Last year very likely represented the greatest 12 months on record for any asset class in history. After beginning the year with a combined market cap of $17.7 billion, cryptocurrency valuations soared nearly $600 billion by year's end, pushing more than 3,300% higher. Though new coins coming to market did add to the ballooning market cap, much of this gain was the result of organic price increases from the likes of bitcoin, Ethereum, Ripple, and Litecoin.

Comparatively, one of the top-performing industries in the stock market in 2017 were marijuana stocks. Whereas the broad-based S&P 500 looks like a veritable flat line next to the growth in cryptocurrency valuations over the last year or two, some pot stocks have made notable one- and two-year gains that would've come close to rivaling the gains in some digital currencies.

Hemp plants in a field with the sun in the background.

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Here's how cryptocurrencies are revolutionizing the pot industry

However, what most investors may not realize is that cryptocurrencies and the cannabis industry may soon be tied at the hip. Cryptocurrencies are helping to shape a cannabis industry that's facing multiple hurdles, especially in the United States where pot is still illegal at the federal level. Below you'll find three unique ways cryptocurrencies are attempting to solve major issues for the marijuana industry.

1. Cryptocurrencies are bridging the gap between banks and consumers

One of the more universal issues that the cryptocurrency market and marijuana industry run into is that traditional financial institutions want nothing to do with them. Three major U.S. banks recently announced that they were disallowing members from buying cryptocurrencies with bank-issued credit cards. Similarly, banks have, in some instances, disallowed consumers from using debit and/or credit cards from purchasing pot in legal states. Since marijuana is a federally illegal substance, banks view any assistance to marijuana-based businesses as a potentially criminal and/or fineable offense. 

Thus enters cryptocurrency as a service, stage left.

A physical gold bitcoin on top of four $100 bills.

Image source: Getty Images.

In Washington state, cryptocurrencies like bitcoin are being tested as an intermediary currency to allow consumers with debit or credit cards to legally purchase cannabis in dispensaries. Understandably, not all credit cards will work given the crackdown from major U.S. banks described above. However, purchasing cryptocurrencies with debit is, in most cases, still an option with big banks.

One company known as POSaBIT is helping lead the charge in Washington as a pioneer of this intermediary service. Once a consumer decides on what goods to buy, he or she has a choice of paying with cash or bitcoin to complete the transaction. If bitcoin is chosen, the consumers' credit or debit card will be charged for the amount of bitcoin needed to complete the sale. This bitcoin can then be exchanged with POSaBIT back into U.S dollars. For its trouble, POSaBIT charges a flat $2 per transaction fee. Meanwhile, the consumer gets a broader array of payment options, and the cannabis business broadens its potential customer reach by being able to accept plastic. 

2. ICOs are creating a new source of funding

Secondly, and building on the first point, funding can be a major issue for cannabis companies. Though publicly listed Canadian cannabis growers have been able to use bought-deal offerings to raise cash, mom-and-pop growers and retailers aren't as lucky. U.S. financial institutions, fearing reciprocity from the federal government should they aid pot-based businesses, usually won't lend to the marijuana industry, or in some cases even allow them open a checking account.

The solution? Initial coin offerings, or ICOs. An ICO is akin to an initial public offering when shares of a stock go on sale to the public, except they're for tokens of a newly traded cryptocurrency.

A tipped-over cannabis bottle with dried buds atop a messy pile of dollar bills.

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The possibilities for these ICOs are truly endless. Some of the cash raised is being used to develop blockchain technology, which we'll discuss in more detail in the next point, specifically for the cannabis industry. Other recent ICOs, such as CannaSOS, are using their newfound funding to create a completely new social network devoted to cannabis. While not all avenues of funding from traditional institutions are closed off, ICOs are providing a means to fill what gaps remain.

3. Blockchain could revolutionize supply chains and government oversight

Lastly, blockchain -- the digital, distributed, and decentralized ledger that underpins digital currencies and is responsible for recording all transactions without the need for a financial intermediary -- may change the face of the cannabis industry.

In its most basic form, blockchain is expected to revolutionize the financial services industry. Without banks acting as third parties during a transaction, fees are expected to fall. What's more, with transaction validation ongoing 24 hours a day, seven days a week, settlement for payments could occur almost instantly, meaning no daylong waits for a transaction to post. The marijuana industry would benefit most from blockchain's non-currency applications.

Recently, Emerald Health Therapeutics (EMHT.F), a Canadian grower that could sport up to 5.8 million square feet of capacity, announced that it was finalizing a joint venture with DMG Blockchain Solutions that'll be known as CannaChain Technologies. This new company will focus on supply chain and e-commerce marketplace solutions for the cannabis industry.

A businessman with hands on his hips looking at an encrypted blockchain on a digital screen.

Image source: Getty Images.

In plainer English, here's what Emerald Health and DMG Blockchain bring to the table:

  • Supply chain transparency and immutability that local, state, and federal governments should love. No more worries about cannabis being diverted to different states.
  • Financial transparency, so state governments are certain they're being paid their fair share in taxes.
  • A means to transparently control product quality to ensure that the consumer and retailer receive the right product.

As noted in Emerald Health's press release, blockchain solutions involve stakeholders from growers all the way to consumers. 

While it's clear that blockchain is still in its nascent stages -- as are ICOs and cryptocurrency intermediary services like POSaBIT -- they have the potential to reshape the marijuana industry over time. Pay close attention to the marriage between digital currencies and the weed industry, because I suspect it'll be more important than Wall Street and most investors probably realize.