Despite their recent hiccup, cryptocurrencies have been practically unstoppable for more than a year. Over a 53-week stretch, the combined value of every digital currency combined exploded higher from $17.7 billion to as much as $835 billion on Jan. 5, 2018. Even taking into account the recent retracement in cryptocurrency valuations, the rise in virtual coin market caps makes the S&P 500's roughly 20% gain last year, which is three times better than its historic average, look like a flat line.
Blockchain technology offers game-changing potential
At the heart of these almost parabolic gains is the emergence of blockchain technology. Blockchain is the digital, distributed, and decentralized ledger responsible for recording all transactions without the need for a financial intermediary.
Image source: Getty Images.
The buzz about blockchain primary revolves around its potential to correct perceived flaws with the current banking system. These flaws include high transaction fees and exceptionally long transaction settlement times, especially when it comes to cross-border transactions.
As noted, the blockchain technology that underpins most digital currencies is decentralized. This is a fancy way of saying that logged transaction data isn't kept in a central location, but rather is scattered on servers and hard drives around the world. This not only ensures that cybercriminals aren't able to cripple a cryptocurrency, but it also keeps a single entity from gaining control over a network.
Blockchain is also capable of significantly lowering transaction costs. Without a third party being involved (which is often a bank), there should be fewer mouths to feed, so to speak.
But the most exciting aspect of blockchain is what it might do for transaction verification and settlement times. Because transactions processed through blockchain networks are constantly being validated 24 hours a day, seven days a week, there's potential to shrink multiple-day holds for payments down to a matter of seconds. This would be particularly useful for banks and businesses that make or receive cross-border payments.
This Dow component is on the leading edge of blockchain development
While most folks are excited about blockchain's potential as it relates to financial service companies, there exists a world of opportunity for this technology well beyond the financial industry, and IBM (IBM 0.53%) knows it. This stalwart Dow Jones Industrial Average (^DJI 0.61%) component that was notoriously late to the party on cloud computing isn't making the same mistake twice. It's been on the leading edge of blockchain testing and development, and it demonstrated this commitment just days ago by announcing a joint venture with Danish global shipping giant, A.P. Moller-Maersk (commonly known as Maersk).
Image source: IBM.
The fact that IBM and Maersk are creating a separate, as-yet-unnamed company should come as no surprise. The duo began a blockchain collaboration all the way back in June 2016, and unveiled the shipping industry's very first cross-border supply chain solution powered by blockchain in March 2017. Both IBM and Maersk's management teams believe their shipping-focused blockchain solutions can be developed quicker in a start-up-like environment.
This new blockchain company will have two primary services offered to customers. First, its blockchain will create a digital information pipeline allowing for end-to-end visibility of a supply chain in real time.
The second service, and arguably the most attractive aspect of this blockchain joint venture, is Paperless Trade. As the service implies, it'll automate paperwork filings required in shipping products using blockchain-based smart contracts. This should allow for quicker approval of documents, and also create more legally binding agreements. In short, blockchain offers the potential to make the shipping industry more profitable and efficient. Said Michael J. White, former president of Maersk Line in North America, and new CEO of the joint venture:
Today, a vast amount of resources are wasted due to inefficient and error-prone manual processes. The pilots confirmed our expectations that, across the industry, there is considerable demand for efficiency gains and opportunities coming from streamlining and standardizing information flows using digital solutions.
According to IBM's press release, auto giant General Motors and consumer products behemoth Procter and Gamble have both expressed interest in the blockchain-based supply chain solutions being developed by this joint venture. These solutions are expected to be available on a wide scale in about six months.
Image source: Getty Images.
A few things to keep in mind
As exciting as it's been for IBM to embrace the blockchain revolution and attempt to reverse a five-year streak of declining sales, investors who are expecting big things from blockchain should probably keep a few things in mind.
To begin with, blockchain technology has been around for roughly a decade, and it's only now being tested in various demos and small-scale projects. Even with success in these projects, expecting the immediate adoption of blockchain on a broad basis simply isn't realistic. There may be infrastructure issues to contend with considering that blockchain technology isn't always compatible with existing networks in the financial and non-financial industries. This is an objection that's going to be difficult for blockchain developers to overcome.
It's also worth noting that IBM isn't the only rodeo in town when it comes to blockchain technology. There are in the neighborhood of 50 to 100 new virtual currencies being brought to market every month, each of which has its own proprietary take on blockchain. Because the barrier to entry is so low among cryptocurrencies, it wouldn't be too difficult for an even better blockchain solution to come along. IBM does have brand-name appeal and deep pockets on its side, but there are few guarantees that it has the shipping solution that'll prove superior over the long run.
Mind you, I'm not trying to discourage IBM investors from being excited about this joint venture announcement. Rather, I'm attempting to get investors to understand that blockchain technology probably isn't an immediate game changer and thus won't impact IBM's sales and profits anytime soon.
