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Beyond bitcoin: Value proxy plays for blockchain

TES Capital
TES Capital • 5 min read
Beyond bitcoin: Value proxy plays for blockchain
SINGAPORE (Feb 26): In the last 12 months, with its rise, fall and rebound, the cryptocurrency bitcoin has virtually hijacked blockchain technology. As at Feb 18, the total market capitalisation of cryptocurrencies in issue, according to CoinMarketCap, is
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SINGAPORE (Feb 26): In the last 12 months, with its rise, fall and rebound, the cryptocurrency bitcoin has virtually hijacked blockchain technology. As at Feb 18, the total market capitalisation of cryptocurrencies in issue, according to CoinMarketCap, is US$460 billion ($607.6 billion). Bitcoin is mined using blockchain, a type of distributed ledger technology (DLT).

International Business Machines Corp (IBM) has taken a forward stance in developing blockchain and DLT for business. The tech veteran has teamed up with Linux to form Hyperledger, an open-source collaborative effort created to advance cross-industry blockchain technologies. In April 2017, Australia and New Zealand Banking Corp and Westpac Banking Corp partnered with IBM and Scentre Group, which owns and operates Westfield malls in Australia and New Zealand, to successfully pilot a blockchain solution that could replace the current paper-based bank guarantee process. This was done on the Hyperledger platform.

Blockchain is a shared, immutable, distributed ledger — distributed across nodes, locations, countries even — that is decentralised in nature, eliminating the need for an intermediary to process, validate or authenticate transactions. It is forged by consensus, combined by “smart contracts” and other technologies. The name blockchain refers to how “blocks”, which contain transaction records, are added to the chain. To make the chaining of blocks possible, the blockchain uses a cryptographic signature, known as a hash, hence making it a distributed ledger.

All participants on the distributed ledger can view all of the records in question. DLT provides a verifiable and auditable history of all information stored on that particular dataset.

IBM Limited Edition’s ebook Blockchain for Dummies suggests that blockchain — and DLT — will one day be as ubiquitous as the internet itself. “The blockchain will do for transactions what the internet did for information.”

The table of stocks features fundamental and valuation scores from The fundamental score is a snapshot of the company’s profitability and balance sheet strength derived using a composite of ratios based on historical numbers. The score ranges from 0 to 3. A score of 0 implies that fundamentals are weak and a score of 3 is an indication of strong fundamentals. The valuation score is a snapshot of the stock’s attractiveness in terms of valuations derived using a composite of ratios based on historical numbers. The score ranges from 0 to 3. A valuation score of 0 means valuations are not attractive and a score of 3 means valuations are very attractive.

Hyperledger aims to be an open-source colla­borative platform that can bring blockchain technologies towards mainstream commercial adoption. So far, IBM has announced eight Hyperledger projects, including Hyperledger Iroha, to be incorporated into infrastructural projects requiring DLT. Another project, Hyperledger Cello, was initiated by IBM and includes Sora­mitsu, Huawei Culture Co and Intel Corp.

Three other well-known platforms for DLT-related projects that have experienced successful pilots are Ethereum, Ripple and Corda by R3. None of these companies are listed, although Ethereum and Ripple are two of the most well-known cryptocurrencies around. The Monetary Authority of Singapore and the local banks have collaborated with R3 and Ripple on successful proofs-of-concepts.

According to IBM, the financial industry is the furthest along in implementing DLT. Benefits would include streamlined settlement, improved liquidity, supply chain optimisation, increased transparency and new products or markets. The financial sector prefers using DLT, as this offers them scale.

The most obvious plays for blockchain, the smart contracts required in the blockchain and DLT, and the blockchain-as-a-service in IBM cloud is IBM itself.

Elsewhere, Toronto-listed HIVE Blockchain Technologies is an interesting company. HIVE sees itself as an infrastructure company for crypto mining. It says it owns two cash-flow-positive crypto mining facilities in a stable jurisdiction (Iceland) with access to low-cost power, and has the option to acquire more such facilities.

HIVE has described the blockchain value chain players in three buckets: hardware, software and power source. Whether financial institutions are piloting projects or crypto miners are mining currencies, none of this is possible without hardware.

DLT pilots and crypto mining companies such as HIVE require a lot more processing power than a normal PC is able to conjure up. Meanwhile, financial services companies are all piloting various uses for DLT. The ultimate short- and medium-term winners are the hardware providers.

For instance, a mining rig is a computer in an open frame. This is so because mining a cryptocurrency requires graphic processing units, which have much greater computing power than an ordinary microprocessor. GPUs are the processors that sit on a graphics card. Application-specific integrated circuits are also used to mine bitcoin specifically. These are designed by a private Chinese company called Bitmain, and Taiwan Semiconductor Manufacturing Corp manufactures them. Last month, Samsung Electronics Co announced it too would be manufacturing ASICs.

Each mining rig requires six to seven graphics cards, SSD, motherboard, at least 4GB of RAM and PCI riser cables. Because powering the GPUs requires energy, rigs need a lot of ventilation — hence the open frame.

The two main providers of GPUs are Nvidia Corp and Advanced Micro Devices. Nvidia’s share price has been on a tear over the past year, pushing its enterprise value skywards (the company is in a net cash position). As a result, its EV/Ebitda is very high, at 45 times (see chart). AMD has had a somewhat chequered five years, but it has turned around and is back to black.

On the software front, Microsoft Corp’s Azure unit is experimenting with several DLTs that address specific business and technical requirements for security, performance and operational processes. Hitachi Group, the Japanese conglomerate known for infrastructure solutions and bullet trains, had diversified into healthcare and is now a major tech player. It has been sandboxing some of its DLT-related projects and is attempting to integrate its Public Biometrics Infrastructure into the blockchain.

Based on the fundamental and valuation scores, and the scatter chart, Samsung Electronics and SK Hynix appear to offer a combination of value, strong fundamentals and growth.

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