O'Sullivan Wealth Management Update - The next wave

Jun 18, 2018 | Kevin O'Sullivan


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The screen was very much like a 1960s black and white TV, and quotes would flicker as the old cathode ray tube would strain to do its work for us...

I started in the investment business in 1991. At that time we used quote terminals to get information on stocks, and on the markets in general. Usually two brokers would share one terminal that would be on a turntable between our desks. The information was live, but the delivery was limited and crude.

 

If we were both on the phone at the same time, one of us would have to stall our clients while the other used the terminal. Sometimes we would lean over the dividing panel between the two desks, and look over our neighbour’s shoulder to try and read off the necessary information. The screen was very much like a 1960s black and white TV, and quotes would flicker as the old cathode ray tube would strain to do its work for us. Most of the systems were DOS based, an antiquated technology even for those times.

 

People would randomly call in for quotes on stocks or T-Bill rates, because it was the only way to get live information. It’s hard to imagine this today, given our current environment of instant access to global information.

 

In 1994, a few of us got our own computers in the office, as we had learned about the internet. We didn’t really know what it was or how to use it, only that we had to have it. Our personal computers gave us access to more information, though the internet was very disorganized at that time. Some early sites, like Yahoo!, began to provide stock quotes and news on companies, though these were often delayed by 20 minutes or more. Change was beginning, but I had no idea where it would lead.

 

In 1995 our firm provided us with desk top computers using windows-based applications. Some of us were familiar with windows, but using it for work applications launched us into a new era. We also began to explore the internet and all of the resources that this new medium brought to our fingertips. The delivery of content was still ad hoc but slowly starting to take shape.

 

The dot-com bubble was beginning to form as people crafted schemes to make fortunes off this new medium called “the internet”. A few of them were fruitful, some phenomenally successful. Many not so much.

 

Today, we are at another watershed moment with cryptocurrencies. The current stage of this new technology can be compared to somewhere between 1991 and 1995 with the internet.

 

What are cryptocurrencies?

 

Cryptocurrencies, like Bitcoin, are a form of payment that allow the buyer and seller a secure environment in which to conduct a transaction while bypassing a middleman. The backbone of the cryptocurrency is blockchain.

Currently we use money that is issued by a Central Bank, and held at a bank for safe keeping. When we conduct a transaction, we can either use cash, credit or debit cards. In each case we are depending on the Central Bank to establish value for our currency and issue it, and the bank to safely hold, receive and disburse our money effectively. Cryptocurrencies allow for scalable peer to peer transactions, bypassing Central Banks, banks, and other “middlemen”.

 

What is blockchain?

 

Blockchain is an electronic ledger that serves as the carrier of information in secured “blocks”. Through blockchain you are provided an encrypted account which stores your currency. When you want to conduct a transaction you present your card with your encrypted account information. Your transaction is securely executed on an exchange, and a record is permanently encoded in the ledger. The ledger of this and all transactions is constantly updated and kept in a decentralized location. This allows for tracking of all transactions, which among other things, eliminates the possibility of fraud.

 

This fraud prevention feature is quite interesting. Thousands of people around the world are working on the exchange for rewards. Their costs to operate are very high, and consequently there is no reward to engage in any fraudulent transactions. In addition, the network can trace all transactions to the source, so any indication of fraud can easily be identified. There are tumblers that can be used to clean fraudulent transactions, but the tumbling action also creates an identifiable trace.

 

Blockchain technology can also be used for applications other than financial transactions. It can be applied to any digital file that needs to be securely transferred.

 

What are the implications?

 

We are very early in the evolution of cryptocurrencies, but the implications are vast.

 

Walmart is currently using Bitcoin to buy directly from suppliers, allowing them to cut costs and more effectively track the source of their products. Airbus is also using blockchain technology to source parts for its manufacturing.

The blockchain market size is expected to grow from where it was at USD 0.24 billion in 2016, to USD 7.7 billion by 2022. Growth by a factor of 32x, in six years.

 

Venture capitalist and Netscape founder, Marc Andreessen was recently quoted in the New York Times as saying: “Bitcoin gives us, for the first time, a way for one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

 

Cryptocurrencies have the potential to significantly disrupt industries around the world. A key holdback at the moment is comparable to what browser did for the internet. Browser-like access to cryptocurrencies will make the technology far more accessible, and compelling.

 

How do I invest in cryptocurrency technology?

 

Many have invested in Bitcoin, and watched as speculators have caused the value of the currency to fluctuate wildly, but that is not necessarily investing in cryptocurrency technology. As noted above, many corporations are already experimenting with the application of cryptocurrencies in their business models. Banks, manufacturers and tech companies are investing heavily in research that will enable them to continue to be market leaders in their fields, as well as exploiting emerging opportunities.

 

There are several broadly based ETFs that focus on technology, and a few that specifically target blockchain opportunities. For example, First Trust markets an ETF that focuses on established companies that are either enablers or users of blockchain technology. In this manner it is possible to invest in companies that are creating the infrastructure for blockchain (e.g. IBM), along with companies that are already deploying the technology in their business models (e.g. Walmart and Airbus).

 

Most of us may not have understood the implications of the internet while it was working its way into our lives. Likewise many of us are still trying to understand what cryptocurrencies are, and those implications. Just as the internet changed our lives, so will blockchain. This is another opportunity to catch the wave in its infancy and hang on for the ride.