"Bitcoin" and "blockchain" are the buzzwords driving this rally

December 29, 2017 | By Sean Williams, The Motley Fool - Yahoo Finance 

Image source: Getty Images (from Yahoo Finance)

Most years, the stock market is the hero. Historically, it's the best creator of long-term wealth, with an average annual return of 7% a year, inclusive of dividend reinvestment and when adjusted for inflation. But 2017 was a completely different story. It was the year that completely belonged to cryptocurrencies.

When the year began, the combined value of all virtual currencies worked out to $17.7 billion. But by Dec. 21, 2017, the aggregate market cap of all virtual coins had reached as high as $654 billion, according to CoinMarketCap.com. That's an increase in value of close to 3,600% in technically less than one year. These gains were a big reason why investors plowed into cryptocurrencies this year.

Arguably leading that charge was bitcoin. For much of the year, bitcoin comprised well over half of the aforementioned aggregate market cap of all digital currencies, and it easily remains the most traded cryptocurrency of all. It also happens to be the virtual coin more likely to be accepted by merchants.

Bitcoin also gets credit for introducing blockchain technology into the mainstream. Think of blockchain as the infrastructure that underlies most cryptocurrencies. It's the digital, distributed, and decentralized ledger that records all transactions, and does so without the need for a financial intermediary like a bank. While the advantages of blockchain technology are aplenty, the potential to reduce transaction fees, speed up transaction settlement times (especially cross-border transactions), and improve security, are what enterprises are most excited about.

To date, we've witnessed a number of brand-name companies open their arms to blockchain – at least in small-scale and pilot projects. In October, Stellar announced a partnership with IBM (NYSE: IBM) and KlickEx that'll have a dozen banks in the South Pacific region developing and deploying blockchain technology for IBM's numerous cross-border transactions in the region.

Meanwhile, in November, it was announced that American Express (NYSE: AXP) and Banco Santander (NYSE: SAN) would use Ripple's blockchain to test instantly settling non-card payments made over AmEx's FX International Payment network to U.K. Santander accounts.