The Market Corner: the month in review

By Filippo Lecchini

Blockchain

The last few weeks were relatively quiet for markets around the world, and Bitcoin, the most famous cryptocurrency, was often in the news particularly for achieving all-time high levels, one after the other. The technology behind it however is not discussed as frequently among the non-initiated: Blockchain is a digital ledger where all the transactions are recorded in blocks and added to the network. Information can be distributed but not copied, which means that is reproduced on a number of different hosts and constantly reconciled, making any manipulation or cyber-attack extremely hard to carry out since there is no single target server. The lack of a central node and supervision also emphasizes the decentralized nature of the transactions that are entered directly in the ledger.

A technical discussion of Blockchain is beyond the purpose of the task at hand, but the crucial point to understand is that this technology can be a groundbreaking solution to a number of old problems and businesses. By not sending all the information to a central node for recording and approval, Blockchain allows direct access to all the parties involved, effectively making centralized coordination unnecessary.

A widespread adoption of Blockchain would generally eliminate the role of a lot of the intermediaries, radically transforming a number of businesses and industries. Simple examples are banking, real estate, simple purchases, trading, etc. The parties involved would be able to settle immediately their transactions, without the need for a third party. For example, readers could buy books from the authors directly without going through publishers and distribution. Some form of this already exists online, but it is not the norm, and often does not include the established and famous writers.

The enthusiastic view is that by getting rid of the middle man and the associated costs, more resources will be available with more participation and initiative to be expected. Adopting Blockchain would be the equivalent of a tax cut: not only money will be saved but will be allocated more efficiently and productively, also causing economic growth to accelerate because of the resulting innovation.

All of that however comes with obvious consequences. There are a number of businesses that can expect to be disrupted and might permanently lose their role in the economy. That also means jobs, not to mention that there are still large parts of the population, even in the US, that don’t have the same level of access and comfort with new technologies.

The financial industry and the markets globally face the same challenges as anyone else. Transactions will be simplified, and money will be moved faster and more securely with demand for new services creating new opportunities. On the other hand, competition will be fierce, and revenues that come from bureaucratic processes and monopoly will be at risk. The real estate industry for example seems in desperate need of simplifying outdated processes and offerings in a world where people can trade securities around the globe from their smart phones.

All in all it seems that Blockchain could jumpstart the next big wave of innovation. Exciting opportunities lie ahead for those who are willing to pioneer this technology beyond Bitcoin.

Looking ahead:

The FED increased rates in June as expected. While that was not really controversial, the uncertainty now is on how the markets will deal with the shrinking of the balance sheets, and how the economy will perform. Inflation doesn’t seem to be trending higher and growth numbers don’t support any concern for an overheating economy. The next increase will likely be a closer call. It should be interesting.

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