Barclays Capital Payments and Fintech Equity Research Team
"We do expect the concept of blockchain, however, to eventually be disruptive..."
The crypto-currency bitcoin has been through the traditional technology hype cycle over the past few years.
First the Peak of Inflated Expectations was reached in late 2013 with bitcoin prices reaching record highs, then the failure of the biggest bitcoin exchange began to push bitcoin toward the Trough of Disillusionment.
We think there will be the gradual shift away from bitcoin, the currency, towards its underlying infrastructure, the blockchain, that will put the concept of cryptocurrencies on the path to broader acceptance.
By separating the two, the blockchain can be used as a low-cost, transparent, reliable and direct infrastructure for many forms of interaction, including payments and also securities exchanges, voting, and inventory management to name but a few.
The bitcoin phenomenon has generated significant interest in the tech and financial services communities… and as we look deeper into the world of digital payments, we increasingly have and are asked about bitcoin by institutional investors.
Bitcoin's success as a currency is questionable
Bitcoin made a breakthrough in 2009 by proving faster and cheaper payments were possible with crypto-currencies. Bitcoin provides a more elegant solution than our current payment system in many ways, but it also falls short in a number of areas. The irrevocability of transactions makes it less consumer friendly and the anonymity and lack of "know your customer" has drawn criticism from regulators. The failure of the bitcoin exchange Mt. Gox and subsequent loss of funds for many consumers provided high profile examples of these shortcomings.
But blockchain is leading to better alt-coins and other services
The technology concept underlying bitcoin, the blockchain, is being employed to build better cryptocurrencies without the pitfalls of first-gen bitcoin. Multiple so called "alt-coins" are under development, taking bitcoin's initial concept and adding natively key features like KYC, reversibility/refunds, real-time transfers and improved security. Building on the idea behind blockchain, crypto-ledgers are also being deployed in areas away from basic payments, such as asset exchanges, smart contracts, inventory tracking and voting.
Still early, but stay tuned for disruption
The timing and the extent of the effect of crypto-currencies and -ledgers on the payment system and broader economy remains unclear. We do expect the concept of blockchain, however, to eventually be disruptive and for long-term investors, we think it worthwhile to monitor developments in these areas related to financial services, particularly for payments, banks, exchanges and insurance.
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