What’s moving the market today
U.S. equities have fallen the most in three weeks after Michael Flynn pleaded guilty to lying to federal agents, unnerving financial markets that have been rallying on the prospects for massive tax cuts and accelerating economic growth. The news has overshadowed the Senate tax bill as it headed for a round of votes Friday, with the chance of passage remaining high. The S&P/TSX is edging higher as banks and energy companies are gaining with higher oil prices and surprisingly robust domestic jobs data.
What is Bitcoin?
Cryptocurrencies use a technology called "blockchain" that enables users to make and receive payments and store money anonymously without the need of an intermediary. Bitcoin, with a market cap approaching that of McDonald’s, is the most recognized, and makes up over two-thirds of the market capitalization of the top 10 cryptocurrencies. Given its astonishing ascent and with more cryptocurrencies emerging, I get many questions asking whether they are the future of money.
Cryptocurrencies are unlikely to replace traditional money in the short and medium term for several reasons:
- Firstly, they are not a store of value as are traditional currencies. We hold our countries’ currencies because we expect to trade them for a future good or service in an economy backed by a legal, political, and economic system. Bitcoins are not created by a central bank, but by a network and complex algorithms.
- Secondly, there is no legal recourse. Cryptocurrency ownership is anonymous—hence, no one to pursue in case of a theft, or hack.
- Finally, their value is both “unstable and widely unpredictable.”
The biggest advantage of using cryptocurrencies is the ability to transfer money cheaply. It’s a peer-to-peer system which cuts out the middle man without being detected. In effect, they can be used to evade the supervision of unlawful money transfers.
Earlier in the year, China banned Bitcoin as it was being used to elude capital controls and transfer funds out of the country. Even in countries without capital controls, governments are likely to want to pin down fund flows to track taxation and potential criminal activities. Because cryptocurrencies do not enable this, governments are likely to regulate them ever more tightly if their popularity grows. As more pressure is put on cryptocurrencies to leave a paper trail, the cheapness of transferring funds could also erode, making them less attractive instruments.
While there are hurdles to cryptocurrencies replacing traditional money, the underlying technology, blockchain, seems to holds promise and could redefine several industries’ rules of operation, in particular those with recordkeeping at their core.
Blockchain is in effect a giant database, or ledger, that can maintain an ever-growing list of data. It is a distributed ledger; it is not kept nor altered in a centralized manner by an institution, but collectively by users. All data “blocks” are encrypted—they cannot be changed or erased without leaving a record of previous blocks thanks to proprietary algorithms designed to protect data. As such, the data records seem to be “manipulation-proof” and much more difficult to hack.
How to play Blockchain?
Investors wanting exposure to this technology could look at software consultants, tasked with testing or integrating the new technology. Hardware providers, such as companies making the processing units used to generate cryptocurrencies, could be an alternative, though these have already had a good run. Companies poised to benefit from successful implementation of this new technology are also possibilities.
It is still early days to gauge the impact of this new technology. More testing must be done as the security of blockchain might yet prove fallible in the hands of the hackers of the future. Moreover, the scalability of the technology has yet to be tested and, as it sucks up a lot of energy as a computer-based solution, its proliferation could yet be limited by the current capacity of the grid. Yet, its potential makes it a technology well worth watching closely…