While it's true that the stock market is the single greatest creator of wealth over the long term, it hasn't been able to hold a candle to the returns of cryptocurrencies in 2017. Since the year began, the aggregate value of all cryptocurrencies combined has rocketed by nearly 2,700%, hitting a half-trillion dollars in combined market cap earlier this week for the first time ever.
As you might have rightly surmised, bitcoin has played a pretty big role in the ascent of virtual currencies. Being the first tradable digital currency, and the one that merchants are most likely to accept as tender, it's set the pace for the crypto-revolution. It makes up more than 56% of the aggregate virtual currency market cap.
The rise in cryptocurrencies is really all about the evolution of blockchain
Though there's no overlooking the important role that the fear of missing out on big gains has played in this rally, the astronomical rise in bitcoin and other cryptocurrencies has to do with more than just raw emotion. It's arguably all about blockchain technology.
Blockchain is the digital and decentralized ledger that underlies most cryptocurrencies and records all transactions. It appears to offer a number of advantages over the way money is currently transmitted over a network, which is why investors and businesses are so excited about its potential.
For instance, blockchain technology eliminates the third party that acts as the intermediary during a transaction, which is often a bank. Without this third party, there are fewer costs to complete a transaction, which is good for businesses and consumers.
Another possible benefit is a faster transaction settlement time, especially with regard to cross-border transactions. Traditionally, banks operate during "normal" business hours, five or six days a week. If banks aren't open, your transaction may take longer to process or clear. With blockchain miners working 24 hours a day, seven days a week to proof transactions, settlement times may be reduced significantly, or perhaps even be instantaneous.
And don't forget about decentralization. Rather than having a central data center where everything is stored and potentially accessible by cybercriminals, data within a blockchain is stored on servers all over the globe, making it practically impossible to disable an entire virtual currency with a successful cyberattack.
This brand-name company has accepted blockchain (and virtual currencies) with open arms
Few, if any, pundits would argue against blockchain offering game-changing potential for the financial services industry, and perhaps other industries as well. But some folks are so convinced of its potential that they're willing to drop everything else to focus on blockchain development.
On Wednesday, Overstock.com (BYON 2.24%) CEO Patrick Byrne announced a for-profit joint venture known as De Soto, Inc. with world-renowned economist Hernando de Soto to develop a blockchain-based global property registry system. The purpose of the joint venture is to leverage Overstock.com's knowledge of blockchain technology, through its subsidiary Medici Ventures, and de Soto's knowledge of property rights reforms, to create a global repository on which ownership and transfer can be based. This shared record-keeping technology would be closely modeled after the blockchain that underlies bitcoin.
"About 80% of the world's population is unable to enter the modern global economy due to lack of visible and standardized property records," said de Soto. "Billions of people have resources that cannot easily be transformed into productive capital. Blockchain is a powerful tool to solve these structural issues, which are some of the principal causes of poverty and conflict."
But forging ahead with blockchain projects isn't a cheap task. It consumes both time and money. Overstock.com subsidiary Medici Ventures is currently working on a blockchain-based securities lending system that'll wind up going head to head with brokers on Wall Street. It could even be one of the largest initial coin offerings on record -- worth up to $500 million, according to some pundits. But this project has also cost Overstock.com money, with the company reporting a loss in its most recent quarterly results. If this blockchain project weren't ongoing, the company's online retail operations would have led the company to post a marginal profit.
Is Overstock.com ready to go all-in on blockchain?
That's a dilemma not lost on Patrick Byrne, who on Wednesday, Dec. 13, told the Financial Times that he's hired Guggenheim Partners to explore a possible sale of Overstock.com's retail operations. This is the primary reason Overstock's share price vaulted higher by as much as 14% on Wednesday.
Why sell the retail business if it's generating marginal profit? For Byrne, it's a way of generating cash that can be funneled back into blockchain development. Though it would leave Byrne with just the Medici Ventures subsidiary, it would presumably provide enough funding to get this new joint-venture shared data project off the ground.
What's more, there's already been a lot of initial interest in acquiring the Overstock.com business, according to the company. A multibillion-dollar investment fund has already approached Overstock about a possible sale, CNBC reports, with interest from Asia also ramping up.
Considering how Overstock.com's online retail business growth has substantially lagged that of Amazon.com and other peers for years, a sale is definitely worth evaluating at this point.
But there's a wild card here, too, and that's how quickly other businesses will open their arms to blockchain technology. Again, there's little denying that blockchain has game-changing potential. The issue is that we've seen little more than demos, pilot tests, and small-scale projects involving blockchain up to this point. Investors are notorious for having overestimated the adoption of new technology throughout history, whether it be 3D printing, decoding the human genome, or even the adoption of business-to-business commerce during the internet boom. It could take years before we see anything that resembles a regular adoption of blockchain technology, making Overstock.com a very risky bet following a roughly 200% run higher in 2017.