Cryptocurrency might be the most renowned application for blockchain technology, but blockchain's capabilities extend far beyond digital currencies. Many organizations use blockchain technology to improve their operations -- specifically for complex and decentralized systems. Here's how you can invest in blockchain and some factors you should consider before doing so.
Quick refresher: What is blockchain?
Before you start investing in blockchain, shore up your understanding of how it works. Blockchain is a digital public ledger that records transaction information. Each "block" of information is digitally verified, 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.
Once again, the capacities of blockchain extend far beyond the world of digital currencies. For example, Walmart (WMT 0.42%) 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.
Blockchain has potential uses in virtually every industry. The technology could be used in healthcare to securely transfer patient medical records, in real estate to record transactions, or in lending to make loan processing faster, just to name a few examples.
Why start investing in blockchain?
As a technology that's having game-changing effects, blockchain continues to garner interest from investors. Here are a few factors that make it attractive:
- Blockchain can help organizations become more efficient, unlocking higher profitability over time.
- Blockchain can reduce the risk of cyberattacks and fraud.
- Blockchain goes hand in hand with other adjacent technologies, such as cloud computing, e-commerce, and artificial intelligence (AI).
There are also risks to consider, particularly for blockchain investments involving cryptocurrency:
- A lot of new cryptocurrencies are 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 financial losses.
Ways to start investing in blockchain
Besides investing directly in stocks of companies making use of blockchain, there are other ways to get in on the action.
- Directly purchase cryptocurrencies, such as Bitcoin (BTC 1.41%) or Ethereum (ETH 3.03%), or buy shares of a cryptocurrency exchange-traded fund (ETF), like the iShares Bitcoin Trust (NYSEMKT:IBIT).
- Buy an ETF that specifically invests in shares of companies with exposure to blockchain. Two notable examples are Amplify Transformational Data Sharing ETF (BLOK 3.23%) and Reality Shares Nasdaq NextGen Economy ETF (BLCN 2.55%).
- 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.
- Invest in public companies involved in blockchain. There's also the option to purchase shares of companies developing or making use of blockchain technology, such as Walmart. Incorporating a digital ledger system can make a company leaner and more profitable, and higher profits equal higher share prices over the long term.
However, some companies have made more focused bets on blockchain. Digital payments giant PayPal Holdings (PYPL 0.94%) allows most U.S. customers to use several types of cryptocurrency for transactions. Similarly, Square's (SQ 2.48%) Cash App digital wallet allows for the buying and selling of bitcoin. Older digital payments companies Visa (V 0.62%) and Mastercard (MA 0.72%) 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 (CME -2.7%) is also notable since it established the first futures and options exchange for bitcoin.
Related blockchain topics
As with current technology, it starts with semiconductors. Graphics processing unit (GPU) chips designed by Nvidia (NVDA -1.81%) and AMD (AMD -1.96%) are a key ingredient in digital currencies. Even old stalwart Intel (INTC 0.58%) has a division that partners with companies developing blockchain to help foster innovation and development. IBM (IBM 1.4%) 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 (AMZN 2.94%) Amazon Web Services, Microsoft's (MSFT 0.21%) Azure, and Alphabet's (GOOGL 1.2%)(GOOG 1.25%) 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 with an opportunity to grow and unlock new value. Early use cases revolved around financial transactions and logistics efficiency improvements, but decentralized 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.
Blockchain Technology Q&A
The Motley Fool sought blockchain insights from two finance experts, Dr. Christine Parlour, professor and Sylvan C. Coleman Chair of Finance and Accounting at the Haas School of Business, University of California, Berkeley and Dr. Jimmie Lenz, Director of Duke University's Master of Engineering in FinTech and Master of Engineering in Cybersecurity.
Expert Advice
Dr. Christine Parlour
The Motley Fool: What innovations or trends in blockchain technology are you most excited about?
Parlour: There are quite a few exciting experiments underway. There are ongoing changes to the consensus protocols that various chains use which will make them more environmentally friendly and increase capacity. I also think that the steps toward interoperability will make the area grow by leaps and bounds. Personally, I find the ongoing experiments in various types of markets fascinating. I like understanding trading venues. The automated market makers effectively introduce a new way of providing liquidity which preliminary analysis suggests is very efficient.
The Motley Fool: In your opinion, what are the key advantages and disadvantages of investing in companies utilizing blockchain technology?
Parlour: Standard portfolio advice is to have a well-diversified portfolio. In other words, don't put all your eggs in one basket. The returns on cryptocurrencies are uncorrelated with gold, the market index, etc. Because of this, they represent a new asset class and so should be part of any portfolio. It is important to note that most crypto returns are correlated with Bitcoin, and unfortunately Bitcoin returns are very volatile -- with a considerable probability of large drops. The space is not for the faint of heart. So, if you dislike risk, put a tiny fraction of your portfolio in crypto and try not to watch it every day.
Dr. Jimmie Lenz
The Motley Fool: What advice would you give to someone interested in investing in blockchain technology?
Lenz: Learn and keep learning. The developments in the space are happening at a rapid pace, so much so that new knowledge is being generated constantly. As a professor teaching blockchain, this is the hardest part, reinventing the course every semester, but it keeps my students and me as current as possible. This doesn't mean neglecting base knowledge; having this is crucial, as well as some sense of the history to understand why developments have occurred at specific times.
