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Q&A: Bitcoin and Emerging Opportunities for Blockchain Technology
As bitcoin grabs the headlines, blockchain technology is just getting started
Since the first bitcoin transaction in early 2009, the
cryptocurrency has moved from the fringe to the futures market.
Investors are struggling to value this speculative instrument—part
commodity, part currency, with some of the characteristics that we
find in businesses with economic moats. They are also delving into emerging opportunities built on
blockchain technology. To explore this uncharted landscape, Jim
Sinegal, a senior equity analyst with Morningstar Research Services
LLC, spoke with two of Morningstar’s specialists in the field. Evan
Morris is an analyst who leads emerging technology coverage at PitchBook. Kai Wu,
a project manager with Morningstar Data, leads various blockchain
initiatives internally and was recently featured among the “Top 40
Chicago Blockchain Thought Leaders” by FinTank. Our discussion took
place on Dec. 5, 2017, and it’s been edited for length and clarity.
Sinegal: Why do you think people are buying bitcoin?
Morris: People are buying bitcoin because they’ve
been reading a lot about it in the news. There’s a price feedback
loop, where the more it goes up, the more news it gets, the more
people get into it, and the more they fear missing out on this
revolutionary technology.
Sinegal: How does blockchain as a technology differ from bitcoin?
Morris: Blockchain is essentially a type of
decentralized protocol that was pioneered in the white paper written
by Satoshi Nakamoto in 2008. Bitcoin is the cryptocurrency that resulted.
Wu: Blockchain is a useful technology even without
bitcoin or another cryptocurrency attached to it. Because it’s a
distributed database with some features for collaboration among
multiple parties, a number of companies have now co-opted it for use
on their own private platforms
Sinegal: Beyond payments, what are some of the applications
for blockchain technology?
Wu: One is in the financial transaction space, where
folks have started to invest quite a bit in these blockchain
platforms. One example is the Depository Trust & Clearing Corp.
The DTCC is responsible for clearing most of the transactions in the
U.S. and settling them. It is planning to move its credit-default-swap
settlements onto a blockchain platform in the near future.
Sinegal: We are looking at the disruptive potential of
blockchain technology. The most profitable companies we cover are
based on monopoly control of information, being a centralized
counterparty for transactions. Any of these decentralized
applications the blockchain enables threatens those business models.
Morris: To provide some perspective about what inning
we’re in, when PitchBook initiated coverage of blockchain in the
summer of 2016, I had to convince my colleagues to call it the
vertical blockchain rather than bitcoin because there really wasn’t
much in the space beyond bitcoin. Ethereum existed at the time, so we
knew the potential for it to serve as a platform for distributed
applications, but actual development of many of these applications has
only really commenced just this year.
Wu: It might be helpful to clarify the terminology.
When people talk about blockchain, they could be talking about the
specific technology of blockchain, which refers to a distributed
database where transactions are collectively confirmed. Or they could
be using it as an umbrella term for a stack of technologies layered
together to create decentralized applications that might actually
compete against some incumbent companies. Ethereum and these tokens
are more of the latter. They’re creating decentralized applications
that can potentially supplant existing companies, particularly digital
service providers like Expedia in travel or Dropbox in cloud storage.
Meanwhile, there’s development in existing companies to replace
workflows with private blockchain technology. It’s important to make
that distinction between public and private blockchain.
Sinegal: A lot of companies are
experimenting. Visa, which I cover, has partnered with a company
called Chain to do cross-border business-to-business transactions.
IBM is doing a lot of work on blockchain. There are the exchanges,
the custody banks. But it’s in the very early stages. It’s much like
the early days of the internet. Are there lessons from that period
that we can apply here?
Wu: In the 1990s, you’d see IPOs where dot-com
companies with products without much substance to them ended up with
billion-dollar valuations. Something similar is happening now.
Sinegal: So, a lot of the current
ICOs are potentially going to end up like the
dot-coms from the 1990s?
Wu: That’s fair to say. But now that we have the
benefit of 20-plus years of history, we can also say that the internet
was a transformative technology. It may have taken longer than
expected, but it is disrupting a lot of businesses now. You see
bankruptcies like Toys R Us as a result of the emergence of online retailing.
Morris: When comparing the current blockchain
revolution with the internet revolution in the 1990s, it’s important
to remember that in order to invest in the internet, you needed to
invest at the application layer in internet companies. Blockchain is
unique in that you can invest at the actual protocol layer, like in
bitcoin or in Ethereum. That would be equivalent to investing in
TCP/IP, which would have been impossible. You could only invest in,
say, AOL or Netscape.
Sinegal: It’s almost like owning a piece of
the internet itself.
Morris: Exactly. I saw some analysis that said that
the application layer would only capture about 3% of the value of the
blockchain space, which gels well with what we’ve seen in ventures.
Coinbase recently raised venture capital at over a $1 billion
valuation, making it a unicorn. This blog post is adapted from an article that originally appeared
in the February/March 2018 issue of Morningstar magazine. Read
the full article.
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Left to right: Jim Sinegal,
Evan Morris, Kai Wu
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