Though cryptocurrencies have suffered their first major pullback in years over the trailing month, they've still run circles around traditional equities. Having begun 2017 with a market cap of just $17.7 billion, digital currencies had an aggregate value of roughly $386 billion as of Feb. 7, 2018. That's an increase of almost 2,100%, which would have taken the broad-based S&P 500 decades to deliver.
Betting big on blockchain
The heart and soul of the enormous rally in cryptocurrencies is the rise of blockchain technology. For those unfamiliar, blockchain is the digital, distributed, and decentralized ledger that underlies virtual tokens and is responsible for recording all transactions without the need for a financial intermediary.
The evolution of blockchain is a result of perceived inefficiencies with the current banking system. These inefficiencies include the length of time it takes to validate and settle transactions, especially cross-border payments, as well as the fact that banks are acting as third parties in transactions and thus collecting a fee in the process.
Blockchain aims to resolve these issues three ways. First, being a decentralized platform means that blockchain has no central server or data center where transaction information is stored. This ensures that no single entity or hacker can ever gain control over a network or cryptocurrency. It is therefore considered to be safer than traditional banking systems.
Second, blockchain removes banks from the equation. Processing payments through blockchain reduces the number of transaction fees collected, which may actually lower transaction expenses when all is said and done. What's unclear is if these lower fees would be a benefit to the consumer, or if businesses would just pocket a smaller fee as added profit.
Finally, blockchain has the potential to dramatically shorten the time it takes to complete a transaction. Whereas cross-border payments can take up to five days to complete with the current system, blockchain could potentially process payments in a matter of seconds or minutes. That added efficiency could be a major boost to businesses.
It's also worth mentioning that blockchain isn't limited just to the financial services industry, even if that's where its most immediate benefits would be seen. Blockchain has application in the technology, energy, retail, and healthcare industries.
These blue-chip stocks are developing their own blockchain technology
While most investors' eyes are on the development of blockchain within the crypto community, a handful of blue-chip companies are working to create their own proprietary blockchain platforms. Here are three of the most prominent developers.
Technology stalwart IBM (IBM 0.34%) was left in the dust when cloud computing became the next hottest trend. However, Big Blue happens to be on the leading edge of blockchain development, having been hard at work on proprietary blockchain technology for years.
Arguably one of the most exciting partnerships is with shipping giant A.P. Moller-Maersk (commonly known as Maersk). IBM and Maersk began their blockchain partnership back in June 2016, and recently announced that they'd be forming a separate joint venture to focus on supply chain management blockchain solutions for the shipping industry. The duo believes that forming a separate company will allow these blockchain solutions to flourish in a start-up-type environment.
This joint venture should offer two advantages over the current paper-based shipping model. First, a blockchain-based shipping system allows manufacturers, shippers, and retailers the ability to see where products are in real time. Second, it removes paper from the equation. Digital shipping logs are immutable and legally binding, meaning approvals should occur much quicker than with paper documents.
IBM is a brand-name Dow component with big blockchain ambitions.
Like IBM, payment processing facilitator Mastercard (MA -2.20%) has been tinkering with blockchain development for years, and it recently took its technology live to a select group of banks and merchants.
The Mastercard blockchain is built similarly to that of bitcoin, but it does have some clear differences. Like bitcoin and other blockchain developers, Mastercard aims to use its technology to expedite the completion of cross-border transactions that might otherwise take days to settle. But unlike typical cryptocurrencies, Mastercard's blockchain platform operates completely independent of a cryptocurrency. Instead, it's capable of accepting payments based on a consumer's local currency. Justin Pinkham, senior vice president at Mastercard Labs, had this to say: "We are not using a cryptocurrency, and we are not introducing a new cryptocurrency, because that introduces other challenges -- regulatory, legal challenges. If you do a payment, then what we can do is move those funds in the way that we do today in fiat currency."
Keep in mind that while bitcoin and other cryptocurrencies have struggled to build their partner and merchant networks, Mastercard currently has a settlement network of around 22,000 banks and financial institutions around the world. This puts Mastercard in the driver's seat among financial service companies given its reach.
Initially, Mastercard is only testing its blockchain with 13 banks, but it has the potential to rapidly scale the project, if successful.
3. Cisco Systems
Another Dow component that's developing its own proprietary blockchain technology is networking giant Cisco Systems (CSCO -0.56%).
Cisco is among the 200 organizations that are currently part of the Enterprise Ethereum Alliance, which aims to expand the use of Ethereum's blockchain solutions to different industries. But it's the company's work in distributed ledger technology for the Internet of Things (IoT) -- wirelessly connected devices that can send and receive data -- that's truly exciting.
In mid-October, Cisco filed a patent application with the U.S. Patent and Trademark Office titled "Blockchain Based IoT Device Identity Verification and Anomaly Detection." In other words, Cisco has developed what it believes is a management system for IoT devices connected to a network. It would, in theory, use blockchain to identify devices on an IoT network, determine if those devices are trustworthy, and continuously search for and update new devices to ascertain their trustworthiness. Keep in mind that IoT devices like smartphones and cars can be moving in and out of networks all the time, which is why this management would need to occur in real time.
Though Cisco Systems is likely just scratching at the surface of blockchain-based IoT applications, its work could solidify the company as a force to be reckoned with in blockchain.