It's been a wild ride for blockchain investors the past few years. After cryptocurrency prices cratered in 2018, interest in digital currency is making a comeback. Here's how you can invest in blockchain and some factors you should consider before doing so.
What is blockchain?
Blockchain is a digital public ledger that records transaction information. Each "block" of information is digitally verified and given a unique hash (or identity) and added to the public ledger. In the case of cryptocurrencies making use of blockchain, adding this new block creates a new unit (or coin) of currency.
However, blockchain can be used for more than just creating new currencies. Many organizations are using it as a way to improve their operations, specifically for complex and decentralized systems.
For example, Walmart (NYSE:WMT) has been testing the use of blockchain to track the distribution of food from its myriad suppliers, making it potentially easier to isolate outbreaks of foodborne illness. Starbucks (NASDAQ:SBUX) also piloted a blockchain project for its coffee growers in Costa Rica, Colombia, and Rwanda to improve pricing transparency.
Why invest in blockchain?
As a new technology with potential game-changing effects on the business world, blockchain is naturally garnering interest from the investment community. Here are a few factors that make it attractive:
- Blockchain could help an organization become more efficient, unlocking higher profitability over time.
- Blockchain is getting some high-profile attention from big tech firms like Amazon (NASDAQ:AMZN) and salesforce.com (NYSE:CRM).
- Because of COVID-19, the world is making a rapid shift to digital. Blockchain goes hand in hand with other adjacent technologies like cloud computing, e-commerce, and AI.
There are also risks to consider:
- There are lots of new cryptocurrencies out there with underlying blockchain projects, and many of them don't pan out.
- Cryptocurrency prices can be highly volatile, and purchasing them may lead to loss of principal.
Ways to invest in blockchain
Besides investing directly in stocks of companies that are making use of blockchain, there are other ways to get in on the action.
- Directly purchase cryptocurrencies like Bitcoin or Ethereum, or buy shares of a cryptocurrency trust like Grayscale Bitcoin Trust (OTC:GBTC).
- Buy an ETF that specifically invests in shares of companies with exposure to blockchain. Two notable examples are Amplify Transformational Data Sharing ETF (NYSEMKT:BLOK) and Reality Shares Nasdaq NextGen Economy ETF (NASDAQ:BLCN).
- Participate in crowdfunding a new cryptocurrency through an initial coin offering (ICO) -- purchasing a new cryptocurrency issued by a developer working on a new blockchain project.
Public companies involved in blockchain
Then there's the option to purchase shares of companies developing or making use of blockchain technology, like Walmart or Starbucks. Incorporating a digital ledger system can make a company leaner and more profitable, and higher profits equal higher share prices over the long term.
But there are some companies making more focused bets on blockchain. Digital payments giant PayPal Holdings (NASDAQ:PYPL) allows merchants to accept payment in Bitcoin via its Braintree subsidiary, and its PayPal and Venmo digital wallet apps are working on other ways to incorporate blockchain and cryptocurrency buying and selling features.
Similarly, Square's (NYSE:SQ) Cash App digital wallet allows for the buying and selling of Bitcoin. Older digital payments companies Visa (NYSE:V) and Mastercard (NYSE:MA) are also partnering with cryptocurrency and blockchain start-ups to keep their payment networks relevant as times change.
Commodities and financial derivatives exchange leader CME Group (NASDAQ:CME) is also of note, as it has established the first futures and options exchange for Bitcoin.
Also on the digital asset front, Facebook (NASDAQ:FB) continues to work (via its Libra project) to enable digital payments and financial services on its apps. The social media giant's aspirations have faced numerous setbacks from government regulators, but the more than 2 billion users Facebook has could make it a formidable force in blockchain if it figures out how to make it work. Salesforce has also built software into its platform to help its customers make use of blockchain in day-to-day operations or to accept payments in cryptocurrency.
As with all technology, it all starts with semiconductors. Graphics processing unit (GPU) chips designed by NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD) are a key ingredient in digital currencies. Even old stalwart Intel (NASDAQ:INTC) has a division to partner with companies developing blockchain to help foster innovation and development. IBM (NYSE:IBM) is another old tech company trying to evolve in a fast-changing world, and its blockchain segment has already partnered with numerous companies to help them put the new tech into real-world practice.
The three largest public cloud providers -- Amazon's (NASDAQ:AMZN) Amazon Web Services, Microsoft's (NASDAQ:MSFT) Azure, and Alphabet's (NASDAQ:GOOGL)(NASDAQ:GOOG) Google Cloud -- all have blockchain services available on their platforms. Amazon specifically could incorporate these capabilities into its massive e-commerce empire as well. While far from a focused bet, these cloud providers could be big beneficiaries down the road as digital ledger tech continues to develop and adoption rises.
Like other technologies, blockchain could provide progressive companies an opportunity to grow and unlock new value. Early use cases revolve around financial transactions and logistics efficiency improvements, but de-centralized digital ledgers could find their way into plenty of other areas of a company's operations.
Buying shares of companies that are taking their time to fully understand and deploy blockchain could be a great long-term investment strategy if you want to bet on blockchain's further development.