Even the most casual followers of global business news find themselves swamped in the raging debate over the meteoric rise of Bitcoin, the world’s leading “cryptocurrency.” Cynics taking the time to investigate may stop searching upon learning the name behind Bitcoin, Satoshi Nakamoto, may be a pseudonym for a man, a woman, or a group of programmers. Whoever this mysterious figure or figures is, in 2008, he, she, or they, introduced a unique “peer-to-peer electronic cash system” calling it Bitcoin. To add to the enigma, no one has heard from Satoshi Nakamoto since 2011.
Yet the market created by Nakamoto has startled investors everywhere. The following chart shows the growth, both in the price of Bitcoin and in searches for the term.
Bitcoin has been called everything from “digital gold” to a fraud, to a bubble, to a pyramid scheme. A Fortune magazine article appearing in late August of 2017 hailed bitcoin as “the next big -thing in tech.” If you give any credence to the adage that imitation is the sincerest form of flattery, you should know there are now approximately 700 cryptocurrencies like Bitcoin around the world.
However, the concerns have some validity, as evidenced by the price volatility shown in the graph and over the last week, where the price of Bitcoin dropped 50% below its peak; and then began to climb again.
In addition, due to the nature of the technology underlying Bitcoin, government regulatory agencies are casting wary glances at the situation. Bitcoin is traded on exchanges, similar to commodity exchanges. The ASX suspended Byte Power Group (ASX), a company attempting to create an exchange in Brisbane, following a tenfold increase in price with no discernible news. South Korean regulators have stepped up investigations into banks and cryptocurrency exchanges there. Reuters is reporting a source claiming a PBOC official says China’s centralized virtual currency trade needs to end.
Most investors who take the time to go beyond the headlines around the trading of bitcoin as a commodity to investigate its underlying technology realize it may actually be a revolutionary next big thing.
However, reaching that point is problematic at best as search results yield explanatory articles that sometimes confuse more than enlighten. Blockchain is the technology behind all cryptocurrencies and the tutorials offered by technophiles portray its simplicity, without getting into details of how it works.
At its core, blockchain is a series of information records, stored in a “block” and organized in sequence, that rely on a network of computers to validate the record and its author and receiver. The “nodes” – multiple computers – in the network eliminate the need for centralised control. Perhaps it is best characterized as a transaction ledger digitally created, verified, and authenticated
The verification involves sophisticated cryptography encryption with a hash tag included in the block, linking the block to the previous one, which along with the decentralized nature of the system make the blockchain difficult to hack.
In traditional forms of electronic payments providers like Western Union or PayPal have centralized control over the payment request, validation, and authorisation. They are the classic “middlemen” and charge fees accordingly Centralisation makes wonderful targets for hackers the world over, as customers of major banks and retailers have learned to their dismay. With bitcoin and blockchain technology control comes from the “nodes” or personal computers in the network; in effect distributed rather than centralised.
For the few remaining uninformed observers, bitcoin is more than a trading vehicle for making money. The US based discount online retailer Overstock.com was one of the first to allow customers to use their bitcoins for payment. A growing number of businesses are accepting cryptocurrencies, with the US National Basketball Association Dallas Mavericks recently adding to the list in the near future. Bitcoin and the other cryptocurrencies are ideal for areas of the world lacking in ready access to banks. While the current price of a single Bitcoin is undoubtedly out of reach for many, the currency can be purchased fractionally.
The downside to Bitcoin and other cryptocurrencies right now is scalability. The validation process involving multiple computers is safe, but slow. Bitcoin’s principal rival in the sector is Ethereum, where the system can process 20 transactions per second. Bitcoin manages 3-4 per second. In stark contrast, PayPal handles 193 transactions per second, and Visa 1667 transactions per second.
It wasn’t long before tech innovators figured out any information requiring records could be stored in blocks. Regardless of the future of cryptocurrencies like Bitcoin, the underlying blockchain technology is where many see disruption occurring.
Supply chain management at Walmart provides an example. Fortune magazine tells the story of the Food and Safety Manager at Walmart headquarters in the US toying with the idea of using blockchain technology for tracking food. Upon his request his employees at Walmart set off to track the origins of a container of mangoes. Point of origin is critical information needed in the event of cases of food related illnesses. It took the Walmart team close to a week to determine the answer. Walmart then partnered with IBM to test a program called Hyperledger Fabric, a framework program for developing blockchain applications across industries. The test involved tracking fruit shipments and recording in blocks linked sequentially each process performed on the fruit and each point, complete with records on taxes or tariffs at border crossings, from farm to shelf. Following a few months of record keeping, the company was able to identify points of origin within two seconds.
The promise here is that any transaction of any kind requiring a record can make use of blockchain technology, leading to cost reductions, increased efficiencies, and information security. Governments are getting into the act as well. In Dubai, plans are underway to convert documentation ranging from visa applications, to bill payments and licensing applications, approvals, and renewals.
Cynics would do well to search the net to discover how many companies are considering potential uses of blockchain technology, beginning with banks like Barclays and J.P. Morgan Chase. At the close of the 2017 trading year the ASX announced it would move ahead with plans to replace its current system for share registry, settlement and trade clearing with a blockchain-based system to record who owns shares of listed companies, and to keep track of transactions and settlements when people buy and sell shares. In May of 2016 US investment bank Goldman Sachs released a research note claiming annual savings of $2 billion should US equities markets switch to blockchain systems, with a $6 billion estimate should all global markets convert as well.
As has happened with “next big thing” sectors in the past, some companies climb aboard the train, proclaiming they are somehow, someway, involved in blockchain or soon will be. There are two small-cap tech stocks on the ASX right now with real presence in the sector. One provides consulting and development services for businesses interested in adopting blockchain; and the other developing blockchain to enhance its existing logistics management software. The following table shows price movement for the two stocks.
Yojee Limited (YOJ) listed on the ASX on 30 December in 2010 following a reverse merger. Supply chain management and logistics are business needs ripe for disruptive technology. Many companies still rely on spreadsheets, emails and phone calls, with route planning done with basic software and in some cases manually.
Yojee offers its clients artificial intelligence software as a service platform based in the cloud. The platform automates all logistical functions of supply chain management from planning and routing pickups and deliveries to confirmations and payments. Yojee is incorporating blockchain technology for records transactions and deliveries, from smart-contracts to bills of lading, foreign exchange, payments, and records authentication. A smart-contract digitally records and executes steps manually implemented with non-digital contracts. They are considered one of the key benefits of blockchain technology.
Yojee has operations here in Australia, as well as in Singapore, Malaysia, Viet Nam, Indonesia, and Cambodia. The company generates revenue from its software customer logistics carriers. In addition, Yojee customers form a network available to ecommerce and other businesses and third-party logistics companies to ship freight.
The share price has been boosted by a series of positive announcements, with the first coming in mid-September following a trading halt. Yojee entered into a Letter of Intent to begin negotiations on a two-year software contract with FedEx Global Service Provider in Peru. In December Yojee announced its Singapore logistics network increased last mile deliveries 150%, month over month. Australian tech research analyst firm TMT Analytics began coverage of Yojee with a BUY rating. Although the initial research note was positive enough to predict a 25% return over the next year, skeptics should be aware this is a paid analyst firm.
DigitalX Ltd (DCC) is using its early experience in developing proprietary wallet software and running a trading desk for purchasing cryptocurrencies to expand its business model. The company still offers some trading services and in March of 2017 launched AirPocket, its blockchain based application for Android/iOS based mobile money transfer app for remittances from the US to Latin America. DigitalX now offers its expertise, consulting with companies to develop their own blockchain applications and ICO offerings, as well as acting as software developer of new projects. ICOs (Initial Coin Offerings) are similar to crowdfunding sources as a means for early stage and start-up blockchain developers to secure funding. The stock price got a big boost in June following the announcement of a $4.35 million-dollar investment from Blockchain Global Limited, securing 40% of the company. Blockchain Global has been active with blockchain technology since 2014, providing software and consulting services as well as mining (computers in the network recording and verifying transactions).
Investors remain enthralled with DCC as it transitions, despite falling revenues as it moves to its expanded business model. The company was issued a “speeding ticket” on 25 October with no apparent news. In its response to the ASX inquiry, DigitalX Management reaffirmed its current strategy of providing ICO advisory services, blockchain based consulting and blockchain-related software development. The company noted that “there has been a significant amount of media attention around ICOs in recent times, together with an increase in the values of certain cryptocurrencies, in particular Bitcoin which DigitalX maintains a significant holding in”.