Why blockchain should matter to advisers

For advisers, blockchain has relevance due to its many potential functions in financial services and in its underpinning of digital currencies or cryptocurrencies.

As is customary for an emerging technology, there is a great deal of hype surrounding blockchain. It is important to understand its significance beyond the echo-chamber of tech speculation and appreciate the real-world applications of the technology, many of which can create real value for clients.

There are implications of Bitcoin for the financial world, especially as blockchain, the technology which lies behind Bitcoin, is becoming a force for change in itself.

Bitcoin

By far the most established and well-known use of blockchain is the digital currency Bitcoin.

Nowadays, anything 'digital' suggests an inherent vulnerability to hackers and malicious groups – however, Bitcoins are extremely difficult to compromise due to the security-by-design that the blockchain provides.

As with any new technology it can be hard for those on the outside to separate hype from reality.

Blockchain enables transactions to be verified because each transfer of Bitcoin takes place on a globally distributed shared computer network and mathematical proof is created when a sender or recipient does something with their coins.

Some 51 per cent of the computers on the global distributed network need to agree that the contract rules of any given transaction have been followed before the transaction can be enacted and recorded (referred to as ‘consensus’ in techno-speak).

It's worth noting here that bitcoin uses 256 bit numbers key encryption for each transaction. It would take a high proportion of world GDP in just electricity costs alone to brute-force break a single 128-bit encrypted key – the security of the blockchain enjoys a very high level of confidence by cryptologists.

For this reason, some commentators compare the blockchain technology behind Bitcoin to the invention of the double-entry bookkeeping system – there is no way to duplicate the coins, and stealing from someone’s Bitcoin transaction within the blockchain is virtually impossible.

The stability of the Bitcoin’s fundamental technology is not mirrored by its price: although steadily rising, the currency has proved to be wildly volatile. It has soared from $0.06 (£0.04) per coin (July 2010) to a recent peak of over $3,018 (£2,342) (June 2017), with occasional fluctuations of $200-$500 (£155-£388) over several weeks. 

At present, the roller-coaster Bitcoin exchange rate is due in part to it being a private currency with no central bank control over the money supply.

Consequently, as demand increases or decreases, there will be large volatility swings driven by short-term speculators in conjunction with long-term investors betting on it being an appreciating store of value.