Traditionally, the stock market has been the greatest creator of long-term wealth. Over time, stocks have returned an average of 7% per year, including dividends reinvested and adjusted for inflation. We’re talking about the potential to double the money you invested roughly once a decade, which is actually pretty awesome.
But cryptocurrencies like Bitcoin and Ethereum did a little better. Since the beginning of the year, the total value of all cryptocurrencies has risen from $ 17.7 billion to $ 244 billion as of November 21. This corresponds to an increase of 1,300% in just under 11 months. It would have taken the stock market decades to deliver the kind of returns that virtual currencies produced in less than a year.
It’s all about blockchain
The charges against Bitcoin and Ethereum were cited. Bitcoin, which started the year below $ 967 per coin, is currently valued at $ 8,265 per coin, a gain of more than 750%. Bitcoin also accounts for about 56% of the total market capitalization of cryptocurrencies. Meanwhile, Ethereum is trading at $ 367.15, down from $ 7.98 at the start of the year. That’s just your usual 4,500% profit since the start of the year.
A number of factors drove virtual currencies through the roof in 2017, but most of them lead back to the excitement surrounding their blockchain platforms. Most digital currencies, including Bitcoin and Ethereum, rely on digital and decentralized networks that log transactions without the need for a financial intermediary such as a bank. These networks are almost always open source, which makes it practically impossible for logged data to be changed unnoticed. This is one of the key functions that blockchain should make more secure than existing software. Blockchain also has the potential to save companies money in the long term, as the operating costs behind blockchain are cheaper than existing verification and processing software.
In the past few months, Bitcoin has embarked on an upgrade to its blockchain that has pulled some information from the network to increase capacity, reduce transaction costs, and improve settlement times. This was a direct attempt to get companies to test their blockchain. As for Ethereum, more than 150 organizations in the Enterprise Ethereum Alliance are currently testing a version of its blockchain in small or pilot programs.
Moving, Bitcoin and Ethereum
However, the biggest threat to these leading cryptocurrencies could be that the barrier to entry into the development of blockchain technology and the adoption of a digital currency is relatively low. After all, the number of cryptocurrencies currently available for purchase has exploded after the success of Bitcoin and Ethereum in 2017. It’s always possible that Bitcoin and / or Ethereum won’t offer what companies want on a blockchain.
A little over a week ago, financial giants American Express (NYSE: AXP) and Bank Santander (NYSE: SAN) announced a cross-border partnership using the blockchain network developed by Ripple. Behind Bitcoin ($ 137.4 billion), Ethereum ($ 35.2 billion), and Bitcoin Cash ($ 20.3 billion), Ripple has the fourth largest market cap ($ 9.1 billion) of all virtual currencies.
As reported by CNBC, payments made by American Express business customers on its FX International Payments platform are routed through Ripple’s blockchain network, enabling instant cross-border cardless payments to UK Santander bank accounts. What used to take days to finish and settle will now happen instantly thanks to Ripple’s blockchain technology. “This blockchain solution opens a new channel between the US and the UK and offers significant opportunities for payments worldwide,” said Jose Luis Calderon, head of global transaction banking at Banco Santander.
Additionally, Ripple’s virtual currency partnership, XRP, could open the door to play a role in the future. Ripple has tested methods to further accelerate payments, potentially making XRP a part of future banking partnerships. According to Ripple’s Global Head of Strategic Accounts, Marcus Treacher:
The technology we have developed separates a connection from the cryptocurrency or the token. So that means that a bank or non-bank like AMEX can use Ripple to connect and exchange value directly from one fiat currency to another without the need for an intermediate blockchain currency.
This is a risk for all virtual currencies (and investors)
And this isn’t the only case where big banking firms go rogue, so to speak, and look beyond the blockchain of Bitcoin and Ethereum. In late August, the Financial Times reported that Barclays, Swiss credit, CIBC, HSBC, Mitsubishi UFJ, and Federal road have teamed up to develop their own form of cryptocurrency (known as “Utility Settlement Coin”) and blockchain.
The point is that few would deny that blockchain has a place in the future of the financial services industry and perhaps other sectors as well, but no one has any idea what the real value of blockchain technology is or how quickly it will be adopted. Yes, we are seeing a lot of small and pilot tests with the Ethereum blockchain and yes, Ripple has just entered into a brand partnership with American Express and Banco Santander. But these attempts are not synonymous with widespread adoption, and it is unlikely that we will see widespread adoption of blockchain anytime soon.
We also have no real idea which blockchain is preferred by corporate customers. Ethereum appears to have an early advantage given the inclusion of smart contracts. These are protocols that aid in the enforcement, facilitation and review of contracts and they are unique to Ethereum’s blockchain. But even then, there is no guarantee that Ethereum, Bitcoin or Ripple will be the blockchain of choice for businesses.
With blockchain interfering so much with current virtual currency pricing, any kind of disappointment given the already high expectations could quickly empty the cryptocurrency bubble.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.
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