There’s a lot of hype about Bitcoin and Blockchain Technology in recent months. Whereas most of mainstream business threat this technology as virtual currency for geeks or tulip mania – like speculative bubble, there’s more in it than that.
What Bitcoin technology is, actually?
- The first and only chance in history for tech specialists (especially in Silicon Valley) to disrupt finance industry from the outside. Up to this time, innovation in finance was driven by traders and investment bankers from Wall Street as well as by banks.
- The first technology which can change multiple sectors in a way Internet did in 90’.
- The next chapter of the business models evolution with ultimate goal to eliminate intermediaries so more value can be left within the value chain.
Finance industry lives in status quo for years
Finance industry evolution from 80’ up to today was in many ways predictable and driven by a need to achieve information asymmetry between financial market participants, so traders, investors and investment bankers could earn extraordinary profits for at least some time.
As a result, new financial instruments were created, structured and sold to investors (from plain vanilla derivatives, by securitization of multiple asset classes, CDSs, exotic derivatives to MBOs, etc.), market infrastructure was more and more decentralized and non-transparent with rising role of speed (HFT, dark pools) and new asset classes were introduced to global portfolios (alternatives). Along the way industry lives in status quo driven by endogenous evolution.
Taking a look at financial services companies, the situation is no different. The companies like Visa or Mastercard protect their business models and slowly adapt new technologies as mobile payments solutions.
Revolution is at the gates
But now, the exogenous revolution is waiting at the gates to be finally unleashed. This revolution is Bitcoin – technology which allows creation of decentralized consensus networks. Bitcoin as virtual currency is nothing different than application of decentralized consensus about value in the network. Bitcoin-related technologies will disrupt trust-based markets within the next few years and for decades to follow.
How will Bitcon and Blockchain technologies disrupt finance industry?
1) Introduction of new theories in finance and economy. Let’s assume that every currency (BTC, USD, EUR, etc.) is not a financial asset but a network. The network which achieve consensus between its’ members about value of things. It can be created in centralized way (central banks and state control for FIAT currencies, currencies managed by a company – e.g. “likes” managed by Facebook) and in decentralized way. The intrinsic value of a currency is in fact a strength of the network (members accepting value consensus) and interaction frequency within network (liquidity). Everything else is secondary (fundamentals, speculative effects, hoarding effects). Keeping a chosen currency or assets denominated in that currency is just a speculation about growth of the chosen network versus other networks.
2) New international financial system. Global financial system is rotten since the Bretton Woods disintegration. Nations use their currencies (e.g. by weakening them) as a weapon to build competitive advantage versus other economies. The money is printed, the balance sheets of central banks are growing and no one in a world understands what’s going on in macroeconomy and where the inflation is (does the “inflation monster” exist?). There’s a disaster coming and after global financial crisis a new “gold parity” based on Bitcoin or another cryptocurrency might be introduced.
3) Decentralized payment networks. Global payments processors who act as trusted third parties are in fact extremely inefficient and may be eliminated by blockchain network itself which automates payment processing and reward distributed processors in cost-efficient, self-regulated way.
4) Decentralized stock exchanges and new type of equity stocks. In the future there will be no need to use centralized exchanges in order to guarantee credibility and liquidity of financial instruments exchange process. Blockchain network will be verifying ownership itself, so the stocks will be allowed to be exchanged in reliable way within the network. Even common equity may be issued as a blockchain.
5) Decentralized derivatives markets. In the future we will not need a trusted counterparty or clearing agency to manage derivatives transaction. Blockchain algorithm can guarantee settlement between members of the network without need to use inefficient third—party.
6) Insurance industry. In the future insurance risk can be managed by blockchain algorithm and traded on the financial markets, so as every risk will be quoted and valued by a financial market participants and in the event of realization of risk, the payment will be guaranteed by the blockchain.
As time goes on, the benefits of Blockchain – decentralization, ultra-low fees, no personal information associated with transactions, and the potential of the technology to have uses beyond mere financial industry – will speed adoption and threaten many existing players.
Who will become a first victim?
Piotr Smoleń, CFA, CAIA is Co-founder and CEO of Turbine Analytics – big data technology company focused on capital and financial market analytics. He is also a Partner in Poland-based high-tech venture capital company Data Invest.
Follow him on Twitter: @psmol