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Blockchain holds both potential and risk for investors

Jim Sinegal  |  09 May 2018Text size  Decrease  Increase  |  
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Bitcoin and Blockchain

Blockchain, the digital ledger behind bitcoin, currently attracts billions of dollars in investment. Large corporations, venture capital funds, and initial coin offerings (ICOs) are funding projects. Blockchains have the potential to disrupt economic activities ranging from simple payments to the structure of companies.

Cryptocurrencies began as a threat to the payment industry, but it is becoming clear that blockchain technology and cryptoeconomics could someday threaten a wide variety of business models, and conceivably the traditional means of corporate organisation itself.

Companies that engage in these functions are seemingly at risk, as blockchain technology can potentially lower transaction costs as well as the costs of recordkeeping.

Bitcoin uses a distributed peer-to-peer network to authenticate and record all transactions in the order they occurred, eliminating the need for intermediaries. In this way, participants can verify a clear chain of ownership for digital funds without relying on a trusted third party. The peer-to-peer network maintaining the digital ledger is known as a blockchain — a decentralised record of transactions across a network of comptuters.

Finance, tech and retail join the rush

Among existing firms, several industries are dominating early experimentation with blockchain technology. Blockchain was invented for payments, so it's no surprise that the financial services sector has taken an interest — Bank of America and Mastercard have filed for dozens of patents between them. The technology sector also got in on the act. Applications are not limited to these two sectors, however. Retailers and big industrial firms have joined in the rush to create proprietary blockchain applications. 

Most of the activity is happening in the world of finance, where transactions involve trust, recordkeeping, and the transfer of information and value. Financial institutions around the world need to reconcile thousands of transactions across a wide variety of markets. Shared, verified ledgers provide an obvious solution.

Wide-moat firms face down threat

The source of a company's competitive advantage – or moat – plays a role in its susceptibility to disruption by decentralisation. Efficient scale moats are created when centralisation is needed to attain satisfactory returns on capital.

Cost advantages often stem from larger scale production – a clear benefit to centralisation in most cases. Retailers such as Amazon, Costco, and Walmart use scale to procure goods at low cost and to distribute them cheaply. Similarly, providers of cloud computing such as Amazon, Microsoft, Google parent company Alphabet, and Alibaba spread the large costs of hardware, software, power, and staffing across a broad base of customers.

Blockchain technology has plenty of potential, but there are still obstacles to world domination: security and trust remain an issue in the cryptocurrency world and decentralisation is not always better. Without a chain of command, central authority or trusted middleman, there is the potential for disputes and fraud.

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Jim Sinegal is the associate director of the financial team at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

Jim Sinegal is the associate director of the financial team at Morningstar.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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