Bitcoin and Blockchain: Behind the Volatility, a Technology with Major Promise

The breathtaking volatility in Bitcoin is garnering a lot of press these days, and for good reason. The headline-grabbing cryptocurrency is trading all over the map, and so are its lesser-known competitors.

Just consider the Bitcoin Investment Trust (GBTC, Rated “B+”) that my colleague Mike Larson wrote about recently. Between late-November and last week, it soared from around $1,000 per share to $3,500 … then plunged all the way back to around $1,150. Yikes!

But behind that volatility, maybe … just maybe … we’re staring at a true technological revolution. What if Bitcoin is just the face of something that’s extraordinary? What if its underlying technology has the capability of changing the way we store and trade everything from currencies to gold to property titles to airline miles?

It all starts with something called blockchain.  You may have heard that word before. But all it really is, is a record of digital assets and transactions spread across many hundreds, if not thousands, of different computers around the world.  Each computer keeps records of all transactions previously conducted, while also racing to process new transactions. Those records ultimately comprise new, additional blocks on the chain, so to speak.  Each block contains information on the seller, the asset, the transaction terms, legal information, and deal structure, among other things.

In the realm of Bitcoin, the blockchain maintained by some 9,500 computers around the world is keeping track of the digital currency — and being rewarded for quickly processing transactions with it. But it’s not the prices of Bitcoins or other cryptocurrencies that matter most here. It’s the validation that the underlying theory of a decentralized and distributed checks and balance system (blockchain) can work!

The implications are tremendous in the financial asset pricing space. Blockchain technology creates a new, efficient, and cheaper way for businesses to conduct and record transactions around the world. In fact, there are already companies out there using blockchain technology to cut down settlement time periods in illiquid parts of the financial system.

One example is the Nasdaq stock exchange, which is working with San Francisco-based Chain to issue and transfer equity shares on its private marketplace. Another is London-based Everledged, which is using blockchain to track diamonds from the mines where they’re found all the way to the rings that end up on peoples’ fingers.

This chart from Bloomberg shows even more ventures and projects that are using the same underlying blockchain technology that supports Bitcoin:

Bottom line: Companies are taking note of the blockchain revolution, and ultimately, we will all benefit from its adoption.

When it comes to Bitcoin and its brethren, of course, regulators may have some say about what version(s) of cryptocurrencies ultimately gain the widest adoption. But Bitcoin is the clear leader for now. Cryptocurrencies provide anonymity and privacy, while allowing anyone to transact with anyone else regardless of national borders or currency exchange rates. The lack of a central regulatory authority for bitcoin, and its decentralized nature overall, are two reasons why it has become popular with folks skeptical or fearful of governmental intrusion.

Plus, Bitcoin is now being traded on futures exchanges. That allows investors to trade the cryptocurrency from either the long or the short side. The most important result of this development, however, is that it’s like a stamp of approval from the investing world.

For these reasons, Bitcoin is here to stay — and as the benefits become better understood, I believe it will continue to be accumulated by investors.  The only downside of the technology so far is the amount of energy it takes to process each consecutive transaction given the growing blockchain ledger and the additional computer processing power needed to track it. But even that may open up new profit opportunities for agile investors, a topic I’ll address down the road.

For now, despite the bubble warnings and wild volatility, I’m confident the underlying blockchain technology platform will revolutionize how we transact in a variety of assets going forward. So, stay tuned — big changes and big opportunities are headed your way!

Best wishes,

Mandeep