Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 259

Investors can’t afford to ignore the blockchain revolution

Blockchain has the power to change the nature of corporations. It is critical that every investor understands this new technology and its implications. For the first time in history, assets can be transferred peer-to-peer without an intermediary, using an internet of value.

The potential of the second era of the internet

The second era of the digital revolution is here, and it has the potential to change everything about the way we interact around the world. The technology behind this new revolution is called ‘blockchain’ – the underlying technology behind cryptocurrencies like bitcoin and ether. Using cryptography, some clever code and collaboration, blockchain creates a decentralised network with trust built into the system.

The ‘double-spend' problem

For the past few decades the digital revolution has been defined by the ‘internet of information’, which has democratised the way we communicate around the world. It enables low-cost, massive peer-to-peer communication where everyone is an active participant. However, when I send an email on that internet of information, I am in fact sending ‘a copy’ of that email. That system works well for information, but not for things with some sort of underlying value, which depends on scarcity. Things like money, stocks, bonds, votes, carbon credits, data, intellectual property and art cannot be reproduced infinitely if we hope to maintain their value. If someone can infinitely copy the $100 they just sent somewhere, that $100 suddenly has no value. This is called the 'double-spend' problem.

Usually, when we want to exchange things of value online, we depend on an intermediary to establish trust – intermediaries like banks, governments, or social media companies. These intermediaries are able to ensure that when someone transfers $100, they don’t still have that $100 in their bank account. This has worked, but it has some major problems. It’s a centralised system, putting far too much power and personal data in the hands of a few. It can also be hacked, and increasingly it is. All of the computer systems in all of our financial institutions can be hacked. Most importantly, it distributes the wealth created by the digital revolution of the past 20 years asymmetrically, leaving far too many people behind.

The solution

Blockchain presents a solution. It's a vast, distributed ledger with thousands of computers working to verify transactions. As a decentralised system, it can’t be hacked, and it enables you to bypass the complex network of intermediaries currently needed to verify transactions. For the first time in history people can trust each other without an intermediary. Blockchain allows people to manage, use, and interact with assets peer-to-peer. This new internet of value will be owned by investors, so rather than a bubble there is a case to be made that this is the biggest investment opportunity in history.

What is blockchain and how does it work?

Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value. Each unit of value is represented by transactions recorded in a blockchain, which leverages the resources of a large peer-to-peer network to verify and approve each transaction. The main differentiating features of blockchain relative to traditional ledgers of transactions are:

  • Decentralised: it runs on computers provided by volunteers around the world with no central database to hack.
  • Public: anyone can view it at any time because it resides on the network, not within a single institution charged with auditing transactions and keeping records.
  • Encrypted: it uses heavy-duty encryption involving public and private keys (rather like the two-key system to access a safety deposit box) to maintain virtual security.

Broadly, the steps in any blockchain process are:

  1. Any transfer request is broadcast out to a global network of millions of computers each using the highest level of security.
  2. At regular intervals, the programme creates a block that contains all of the transactions in that period. In the case of bitcoin, it is every 10 minutes.
  3. All around the world there are a group of people called ‘miners’ who compete to validate the transactions in the block. The first miner to validate the block gets paid part of the crypto currency from that blockchain.
  4. Importantly, that block gets connected to the previous block to create a chain of blocks and it is sealed with a digital wax seal. The structure permanently time-stamps and stores exchanges of value. If the block can’t be validated it will not be connected and is referred to as an ‘orphan block’.
  5. Records cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. Therefore, to hack a new validated block you would need to hack the entire chain simultaneously, not just on one computer but across millions of computers with each of the computers using the highest level of cryptography.

What is the potential impact?

With blockchain, trust is built into the network, which is why in our book Blockchain Revolution, Alex Tapscott and I refer to it as the ‘trust protocol’. This trust protocol has enormous implications and opportunities for business. Here are three real-world examples:

Global payment systems

The global payment system, for instance, can finally be brought into the 21st century. Right now, it can take days or even weeks to bypass the complex, inefficient network of intermediaries set up to move money from one party to another internationally. These intermediaries also take a significant cut, which is especially harmful for remittances. When looking at the process of immigrants sending money back to their country of birth, the implications of reduced transaction costs would mean more money in the hands of local people and improved local economies in emerging markets.

Verifying land titles

Blockchain has the potential to ensure the largesse of the digital age is distributed more equitably. The famous Peruvian economist Hernando de Soto pointed to land titles as one of the key points of failure for economic development in the Global South. There is as much as $9 trillion in capital yet to be used because of tenuous land titles, meaning that the people who own those farms, businesses, or homes can’t borrow against them to improve their lives.

As an immutable public ledger with a single version of the truth, blockchain enables us to establish a secure link between an individual and their land. This increased governance, and therefore security, may also have a significant impact on the appetite for foreign investors to invest in emerging markets.

Data protection

Blockchain also has the capacity to assure that citizens are able to exercise more sovereignty over their data. A person’s digital identity – currently controlled by large digital conglomerates who amalgamate and sell that data – could be stored in a digital ‘black box,’ secured on a blockchain.

The investor perspective

These are just a few of the potential opportunities for blockchain, and there are already companies working to capture these opportunities today. The most successful companies in this second era of the digital age will be those that have the willingness and ability to harness the power of blockchain, directly or indirectly. The most successful investors will be those that can identify the impact of blockchain on their investee companies.

 

Don Tapscott, CEO of The Tapscott Group, is one of the world’s leading authorities on the impact of technology on business and society. He has authored over 15 books. This document was commissioned by Insight Investment and is not investment advice.

Insight Investment is a sponsor of Cuffelinks. For more articles and papers from Insight, please click here.

1 Comments
Chris
June 21, 2018

Fantastic summary of blockchain.....now I finally understand it.

 

Leave a Comment:

RELATED ARTICLES

A reluctant investor’s guide to understanding bitcoin

Opening the virtual frontier: Senator Hume’s address to Blockchain Week

When I’m 64: the year traditional investing looked old

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.