the immutability. The validity of new transactions is also verified by cryptography and achieved through computer processing power lent by the wider network. It has been dubbed ‘the trust protocol’.
Why Does Blockchain Technology Hold So Much Potential?
This is a very broad overview and Blockchain is a group of technologies and can take different forms rather than one technology as it is often represented as. The key qualities it represents are decentralisation, immutability, self-sufficiency and efficiency. While originally devised for Bitcoin, and other cryptocurrencies are also now all based on Blockchain, Blockchain can be applied to any data storage and transfer system. It is seen as a perfect technology platform to improve efficiencies in processes from supply chain management to medical records, physical and intellectual property, stock exchange systems and many more applications. Its immutability is seen as holding the potential to revolutionise particularly developing and emerging economies where corruption is a major handbrake to economic development.
Another way Blockchain has been described is as ‘the internet of value’ – adding an additional layer to the ‘internet of information’ we’ve had until now. If there is one thing that the internet of information has had a negative impact on it is trust in the security and veracity of information and data. Blockchain apostles believe that Blockchain technology solves this and will have a comparable impact to the rise of the internet age in its influence on global economic development and the way we live.
But Is Blockchain Investment Another Bubble?
Blockchain has undoubtedly become ‘the latest technology in world’ in terms of its investment appeal. VC and other forms of private equity have poured into Blockchain start-ups. The big IT companies are also pouring R&D funds into building teams of Blockchain engineers and exploring potential applications.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.