Blockchain, the technology behind cryptocurrency, and more popularly Bitcoin, seems to be the hottest commodity in finance right now. A billion dollars have been invested in start-up companies that are focusing their efforts on this technology, with the hope that it will transform the way we transact with others online.
Blockchain’s potential applications extend far beyond it’s use by Bitcoin, however. It could facilitate the transfer of money without an intermediary, settle trades, and revolutionize the financial system. But how?
In the simplest of terms, a blockchain allows people to transact with one another without requiring any element of trust from either party. It also has no central authority, and no compliance rules to adhere to. It acts as a ledger in which blocks of data containing transaction details are connected to each other. This ledger is verified by a worldwide network of computers, and only recorded if given consensus. Once the transaction has been recorded, it cannot be erased, making a blockchain virtually impossible to tamper with.
For these reasons, blockchain is a natural choice for monetary transactions. Enter the cryptocurrency craze. Cryptocurrencies are digital currencies that run on a blockchain network. Cryptocurrencies are not valued like traditional currency because they are not tied to the performance of any economy, nor are they governed by any government or financial institution. They are used to transact between individuals, and there is often no need for any identification process; cryptocurrency can be used completely anonymously.
Bitcoin is one form of cryptocurrency. Bitcoin (BTC) was released to the public in 2009, and since then hundreds of other forms of cryptocurrency have been released. The Bitcoin protocol dictates that there can only ever be 21 million Bitcoins in existence, but the coins can be divided into fractional amounts, the smallest being a hundred millionth of a Bitcoin. Bitcoins are stored in the user’s “wallet” and can be sent into the Bitcoin network in order to make payments to others. Over 100,000 merchants world-wide have adopted cryptocurrency as a payment method for their goods and services.
Bitcoin has appreciated 970% relative to the Canadian dollar over the last year, which explains why it has received so much attention from investors. However, the value of Bitcoin and all other cryptocurrencies can fluctuate significantly on a daily basis, and there is no universally accepted method by which to value these currencies. In fact, Bitcoin (BTC) has declined more than $72 billion US since the beginning of 2018 alone. This means that while a cryptocurrency may not be a responsible choice for your retirement portfolio, the underlying technology of blockchain could be revolutionary for the financial industry. We would be happy to discuss exposure to companies investing in blockchain technology and other innovations and whether it is a good fit for your portfolio and financial goals. Please call or email us to book an appointment.