It is commonplace today to refer to clever, beneficial innovations as hacks. So a life hack is a positive habit or practice; or a high-powered health regiment might be called a bio-hack.
When it comes to financial hacks—no, not the shady fund managers or brokers—the “next big thing” seems to be cryptocurrencies and the blockchain technology that these digital coins rely upon.
A growing chorus of analysts and investors are convinced that such technology will revolutionize the future of finance. (Fortune dedicated an entire issue in July to cybersecurity and the future of Bitcoin.*) We’ll begin by looking at the resurgence of one of the biggest tech companies in the U.S. market and then jump into the rising popularity of cryptocurrencies like Bitcoin and Ethereum.
However, we’ll also explore why these emerging technologies “can never replace physical gold,” in the words of Forbes.
Call It a Comeback
The explosion of the technology sector over the last 25 years would not have been possible without the Silicon Valley innovation of the microchip. This invention underpins all of our computers and mobile devices. Microchips are used all across the tech sector. Perhaps the best-known manufacturer of these chips is Advanced Micro Devices, better known as AMD. (The company is listed on the Nasdaq as AMD.)
Although AMD has long been one of the premier chip producers in the U.S. and around the world, it has long had a reputation for disappointing investors relative to their expectations. Its share price has fluctuated over the past several years, with investors oscillating from hot to cold on the company in feverish streaks. AMD has provided negative returns to shareholders for five straight years and has seen its market share shrink from 23% to just 10% in the span of the last decade.
In spite of these persistent troubles, AMD remains one of the premier chip-makers in Silicon Valley and indeed the world. It has a reputation as an innovator, and consistently undercuts its competition on prices. The firm has long been the clear-cut #2 to Intel (INTC) in the industry. Its other main competitor going back decades, Nvidia (NVDA), has seen its share price rise an impressive 176% in just the last 12 months. Yet, thanks to a strategic move by Microsoft in the 1980s, AMD has had the advantage of producing chips compatible with the x86 motherboards patented by Intel, which are found in just about every PC in the world. It’s worth noting that Nvidia and AMD hold very different views on the future of cryptocurrencies, which are discussed in more detail below.
Fresh leadership in the form of new CEO Lisa Su, as well as new line of purportedly hyper-powered microprocessors, has helped revive AMD. This “Zeppelin” line of microchips exceeded the firm’s own stated goal of a 40% increase in performance, though their rollout has not been without its own difficulties. Su has made other prescient moves, such as redirecting the company’s focus more toward chips for large servers and supercomputers, a market segment dominated by Intel. It will still maintain its foothold in the PC microchip market, as well. These adjustments have helped boost the AMD stock price from $2 per share just over a year ago to about $13/share at the time of writing.
“Digital Coins” Catch Fire
The next step in the technology evolution appears to be cryptocurrencies. These digital coins are powered by blockchain technology, or a digital ledger that makes all sorts of transactions and bookkeeping a far more streamlined process.
While Bitcoin, the most prominent and most widely traded cryptocoin, gets most of the attention, there are many other such digital coins springing up around the landscape. In fact, there are hundreds.
Inasmuch as any digital form of money or wealth is inherently risky, cryptocurrencies are becoming an especially speculative enterprise. After we had our “first Bitcoin billionaire” (and our “first Bitcoin felon”), it’s clear that speculators are keen on cashing in on this new technology. Unfortunately, this opens up potential avenues for fraud and manipulation. Even before BTC prices surged above $4,000 USD, a number of prominent voices were making big bets on Bitcoin.
The cryptocurrency Ethereum is now perhaps Bitcoin’s biggest rival. Like BTC, ideological differences over how the blockchain will work caused the digital currency to split into two entities. Once as low as $8 per unit, Ethereum has followed a similar up-and-down path to its current price near $300. It has rapidly received a great deal of attention relative to its numerous competitors and imitators because its blockchain technology has been bankrolled by the likes of megabank JPMorgan, possibly forming the backbone of its future ledger management.
All of this growth in cryptocurrencies has inspired widespread “mining” of these digital coins, which is basically accomplished by programming a computer to perform specific kinds of calculations. However, this is also happening on a massive scale in China and places where big industries can take advantage of a cold climate to allow their machines to run at maximum capacity. In short, if this is the first you’re hearing of “Bitcoin mining,” you’ve already missed that train.
As all of this mining and speculation raises awareness of this new market, the risks of a bubble will naturally rise. This makes tangible safe havens like precious metals all the more important in one’s investment portfolio. Moreover, the growth of cryptocurrencies also invites regulation by the SEC (since “Initial Coin Offerings,” or ICOs, are now considered securities) or CFTC (in the event that these digital coins are someday categorized as “commodities”). Regulation is the biggest threat to the broader Bitcoin craze—but is far from the only threat.
Of course, this quickly-changing environment invites certain security vulnerabilities. Ideally, blockchains will make secure and transparent financial transactions (among other applications) a convenient and universal standard. However, this is once the tech has been perfected, which is still a long way from coming to fruition.
In the meantime, cybersecurity remains a huge concern. This is true not only for big businesses and banks, but also for individual citizens who must protect their assets from digital hacking. Therein lies the biggest problem with cryptocurrencies thus far: They are still susceptible to hacking.
Efforts are underway to combat this problem. Google, far and away the company with the largest presence on the web, has been preempting major security breaches by employing its own group of sophisticated hackers. The CIA and other government agencies operate on the same principle of staying one step ahead of the criminals.
Nevertheless, until innovations such as Bitcoin, Ethereum, and other blockchain technologies have had all of the bugs worked out, so to speak, the risk to one’s security and financial stability is too great to ignore amid all the exuberance. While the lemmings may simply follow one another off the cryptocoin cliff, the smart money will hedge that risk by increasing their allocation of physical gold and silver.
*Much of the information about cryptocurrencies and tech companies presented in this article was originally reported in the July 1st issue of Fortune magazine.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.