Quantum Computing: Investment Vehicle, Novel Geopolitical Risk, or Both?
While quantum computing is a nascent technology, it holds considerable economic potential - and dormant geopolitical risks.
Like AI, the hope and hype around quantum computing (QC) could push equity indices and QC-focused stocks higher in the coming years. However, advances in this new technology will also open Pandora's Box of novel geopolitical and cybersecurity risks.
The rivalry between the US and China is and will continue to be an important catalyst in the development and deployment of QC technology. Specifically, the security implications it presents will compel competing players to reinforce their R&D.
Source: McKinsey
A report from McKinsey found that: “68 percent of all start-up investments in quantum technology since 2001 have streamed into the industry over the past two years. However, the limited number of use cases that are sufficiently developed for eventual commercial implementation may be dampening new-company creation”.
Why the sudden interest in quantum computing technology? The answer is: unparalleled computing power.
What makes QC so effective is its ability to compute enormous volumes of data by leveraging the properties of quantum mechanics to amplify its computing power. Quantum computers use quantum units of information called “qubits”.
Unlike classical computing, which uses a binary system of 0s and 1, QC allows these qubits to exist as both a 1 and 0 simultaneously. “This ambiguity – the ability to both “be” and “not be” – is key to the power of quantum computing”.
A Brief History
A majority of the trailblazing innovation is being done by the private sector such as IBM, Ionq, Google, Intel, etc. However, like the internet and GPS, QC technology was originally researched and funded by the public sector.
The theoretical foundations of quantum computing were laid by physicists like Richard Feynman and David Deutsch in the early 1980s. These developments were primarily driven by scientific curiosity and interest in understanding the behavior of quantum systems.
While the theoretical work on quantum computing began in academia, some government agencies, notably the Defense Advanced Research Projects Agency (DARPA) in the United States, did become interested in the potential military and cryptographic applications of quantum computing. DARPA, for instance, funded research related to quantum computing in its early stages.
Quantum computing research also saw involvement from private companies and academic institutions. Companies like IBM and universities such as MIT played pivotal roles in advancing quantum computing research.
Over time, quantum computing evolved from a purely academic and government-funded pursuit to one with increased commercial interest. Companies like IBM, Google, Microsoft, and startups began investing in quantum computing, leading to the development of quantum hardware and software for broader uses.
Economic Applications
The ability of quantum computers to process and analyze vast amounts of data makes it the optimal tool to use in applications that are saturated with complex information. A few examples to note are:
Supply chains. QC can optimize logistical operations by leveraging the abundant supply of data to improve efficiency and reduce costs by incorporating multiple interconnected variables into its analysis and producing an optimal, data-driven solution.
Drug Discovery. Pharmacogenomic and pharmacokinetic research would be accelerated by QC. It would be able to process the complex network of genetic data and analyze how a pharmaceutical drug reacts to a person’s unique genetic code. The result would be greater insight into how a particular drug may affect someone, and what modifications may be necessary to adjust to generate the optimal effects.
Climate Modeling and Policy Optimization. Climate models are incredibly complex and require massive amounts of computing power to process all the data. QC could be used to develop more accurate and sophisticated climate models that can simulate the Earth's climate at a higher resolution and with greater precision. The enhanced models would in theory reduce policy-driven volatility across markets and the economy.
Cryptography and Cybersecurity. Quantum computers threaten to undermine existing encryption methods, driving the need for quantum-resistant encryption. Investments in cybersecurity to shield against quantum threats will lead to new investments opportunities and job growth. The Economist published a report stating that: “A quantum computer could potentially crack much of the encryption used on the internet. [As a result], In December, Joe Biden signed a law requiring the government to research acquiring information technology resistant to quantum code-cracking. China has invested heavily in quantum computing too”.
Financial Implications
Optimism about the applications of quantum computing could create market-wide euphoria not unlike what investors witnessed during the AI optimism-driven gains in H1 2023. Tech-heavy indices like the Nasdaq or tech-focused ETFs may asymmetrically rise vs indexes like the S&P 500 and industrial-leaning Dow Jones.
Investment firms may use QC to perform complex optimization tasks to enhance their portfolios by considering numerous variables and constraints simultaneously. Hedge funds and quantitative trading firms can also benefit from enhanced modeling and analysis capabilities, potentially leading to better performance.
By quickly processing and analyzing data related to market volatility and credit risk, quantum algorithms can provide more accurate risk models, potentially helping institutions avoid financial crises and minimize losses.
Quantum computing can also significantly speed up algorithmic trading strategies. High-frequency trading algorithms that leverage quantum computing may execute trades more efficiently and take advantage of market opportunities more effectively.
The increased trading activity can add liquidity to the market and contribute to higher trading volumes.
Shortcomings
Despite the exciting prospects QC has to offer, the frontier technology faces a plethora of risks and challenges it has to resolve before mass deployment becomes economically feasible and financially tenable.
Building and maintaining quantum computers is extremely challenging. They require specialized hardware and infrastructure that operate at extremely low temperatures (near absolute zero) to maintain the fragile quantum states of qubits. Achieving and maintaining these conditions is technically demanding and costly.
Quantum computers are also susceptible to errors due to decoherence (loss of quantum information) among other factors. Implementing error-correcting codes to address these faults adds complexity and reduces the effective qubit count, limiting the advantage of quantum speedup.
Currently, quantum computers have a relatively small number of qubits compared to the massive qubit counts required for solving many practical problems efficiently. Scaling up quantum hardware while maintaining low error rates remains a substantial challenge.
Quantum computers are also sensitive to external factors, including electromagnetic interference and cosmic rays. These can introduce errors and disrupt quantum computations, necessitating careful shielding and isolation.
Furthermore, developing quantum algorithms that outperform classical counterparts for real-world problems is challenging. Identifying suitable applications and designing quantum algorithms that exploit quantum advantages is incredibly complex and time-consuming.
Quantum computing infrastructure, especially for large-scale systems, is expensive to develop and maintain. This cost may limit access to quantum computing resources for smaller organizations and researchers.
The Journal of Quantum Information Science found that the average R&D cost for a small-scale quantum computer ranges from $10 to $15 million. Excluding the cost of qubits, according to Quantum Zeitgeist: “other hardware components like quantum gates, cooling systems, and error-correction modules add to the cost. For example, a dilution refrigerator required for superconducting qubits can cost upwards of $500,000”.
The extreme cooling requirements for quantum computers and the energy consumption associated with maintaining those conditions can have environmental implications, especially for large-scale quantum data centers.
While quantum computers excel at certain types of problems, such as factorization and quantum simulations, they may not provide significant advantages for many common computing tasks. This in turn limits their practical applications.
As quantum computing advances, there may also be ethical and regulatory concerns, particularly regarding its potential impact on cryptography, cybersecurity, and national security.
Geopolitical Risks
Quantum computers’ vast computing power threatens to undermine modern encryption protocols, posing a vulnerability to national security. Entire nations and companies are exposed to unprecedented hacks in sensitive information including government and military communications, financial transactions, and personal data.
While quantum computing threatens existing encryption methods, the development of quantum-resistant encryption techniques is still ongoing. Until quantum-resistant encryption becomes widespread, there is a potential security risk for sensitive data.
Even more concerning is QC may be able to break the encryption codes embedded in blockchain technology. The $1 trillion cryptocurrency market would therefore be at risk of disruptions along with blockchain-based supply chain systems.
China is the biggest investor of domestic quantum computing development at $15.3 billion, dwarfing the US, EU, and Canada at $1.8 billion, $1.2 billion, and $100 million, respectively.
However, big investments does not necessarily always mean results follow. The US continues to lead the world in quantum computing, specifically Google, Microsoft, IBM, the latter of which boasts the world’s most advanced quantum computer named “Eagle”.
The capital-intensive nature of QC means existing supply chains will be vulnerable to trade restrictions on the basis of national security. Washington’s policy of building a tall fence around a small garden means quantum computers may fall into that techno-digital lawn.
Looking ahead, the depth and width of applications QC can be applied to makes it a strategic priority - and concern - both in the realm of private sector competition and Great Power rivalries.
Policy-driven capital investments and free market competition may make this industry ripe for growth, and geopolitical risks will play both a driver and constraint on quantum computing's prospects. The question is which one and to what degree?