The backstory: Bitcoin has been setting record highs and initial coin offerings (ICOs) are on the rise. Companies are realizing that cryptocurrencies and blockchain technology — the technical underpinning of any cryptocurrency system — are impacting the economy and the traditional payment system and might be here to stay.
The banking system stands to benefit directly from implementing the distributed-ledger technology.
How this affects banks: Blockchain is simply a digital ledger that’s kept and validated by a network of computers. No one can change the ledger without “signing” an agreement with other computers on the network. Because this can be done without an intermediary, it has the potential to decentralize the industry.
Companies are already using blockchain technology to send payments and settle trades. If banks use blockchain and standardize their records, it could potentially cut costs and raise profit margins. If and when this happens, banks could start to see a rise in their earnings-per-share and revenues, potentially driving up stock prices.
How to play it: There are no pure-play blockchain exchange-traded funds out there, although you have to think some fund sponsors are considering it. Until then, you have to look for issues where blockchain can be influential.
ARK Web x.0 ETF (ARKW) is one fund that looks to track cryptocurrencies, as well as other Internet-related industries, such as cloud computing, cyber-security, big data and machine learning. Although this doesn’t give direct exposure to banks implementing blockchain, we might see this ETF pop, if more companies start to invest in blockchain technology.
The Financial Select Sector SPDR ETF (XLF) could also be another play on banks using blockchain, since it could help with cost-cutting measures and drive banking stocks higher.
Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share.