My friend sent me a text as Bitcoin's price dipped under the $9K range.
"It's over for Bitcoin."
On a holistic level, the drop in price makes sense, as this rapid commercialization and institutionalization of BTC is indeed counter to what its creator(s) originally intended. This was meant to be the anti-institution: an entity whose integrity and reliability was strengthened by being fragmented (i.e. distributed). Decentralization was the goal and entire point. But Mr. Market is never one to miss out on a good hype train, so in 2018, emotional investors are left licking their wounds if they acted too late on his advice.
Socioeconomic musing aside, I think this correction is good for the current market. I feel like now, the differences between private and public blockchains are beginning to enter the financial mainstream. Understanding why Bitcoin's current iteration of its blockchain isn't good for commercial application is a corollary to understanding why conversely, Ethereum-based and non-currency systems are incredibly valuable. Under these conditions, then, extant public companies working on projects in this field stand to benefit, especially if they embed themselves into the early infrastructure.
One month into 2018, and much of the cryptocurrency market is a bloodbath. But the blockchain market is only just heating up. Herein lies an important point: grasping the difference between blockchain or distributed ledger technology, and cryptocurrencies is fundamental before you even consider investing in either. Cryptos or digital currency are the tokens that are part of a blockchain's process for incentivizing participation, among other reasons. There's usually a hard cap on how many of these tokens will eventually be available or outstanding: for example, BTC is 21M. This scarcity, coupled with a healthy amount of market speculation is what led to the wild run in 2017.
The parallels to the dotcom boom and subsequent bust are not without merit. Much of the value in many of the available altcoins is not rooted in clear fundamentals or even vague ones. Wide-spread adoption, commercial demand, and plausible use cases are the factors that need to be considered when determining if there's true intrinsic value in any given token (which is itself an investment proxy for the blockchain it's built on).
All the intricacies and nuances of blockchain are like a rabbit hole: what you see on the other side will feel like another world. What exactly is a consensus mechanism? What makes a crypto the real deal versus just a flash in the pan? For many investors, myself included, untangling all the jargon and data is enough to send us looking for opportunities elsewhere. At its core, blockchain is a revolution for the financial industry: it is essentially a more advanced ledger that provides greater transparency, efficiency (i.e. speed and cost reduction), and accountability to transactions. If you are a savvy investor, you need to be aware of how this can impact the global economy, and I don't mean in just bearish, cataclysmic ways.
This should come as no surprise to folks already following these stocks, but my expected winners in this space are stalwarts in the tech community. Each of these companies has numerous projects underway that span industries and partners. If you're interested in exposure to the potential growth in the distributed ledger technology market, consider choosing these stocks:
First-mover advantage isn't everything, but IBM's (IBM) ability (with the help of others) to get its platform to a production-ready version last year is a good sign. I like its involvement with the Hyperledger group, an organization run by the Linux Foundation that's focused on fostering corporate collaboration on blockchain R&D. Linux tech already underpins much of the Internet, so it's encouraging to see it rolling up its sleeves and contributing to the blockchain ecosystem. IBM's contribution involves its work on Hyperledger Fabric, a framework that will allow for development of blockchain applications using modular architecture.
If this sounds complicated, that's because it is, but the good news is that IBM's work has recently bore fruit: in October 2017, it began using digital currency and blockchain software as part of a cross-border transaction network between banks in the South Pacific. In this project, Stellar created the digital currency Lumens that the participating banks will be using for transactions, but IBM's future applications in this space will likely involve a currency-less platform (or at least one using a privately-built token).
Taken from IBM's website
A bet on blockchain here is not as speculative as it would be in a singular crypto: IBM's use of blockchain is about solving practical business problems, not so much about fulfilling a vision of decentralized markets or jumping the corporate shark. Many of the smaller cryptos and their respective blockchains are also trying to solve a need in the market, but how many are as sophisticated and experienced in their execution like IBM is? It has the scale, the connections, and the brainpower to make a significant impact in this space. The company's stock price is expanding out of a 2-year low; its continued strength in areas like cloud and blockchain infrastructure will likely support this upward trend.
Like IBM, Microsoft (MSFT) has excelled at staying on the forefront of new developments: enterprise software, cloud services, and now, blockchain. MSFT's first offering in this space was in 2015, with the release of its enterprise toolkit for use with Ethereum. Since then, MSFT has been involved in different capacities in this space. Overall, its efforts are focused on enterprise solutions, funneling its work in blockchain through the Azure platform and not necessarily its own distributed ledger. MSFT introduced its Coco framework last year, which is designed to help build out enterprise networks across public platforms like Ethereum. Microsoft is hinging the adoption of its framework on powerful security and performance features. Not only will MSFT offer a trusted execution environment at a software level for Coco, but the company has acknowledged that Intel's (NASDAQ:INTC) hardware-based security measures can be integrated into the platform too. Transaction speeds are also greatly increased. Transactions going through a private version of Ethereum with Coco were measured at 1,700 processed per second, versus 19 without Coco.
Like many other parties in this space, the company also has a strategic partnership with R3, the developers of the distributed ledger platform Corda. This relationship means that Microsoft's Azure services will have Corda integration built-in, resulting in what will likely be a private variation with various enterprise features. I believe this synergy between R3's blockchain expertise and Microsoft's Coco/Azure capabilities will keep the company competitive in this market. Plus, Corda is tailored toward financial institutions, the majority of which have a relationship with MSFT that can be potentially leveraged. Its revenue streams are currently as diversified as I've ever seen them, so to say that this or other blockchain projects will be a major revenue driver in 2018 is speculative. But as a proxy for exposure to the growth and adoption of this tech, I like Microsoft as a reasonably safe choice. It has been in the blockchain space for several years now, and introducing new tech to enterprise-scale clients is one of its core competencies.
JPMorgan Chase & Co.
Many financial institutions are already getting their feet wet. Notable among American bulge bracket firms is JPMorgan Chase & Co. (JPM) and its Quorum project, a distributed ledger protocol that it is tailoring to the financial services industry and based on Ethereum. Like Microsoft and IBM's projects, the resulting blockchain is likely being designed as a permissioned network prioritizing confidentiality and scalability, a key concern for any potential enterprise-wide implementation. As part of addressing the concerns of corporations who might adopt this tech, JPM brought in Zcash, a public blockchain and well-known crypto. Its specialty is privacy, and with its involvement, JPM implemented a zero-knowledge security layer to its own private blockchain. Zero-knowledge proofs are expected to reinforce the weakness in using blockchain on an enterprise scale and, for now, should be considered one of its bleeding-edge cryptographic features that will hopefully differentiate themselves enough in the market.
I like JPM's position in this space because it is an insider to the industry it is targeting with Quorum. These preexisting relationships are fundamental for spurring on the network effects that are critical to expanding this platform. The public nature of Quorum is also intriguing, as the open source-style of this project is counter to the usual culture of secrecy at big banks. The company has been developing this idea for several years now, and seeing it play out into real-world use cases is a positive indicator that JPM is taking control of its future growth. Its price movement has been healthy since 2016, and Quorum should help maintain reasonable growth levels.
Intel has also recently launched its own blockchain offering, Sawtooth, and like IBM, it's part of the Hyperledger project. It has big partners already, with Huawei, T-Mobile (NASDAQ:TMUS), and Amazon (NASDAQ:AMZN) all onboard in different capacities. As you would expect, it's a permissioned network with a unique consensus mechanism (proof of elapsed time), and as of a few days ago, it's ready for enterprise use. This blockchain also plays nice with outside hardware security solutions, another selling point by INTC as it seeks to push its adoption. INTC's stock is pushing past multi-year highs, and its blockchain offering may help continue its secular growth. But buying and holding INTC means you'll also have exposure to the semiconductor industry, so be sure you're comfortable with this added risk if you're only interested because of its Sawtooth tech.
In the last month alone, BTC is down ~43.4%. Don't let this distract you: the significance of blockchain technology should not be dismissed, especially as it will affect the financial services industry and the greater corporate world. I listed a few leaders here in this space, and if their pilot projects in blockchain prove successful, integrating this tech into their ecosystems will be a significant boon to their respective revenues.
Are there any other mega-cap or large-cap companies that have interesting blockchain projects underway? Please leave ideas and suggestions in the comments!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.