Quantum computing is shaping up to be the next big technology theme. While the opportunities could be extraordinary, investors and advisors will find unique challenges associated with quantum, including trying to wrap their brains around it.

Let’s face it—for the last several decades, the word “growth” has been largely synonymous with technology. That puts advisors on a balance beam between the alpha that technology has created in portfolios and the higher levels of risk and concentration it leaves in its wake.

Artificial intelligence (AI), the current tech obsession, has dominated the investment landscape for the last several years. For perspective, a recent report by Michael Cembalest at J.P. Morgan Asset Management stated that “AI related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth since Chat GPT launched in November 2022.”

At the same time, investors have also embraced crypto and blockchain-related investments in a big way as well, with much of those assets migrating out of separate crypto wallets into securities portfolios through the numerous stocks and ETFs that now hold crypto assets.

While bitcoin and crypto investments took a very different path into investor portfolios than AI, they also created obstacles for advisors (and regulators), who struggled not just to understand the nature of crypto investments but to embrace crypto as essentially a new asset class.

Even now, with crypto arguably a mainstream holding among individuals and a rapidly emerging one for institutions and corporations, there are still those who struggle to accept the notion that bitcoin is any more investment-worthy than NFTs (non-fungible tokens)—many of which can be of the most obscure nature.

Nonetheless, both AI and crypto represent major investment themes of our time. Given that both have not yet fully proven their value and are still in the early stages of development, they present advisors with a variety of challenges—from understanding the technology to selecting the right players and guarding against overwhelming client portfolios with tech risks.

The question is whether advisors are ready to tackle yet another transformative technology, because one has already entered the scene, and it is nothing like these other two. This one requires embracing notions about our world that are often harder to accept than science fiction.

Welcome to quantum computing.

Introducing quantum mechanics

Quantum physics (also called quantum mechanics, because it is so different from traditional physics) is a branch of science with roots in the early 1900s, when academic notables such as Max Planck, Niels Bohr, Albert Einstein, Werner Heisenberg, and others knocked heads trying to make sense of the quirky traits of subatomic particles.

Among the more vexing questions of the day was whether electromagnetic energy (i.e., light) was composed of waves or particles. Planck postulated that light energy occurred in “packets” rather than in a continuous form. It seemed plausible, and it fit with the data they were seeing from experiments. It also stood in direct opposition to Newtonian physics, which had been the accepted wisdom and well-practiced science for 300 years.

Planck labeled his packets “quanta,” which led to a series of observations by the world’s leading scientists that ultimately resulted in the realization that Newton’s laws simply did not hold for the physical realities exhibited in the subatomic world. That lit up the world of physics, leading to a global enclave in Copenhagen, where, in 1927, the experts of the day hashed out an early consensus on how the world should view this emerging field, henceforth known as quantum mechanics.

Significant debates, analyses, and experiments ensued. For decades, the scientific elite wrestled with the unique realities of subatomic waves and particles. Even today, nearly a century later, aspects of it remain unknown, and numerous questions persist. More recently, attention has turned to the unique characteristics of atoms that could, at least in theory, provide a significant boost to data processing, offering a major enhancement to computer technology.

Such an advancement would not be trivial—nor is the task of making it a reality. The practical constraints of designing a computer that processes data using atomic particles are daunting. For one thing, atoms are so full of extraneous energy that to utilize them for processing information, one has to slow down their energy to the lowest level possible in order to minimize errors. The only way scientists know how to do that is by working with them at temperatures near absolute zero.

For another, even finding an atom is a task that defies intuition. When an atom is detected, quantum mechanics tells us that we are not actually “seeing” it in a particular place. Instead, we are just learning what the probability is that the atom is there versus somewhere else. You can begin to see why quantum mechanics has largely simmered in academia these past 100 years.

Nonetheless, the prize for success could be a landmark leap forward in computer processing power, leading a number of organizations to conclude that the effort is actually worth pursuing. Quantum computing now has all the makings of an important emerging technology—commitments from today’s major tech giants, sky-high valuations for recent IPOs, and millions of dollars flowing into private equity ventures.

So, the race to quantum “supremacy” (the point at which a quantum computer can outperform a digital one) is on, but it is unlike the competition for AI supremacy in numerous ways. With AI, the technology can be readily experienced by anyone with a computer. Even under the most optimistic scenarios, the average person is not likely to experience quantum computing directly since the applications will generally be designed for highly complex computational tasks.

Furthermore, the various players competing to build the first working quantum computer are all approaching it differently, since the optimal way to build one has yet to be determined. That could set the stage for one or two winners and a bunch of others without a workable solution, bringing a lot more risk to quantum development than to AI development.

Despite these issues, quantum efforts are beginning to bear fruit, inspiring confidence that creating a fully functional, continuous-use, error-free quantum computer might actually be doable, and that even getting close could yield something with impressive capabilities.

Several of the organizations working on the challenge have already issued statements suggesting that a working quantum computer may be just a few years away. That was all investors needed to hear.

What exactly is a quantum computer?

Today’s computers are digital, processing “bits” of information based on the binary states of tiny electric circuits that are either on or off.

Atomic particles, however, exhibit characteristics unlike anything we’ve seen in the macro world. They can be “entangled,” meaning they can remain connected to each other in some way even when separated, and they exhibit “superposition,” which means they can essentially exist in more than one place or state at the same time. Once experimenters were able to stretch their minds enough to accept these realities, they began to realize that they could be immensely advantageous in computing.

Using multiple, rather than binary states, quantum computers could potentially harness the power of quantum bits, or “qubits,” of data, enabling them to exponentially expand the processing power of a conventional computer. That says a lot, given that we have entered an age in which we expect computers to draw instantly from enormous archives of accumulated information to hold meaningful conversations, create fully written documents, or originate new forms of art or music.

The potential impact of a quantum computer is not just a modest advance in the speed or capacity of today’s digital computers. It would not be much of an exaggeration to say that it could be as far ahead of current computing technology as the latest systems are to the initial Apple machine that came out of Steve Jobs’ garage.

It’s not that quantum computers would be faster than digital ones at processing the same kinds of information. It’s that they would be able to handle far more complex tasks. A quantum computer would really shine in situations involving massive combinatorial calculations, optimization tasks, or the simulation of molecular interactions.

Source: Proactive Advisor Magazine

Business cases abound

Advances in the application of quantum technology are being touted by numerous companies that are either trying to build a quantum computer themselves or are in industries that would be prime beneficiaries of such a machine.

A recent Wall Street Journal article noted, “With commercial grade quantum computers inching closer to reality, industries are already investigating their impact on everything, from food to medicine to streaming football games. Quantum computers are expected to power certain computations that would take today’s conventional computers years to solve, if they could at all.”

One example given was Moderna:

Other examples include insurance companies, which could run billions of simulations on the impact of weather on individual properties; fertilizer companies, which could reverse engineer the enzymes that nature uses to create nitrogen in soil; asset managers, who could more efficiently price tens of thousands of securities in real time; and airlines, which continually need to optimize worldwide flight plans in changing conditions. All of these currently employ digital computers that simply aren’t optimal for the task in question.

Another business segment that would be uniquely impacted by quantum computing is cybersecurity. The industry is built on encryption technology designed by digital computers. A quantum computer, however, could be powerful enough to break through today’s cryptographic security measures across financial, government, and corporate infrastructures. To combat such a risk, global cybersecurity will need to employ quantum-level protection—something only quantum computers themselves would be capable of doing.

The players in quantum

At present, at least six major tech companies have made significant investments in quantum development: Amazon, IBM, Google, Microsoft, AMD, and Nvidia—most of which are also major players in AI.

In addition, there are four notable startups in the field that are now public (as well as other aspiring companies): Rigetti Computing (RGTI), IonQ (IONQ), D-Wave Quantum (QBTS), and Quantum Computing (QUBT). There is also an ETF for Quantum stocks as well: the Defiance Quantum ETF (QTUM).

Several more quantum companies are still private: PsiQuantum (which says it expects to be online with a quantum computer by the end of 2027 and another in 2028), Quantinuum (backed in part by Honeywell), IQM Quantum Computers, and Infleqtion.

MarketWatch has noted that the industry’s development costs have so far greatly exceeded any revenues, highlighting the speculative nature of investments in “pure-play” quantum computing companies—another challenge for financial advisors entrusted with managing client assets.

However, the segment garnered increased attention recently, with The Wall Street Journal reporting on Oct. 23 that the federal government was looking at several quantum computing companies for a possible strategic investment. MarketWatch quoted Bank of America analysts who said of the international implications, “Whoever wins the ‘quantum race’ will gain an unprecedented geopolitical, technological and economic advantage.”

Academia is in the quantum game as well. The Harvard Gazette recently reported that in a paper published in the journal Nature, a team of Harvard physicists “demonstrated a system of more than 3,000 quantum bits (or qubits) that could run for more than two hours, surmounting a series of technical challenges and representing a significant step toward building the super computers, which could revolutionize science, medicine, finance, and other fields.”

A trio of professors in the U.S. also just “won the Nobel Prize in physics for work that enabled the creation of macroscopic quantum systems, a foundation of quantum computers and other technology.”

So, while the glow of AI has hardly begun to dim and crypto has made it onto the radar screens of portfolio managers everywhere, the next bright technology star is already coming into view.

Like AI and crypto, quantum computing has the ability to transform entire industries. That means it will also harbor outsized risks and opportunities. With client portfolios already bursting at the seams with technology-based assets, financial advisors will be challenged once again to figure out the best path forward for investors.

The opinions expressed in this article are those of the author and the sources cited and do not necessarily represent the views of Proactive Advisor Magazine. This material is presented for educational purposes only.