Bitcoin's meteoric rise has done more than make some daredevil investors rich overnight. It's also put blockchain – the software technology enabling Bitcoin and other cryptocurrencies — on a trajectory of its own.
X A wave of venture capital investment is pouring into blockchain technology startups. Many of those early-stage ventures, as you might figure, are directly involved in Bitcoin or other cryptocurrencies, exchanges and trading platforms, or in the companies that "mine" computers for digital tokens.
A growing number of blockchain startups, though, have nothing to do with Bitcoin or its peers. They aim to harness the technology for a long and growing list of other purposes in private industry. These begin with financial services, e-commerce, food safety and supply-chain management, but also include digital media, pharmaceuticals, cybersecurity and transportation — so far.
The list of big companies funding blockchain startups is also long: Alphabet's (GOOGL) Google, Citigroup (C), Goldman Sachs (GS) and Cisco Systems (CSCO) are just a few, says research firm CB Insights.
The momentum gathering behind blockchain isn't simply a matter of venture capital. Giant tech companies — the likes of Microsoft (MSFT), IBM (IBM), Oracle (ORCL), Intel (INTC) and Accenture (ACN) — are also jumping on the bandwagon. Early efforts include creating blockchain tools for cloud service offerings and taking part in consortiums developing blockchain offshoots for specific industries.
Blockchain Explained
What is blockchain? It is basically a shared public ledger, also called a distributed database, which tracks transactions and ensures that the record of those transactions remains transparent and tamper-proof.
"Blockchain is a world-readable digital bulletin board," said Ari Juels, a professor at Cornell University and former chief scientist at security firm RSA. "And when something is written to the bulletin board, it sticks there forever."
Any web-shared blockchain is meant to be impossible to edit or forge, because there's no centralized database vulnerable to hackers or chicanery.
"Blockchain is a way of creating strong trust relationships in a way that the internet alone can't do. And that's a powerful proposition in a lot of industries," added Juels.
IBD'S TAKE: It is crucial for investors to understand the difference between cryptocurrencies, like Bitcoin, and the blockchain software programs that enable them. It is also important to get a feel for just how speculative digital monies like Bitcoin are right now before investing directly in the currencies or through related exchange traded funds or stocks.
Companies are not yet using blockchain programs to run any large-scale commercial projects. But Deutsche Bank (DB) forecasts that blockchain systems will, by 2027, record transactions for about 10% of worldwide GDP, with financial services and banking sectors likely to play key early roles.
Gartner Group forecasts an accelerating takeoff for blockchain platforms. Blockchain is estimated to have delivered $4 billion in business value-add or technology innovation in 2017, with that growing to $21 billion by 2020, $176 billion in 2025 and $3.1 trillion by 2030, says Gartner.
Microsoft is making blockchain software tools available for project trials through its Azure cloud-computing service.
"We're seeing customers doing things. There's a ton in the pipeline. I think in 2018 we're going to see some things pop," said Matthew Kerner, a general manager in Microsoft's partner program. "And as the 'got-ya's and the solutions become broadly circulated among industries, I think we're going to see momentum build."
Microsoft is focusing on financial services, and plans to roll out new tools in early 2018. JPMorgan Chase (JPM) and Bank of America (BAC) are two of Microsoft's blockchain partners.
Artificial Intelligence And Blockchain Apps
Kerner expects synergy between blockchain and another fast-emerging technology, artificial intelligence. Blockchain deals with vast amounts of data. AI software programs crunch massive amounts of data in order to make predictions or draw conclusions.
Kerner says AI and blockchain could team up to identify money-laundering schemes, for example.
"AI is further along, but both can be disruptive," Kerner said. "I think AI and blockchain could have a great story together. We're at the beginning of seeing it develop."
Colin Sebastian, analyst at RW Baird, says AI and blockchain could be the foundation for Internet 3.0, following the social media explosion created by Facebook (FB) and others in Web 2.0.
Bitcoin Stability And Blockchain
How are the future prospects of Bitcoin and blockchain, meanwhile, entwined?
Amid the wave of initial coin offerings (ICOs), outgoing Federal Reserve Chairman Janet Yellen has called Bitcoin a "highly speculative asset" and "not a stable store of value." If Bitcoin and other digital currencies crash and burn or fade away under regulatory pressure, will that be a black eye for blockchain?
Not according to Ryan Orr, co-founder of blockchain startup Chronicled.
"If Bitcoin gets knocked back, that may create atmospheric paranoia," Orr told IBD. "But the underlying value of blockchain, in enterprise, in the real economy, is significant."
San Francisco-based Chronicled is taking part in MediLedger, a project aimed at getting drug companies to adopt blockchain to help manage their supply chains and combat counterfeiting.
Despite Bitcoin's roller-coaster ride, many blockchain projects are going full steam ahead.
Blockchain Consortiums
One is HyperLedger, an umbrella organization created by the Linux Foundation to "incubate" many different enterprise blockchain technologies. HyperLedger, which also acts as an information clearinghouse, has 170 members.
Two financial industry consortiums, R3 and the Enterprise Ethereum Alliance, are building private digital ledgers. R3 had 100 or so financial firms but has recently lost some members.
The Australian Securities Exchange in early December said it will upgrade its trading system with blockchain technology.
Cornell's Juels says: "If Bitcoin blows up, it tells us nothing about the utility of blockchain in enterprise settings. It wouldn't be about the vulnerability of the underlying technology."
Bitcoin Vs. Private Blockchain Projects
Bitcoin's public ledger is replicated on networked computers around the world. It is accessible to "miners" that use Bitcoin code.
For cryptocurrencies, blockchain records all the changes in ownership of digital tokens. Transactions are confirmed using encrypted code. Each "block" contains a set of new transactions, verified by network users without the need of a central authority, or middleman, like a bank or a credit-card processor.
Enterprise blockchain apps retain this public ledger aspect of cryptocurrency blockchains, but they validate transactions using different methods. These methods generally consume much less computing power and, therefore, less electricity than the power-sapping data mining required by Bitcoin-type transactions.
Another difference: With Bitcoin, anyone who buys a digital token is in the ledger loop. But most enterprise blockchains are "permissioned," making them accessible only to certain parties.
Juels and Microsoft's Kerner both expect "smart contracts" to be a big part of blockchain's future. Smart contracts are programmed into blockchains to automate tasks — for example, processing insurance claims — when preconditions are met.
Companies Using Blockchain Technology
Danish shipping giant Maersk aims to use blockchain to track ocean freight shipping containers. IBM, Wal-Mart Stores (WMT), Nestle and others are partnering to study how blockchain can make food supply chains more traceable.
In the hospitality industry, Microsoft has worked with online travel service Webjet to track the inventory of hotel rooms. And London-based startup Everledger has focused on combating fraud in the diamond and wine industries. Markets for counterfeit goods could disappear because of blockchain systems, says a Goldman Sachs report.
Eastman Kodak (KODK) announced on Tuesday it would launch a cryptocurrency of its own, specifically for photographers. It also plans to create an encrypted blockchain ledger of rights ownership enabling photographers to register both new and archived work.
Blockchain supporters say digital ledgers can also be used in applications including land titles in real estate, health care records, music copyright protection, notarizing artwork, educational degrees and identity management.
While leery of Bitcoin's origins and volatility, the financial industry view is ameliorating, Even JP Morgan Chief Executive Jamie Dimon said on Tuesday that he regretted his comment from a year ago suggesting Bitcoin was a fraud. And more broadly, big financial names are embracing blockchain.
Sebastian says most blockchain-related job openings are at companies like Fidelity Investments, Invesco (IVZ) and Bank of America, not to mention Dimon's JPMorgan.
Cornell and other universities have formed the Initiative for CryptoCurrencies & Contracts, or IC3, which is focused on blockchain-based solutions in finance and banking.
Fidelity, Microsoft, Intel and IBM also belong to IC3.
Companies such as travel-booking site Expedia (EXPE) have experimented in accepting Bitcoin. But don't try using Bitcoin to buy a cup of coffee or a car. And very few e-commerce companies have ventured into the cryptocurrency waters.
Importance Of Bitcoin Acceptance
If Bitcoin does evolve into a legitimate payment system, that could help validate blockchain, says Michael Graham, an analyst at Canaccord Genuity.
"The price of Bitcoin is less important than the underlying transaction volume in terms of the read-through in the blockchain market," said Graham in an interview. "If Bitcoin can become a practical mechanism for payments, which it has not yet, that would give people confidence that blockchain technology can be used to create widespread trust."
Another way that Bitcoin can validate blockchain technology is by continuing to survive cyberattacks, says Robleh Ali, a digital currency research scientist at the Massachusetts Institute of Technology.
"Bitcoin has been running for eight or nine years in a hostile environment," said Ali, who earlier worked at the Bank of England on digital currency issues. "People are trying to bust the system all the time. Bitcoin has proved itself to be resilient, and that shouldn't be taken lightly."
Some Wall Street firms are cheering on blockchain.
"Blockchain technology has the potential to join autonomous trucks, drones and the Uberization of freight transportation as a key disruptive technology," said a Morgan Stanley report.
Cisco, Bosch, Gemalto and others have set up the Trusted IoT Alliance, one among a number of organizations eyeing the Internet of Things — millions of web-connected devices from microwave ovens to security cameras and forklifts — as another blockchain platform.
Canaccord's Graham says microtransactions involving digital goods, such as those earned in video gaming, can't be handled by ordinary accounting systems, leaving another door open for blockchain.
Blockchain And Bitcoin Transaction Volume
What could derail blockchain?
Only Bitcoin and Ethereum operate at "scale." That refers to their ability to update ledger copies across a network of separate computers.
"Bitcoin can process about 3-4 transactions per second, Ethereum maxes out at about 20 transactions/sec while Visa (V) can process over 1,500 transactions/sec," said a CB Insights report. Enterprise blockchains spread over thousands or potentially millions of computers would face scaling issues.
Goldman Sachs says that standards will be needed to ensure technical compatibility as special-purpose blockchains proliferate. Otherwise, industries may not be able to share blockchain data.
And the technology has skeptics.
Amazon Web Services, the cloud-computing arm of Amazon.com (AMZN), has yet to jump on the blockchain bandwagon. Andy Jassy, the chief executive of AWS, said at a customer conference in November that distributed ledger technology may not pan out. Jassy said AWS does not "build technology because we think it's cool."
"We are in hype cycle. There are magical abilities attributed to blockchain that it may not realize," said Cornell's Juels.
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