Introduction
In a December 4, 2024 interview with CNBC, Federal Reserve Chairman Jerome Powell commented on cryptocurrencies. “People use bitcoin as a speculative asset,” Powell told CNBC’s Andrew Ross Sorkin during the New York Times’ DealBook Summit. “It’s just like gold, only it’s virtual, it’s digital. People are not using it as a form of payment or as a store of value. It’s highly volatile. It’s not a competitor for the dollar, it’s really a competitor for gold.”
Hemispheres Investment Management is a global value investment advisor. As such, the current lack of investment fundamentals of cryptocurrencies, along with the speculative nature of the investment do not meet our investment criteria. Cryptocurrencies however, represent only a small application of blockchain technology. This article discusses various modalities and future potential of the technology.
What is Blockchain Technology?
Imagine a digital ledger, not controlled by a single entity but distributed across a network of computers. This is essentially what blockchain technology represents. It’s a decentralized peer-to-peer distributed database that records transactions across multiple computers, ensuring transparency, security, and immutability. A new transaction adds to a block, which then links to the previous block, forming a chain of blocks—hence the name ‘blockchain’.
Key Features of Blockchain Technology:
- Decentralization: No single individual, organization, or government has the power to manipulate or control the network. Instead, a peer-to-peer consensus mechanism governs it. Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the two best-known algorithms to achieve consensus.[1]
- Security: Cryptographic techniques ensure the security and integrity of data.
- Transparency: All transactions are visible to everyone on the network.
- Immutability: Once recorded, a transaction cannot be altered.
Applications of Blockchain Technology
Blockchains can be categorized into various types based on their level of accessibility and control. Here are the primary types:
1. Public Blockchains
- Open to All: Anyone can participate in the network and view the blockchain.
- Permissionless: No central authority grants permission to join the network.
- Examples:
- Cryptocurrencies: Bitcoin, Ethereum, and other cryptocurrencies operate on public blockchains, allowing anyone to participate and verify transactions.
- Decentralized Finance (DeFi): Platforms like Uniswap and Aave use public blockchains to offer decentralized financial services without intermediaries.
- Advantages: Highly secure, transparent, and resistant to censorship.
- Disadvantages: Can be slower and less scalable due to the large number of nodes.
2. Private Blockchains
- Controlled Access: Access is restricted to authorized participants.
- Permissioned: A central authority grants permission to join the network.
- Examples:
- Supply Chain Management: Companies like Walmart and IBM use private blockchains to track the origin and movement of products, improving transparency and efficiency.
- Healthcare: Private blockchains securely store and share patient records, ensuring data privacy and interoperability.
- Financial Services: Banks and financial institutions can use private blockchains for secure and efficient transactions, such as cross-border payments.
- Advantages: Faster transaction speeds, higher scalability, and greater control over data privacy.
- Disadvantages: Less decentralized and may be subject to censorship.
3. Consortium Blockchains
- Hybrid Approach: A mix of public and private blockchains.
- Controlled Access: A group of organizations jointly controls the network.
- Examples:
- Banking and Finance: Consortiums of banks can use blockchain to streamline interbank settlements and reduce costs.
- Healthcare: A consortium of healthcare providers can use blockchain to share patient data securely and efficiently.
- Supply Chain: Multiple companies in a supply chain can collaborate on a consortium blockchain to track product movement and quality.
- Advantages: Combines the security and transparency of public blockchains with the control and efficiency of private blockchains.
- Disadvantages: Requires collaboration and trust among participating organizations.
4. Hybrid Blockchains
- Combination of Public and Private: Offers both public and private features.
- Selective Privacy: Certain parts of the blockchain can be public, while others remain private.
- Examples:
- Government Agencies: Government agencies can use hybrid blockchains to securely share sensitive data with authorized parties while maintaining transparency and accountability.
- Real Estate: Hybrid blockchains streamline property transactions, ensuring secure and transparent record-keeping.
- Advantages: Flexibility to balance transparency and privacy.
- Disadvantages: Complex to implement and manage.
The choice of blockchain type depends on the specific use case and the desired level of decentralization, security, and privacy. Public blockchains suit applications that require high levels of transparency and security, while private and consortium blockchains better support enterprise use cases where control and privacy are paramount. By understanding the different types of blockchains and their potential applications, we can appreciate the transformative power of this technology.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. It operates on a blockchain network, which records and verifies transactions. Bitcoin is the most well-known example of cryptocurrency. The most common use of cryptocurrency is on public blockchains. Public blockchains are open to anyone, and transactions are verified by a decentralized network of computers. This makes them ideal for cryptocurrencies, as they offer a transparent, secure, and decentralized way to transfer value.
Here are some of the most common use cases for cryptocurrencies on public blockchains:
- Digital Currency: People can use cryptocurrencies as a medium of exchange to purchase goods and services.
- Store of Value: Investors can hold cryptocurrencies with the hope of increasing their value over time.
- Speculation: Many people trade cryptocurrencies for short-term profit, taking advantage of price fluctuations.
- Decentralized Finance (DeFi): Cryptocurrencies enable decentralized financial services, such as lending, borrowing, and trading, without the need for traditional financial intermediaries.
While private and consortium blockchains have their own advantages, public blockchains remain the primary platform for cryptocurrency transactions and innovation.
Types of Cryptocurrencies:
- Bitcoin: The original and most widely recognized cryptocurrency.
- Ethereum: A platform for building decentralized applications (dApps).
- Ripple: A digital payment network focused on cross-border transactions.
- Litecoin: A peer-to-peer cryptocurrency similar to Bitcoin.
The Future of Blockchain and Cryptocurrency
Blockchain technology and cryptocurrencies are still in their early stages, but their potential is immense. As technology continues to evolve, we can expect to see innovative applications that will reshape industries and economies.
However, it’s important to approach this emerging field with caution. The cryptocurrency market is highly volatile, and investing in cryptocurrencies carries significant risks. Hemispheres views valuations to be extended at this time and we are not making an investment recommendation in the sector. As with any investment it is essential to do thorough research and understand the risks before investing. We recommend that you seek professional advice to determine the suitability of any investment for your individual circumstance.
Hemispheres Investment Management
Hemispheres Investment Management is a wealth manager with a global (domestic and international investments in the same portfolio) investment management focus. Our team of seasoned professionals each have over 35-years of experience researching, managing or strategizing investments and investment portfolios, including deep proficiency in U.S., international and emerging markets. Hemispheres can assist you in diversifying your portfolio globally. Global Equities is Hemispheres’ flagship investment product.
Please contact Hemispheres Investment Management for a free consultation. We provide guidance and strategies to assist you in optimizing your investment policy and helping you achieve your investment goals. Book a meeting.
[1] https://usa.visa.com/solutions/crypto/consensus-mechanisms.html#:~:text=All%20open%20public%20blockchains%20are,even%20when%20there%20are%20conflicts%2C
