The stellar rise of the cryptocurrency Bitcoin has shone fresh light on the Blockchain network that underpins it. Here, Mellon1 portfolio manager Erik Swords looks at the latest developments and considers the wider business potential of Blockchain itself.
In March the cryptocurrency Bitcoin saw its value rise above US$60,000 for the first time2 continuing a record breaking - and at times controversial – run, which has seen it triple in value since the end of last year.
Among more recent investors in Bitcoin is billionaire entrepreneur Elon Musk, whose pioneering electric car company Tesla bought US$1.5bn in Bitcoin in February saying it plans to accept the cryptocurrency as payment3 for its cars in future.
With Bitcoin’s total market value now exceeding US$1trn4 - and amid increased adoption of the cryptocurrency by both investors and a growing range of mainstream financial institutions - renewed attention is now focusing on the Blockchain technology that underpins it.
In essence, Blockchain is a special type of distributed digitized ledger in which transactions are recorded chronologically and it can provide an immutable, time stamped record of transactions. While the technology is perhaps best known for its supporting role in the Bitcoin market, Blockchain is increasingly being used to support areas as diverse as healthcare, retail supply chains, mining and the food and drinks industry. Anything that requires an underlying ledger can, in theory, be supported or assisted by Blockchain technology.
Mellon portfolio manager Erik Swords has monitored the development of both Bitcoin and Blockchain since their inception and is particularly excited by the investment potential of Blockchain and the range of applications and industries it could support in the future.
“Blockchain has the power to disrupt traditional systems of exchanging, settling and servicing assets by offering unique ways to reduce costs, remove inefficiencies and lower fraudulent activities often caused by intermediation,” he says.
While moves towards a more digitized society – embracing cryptocurrencies such as Bitcoin – were in train well before Covid-19 appeared, Swords believes the pandemic has helped accelerate the development and implementation of many useful Blockchain solutions.
“While the digital transformation was well underway prior to Covid-19, the pandemic forced just about everybody that had previously worked in an office to go home and adopt new, more remote and electronic ways of working.
“Lockdowns quickly made us see how our society can function digitally. Most of the technological backbone and infrastructure for digital living and working was already there and, when the pandemic struck, we started to realize just how effective channels such as e-commerce can be,” he adds.
It is against this backdrop that Blockchain technology is finding some surprising new uses and applications, though its contribution to the financial sector remains perhaps the most obvious. In finance, early concerns about the abuse of cryptocurrencies and Blockchain technology have given way to acknowledgement that it can provide highly secure transaction channels.
According to Swords: “Today, the global financial system relies heavily on third parties to facilitate the exchange, settlement and servicing of assets. Blockchain can disrupt this established system by offering a unique way to avoid the inefficiencies and potential fraud opportunities posed by intermediation.
“The system does this by requiring individual users to reach a majority consensus in confirming asset ownership before a peer-to-peer transaction can become part of the community’s accepted ledger. It is very secure. For all the noise around Bitcoin, for example, the transaction system has never been hacked.”
Living by numbers
Beyond financial services, Swords sees huge potential for Blockchain application in areas such as healthcare, retail supply chains and the food and drinks industry.
“The number of ‘use cases’ we are seeing is increasing exponentially across business sectors as potential users learn more about the likely benefits of Blockchain,” he adds.
“In particular, supply chains have been notoriously inefficient and could really benefit from Blockchain - a system that offers end to end transparency and visibility for all the different constituents involved in supplying goods.”
Swords uses the example of fruit and vegetable supply to major supermarket chains to illustrate Blockchain’s usefulness. By documenting every step of the chain in a single system, he says the system can allow both suppliers and distributors to become more nimble and responsive to shifts in supply and demand.
“In food supply, a lot of things happens along the way. Being able to have a system that documents each and every step of that journey in the supply chain management system is remarkable because the data gleaned from that suddenly becomes much more relevant,” says Swords.
“One example could be when there is a shortage of certain vegetables on the shelves of a major supermarket. That can be immediately communicated back to the suppliers who will then know to get more vegetables on trucks that can then go on to the distribution centers that need them and ultimately to customers.”
Swords adds that data communicated via Blockchain can also give supermarkets a clearer idea of when to adjust the price of its vegetables and help them to become nimbler in adjusting to subtle changes in supply and demand.
The deep level of data Blockchain can provide on supply chains can also prove useful for a new, more discerning generation of customers who want greater information about the source of both the food and drink they consume and other products they buy.
Commenting, Swords says: “Younger people are perhaps more ethically and environmentally aware today and are always seeking more and more information about the goods they buy and where these come from. Taking a pint of milk as an example, Blockchain can allow customers to scan a label to learn how long that milk has been in transit, how long it has been sitting on it shelf and even which farm it came from.”
Whatever innovation Blockchain breeds, Swords is sure of one thing: it’s market and applications will continue to grow. Over time he believes the system may prove as influential and valuable as the Internet itself, though he believes it will take policymakers, private companies, investors and individuals some time to grasp and fully exploit its true value.
“The sky really is the limit. At the moment governments are trying to work out the true potential of Blockchain and other cryptocurrencies and also gauge what potential threats they might present to existing currencies and assets. The size and magnitude of these markets is potentially vast and digital transformation acceleration, convergence of technology and generational change are all key to its future growth and success,” he concludes.
1 The equity and multi-asset capability, including managers and analysts, of Mellon Investments Corporation (Mellon) is moving to Newton. There will be no change to either Mellon or Newton’s investment processes, approach or philosophies during the transition period as a result of this change. There are also no plans at this time to merge or rationalize any BNY Mellon Investment management-branded Mellon and Newton-managed funds. For more information please visit www.bnymellonim.com.
2 BBC. Bitcoin surges past $60,000 for first time. March 14, 2021.
3 CNBC. Tesla buys $1.5 billion in bitcoin, plans to accept it as payment. February 8, 2021.
4 CNBC. Bitcoin hits $1 trillion in market value as cryptocurrency surge continues. February 19, 2021.
All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Digital assets can be volatile and subject to fluctuations in value.
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.
This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Mellon is a global multi-specialist investment manager dedicated to serving our clients with a full spectrum of research-driven solutions. Mellon Investments Corporation (Mellon) is a registered investment adviser and an indirect subsidiary of The Bank of New York Mellon Corporation.
BNY Mellon Investment Management is one of the world’s largest asset managers, with $2.2 trillion in assets under management as of March 31, 2021. Through an investor-first approach, BNY Mellon Investment Management brings to clients the best of both worlds: specialist expertise from eight investment firms offering solutions across every major asset class, backed by the strength, stability, and global presence of BNY Mellon. BNY Mellon is the corporate brand of the Bank of New York Mellon Corporation and may be also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
© 2021 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York NY, 10286
Not FDIC-Insured | No Bank Guarantee | May Lose Value