How To Invest in Blockchain Technology – Bitcoin & Beyond
Blockchain technology is arguably the hottest trend in modern finance, with the potential to disrupt established business models across a wide range of different industries.
The first, and still by far the biggest tech project to make use of blockchain technology, is Bitcoin: a peer-to-peer digital currency and internet payment protocol. Bitcoin itself is already valued at well into the billions of dollars, and in addition to its growing base of regular users it is being investigated by various banks and other financial services companies for its ability to reduce the cost of moving money around the world and transferring balances between different service providers. So much so, in fact, that its impact on the finance industry is being compared to the digital revolution which has rocked the publishing and music industries in recent years. Yet Bitcoin is only one out of many hundreds of applications which are now being built to take advantage of the benefits that blockchain technology can offer.
From transparent and manipulation-resistant financial markets to corruption free land registry, social networks in which users retain control of their personal data to new forms of internet architecture, smart contracts capable of enforcing their own terms without remit to the traditional legal system to niche / community currencies: blockchain technology is being put to use in a diverse range of applications.
It is no surprise, therefore, that astute investors are asking themselves how to invest in blockchain technology in order to enjoy a part of the profits from this ‘next tech revolution’. Although investing in blockchain technology does involve some unique considerations and methods in comparison to more traditional investments, there are many opportunities for every type of investor – especially retail investors who will find this industry especially accessible and accommodating to their needs.
In this article I will provide an introduction to the most common routes for investing in blockchain technology.
Bitcoin is often compared to gold. This comparison does not relate to its utility, of course, but to the fact that it derives its value from scarcity.
During its early days many new Bitcoins were generated through the process of ‘mining’ which secures the peer-to-peer network and prevents fraudulent transactions. Over time the rate at which new coins are generated has slowed, and will continue to slow as it approaches a hard coded maximum – no more than 21 million coins can exist, ever.
These limits on the supply of Bitcoins mean that as demand grows from buyers, the value per coin must rise. As we get closer to the 21 million coin cap, which it is estimated will be reached within a few decades, the rate of attrition due to abandoned and lost wallets will exceed the rate at which new coins are generated – making Bitcoin a deflationary currency which appreciates in value over time even given a stable level of demand.
All of this means that if Bitcoin gains any kind of mass market success, its value will skyrocket. If just 1% of the world’s 7 billion+ inhabitants were to use it, for example, there would only be enough for each person to have an average of 0.3 coins each even if we take the full 21 million max supply without accounting for lost coins, or for the expected increase in global population by the time that cap is reached. The possibility of global financial markets also wanting to make use of Bitcoins has led some pundits to speculate that prices as high as $1 million per coin are not inconceivable within a decade or two.
The case for hoarding Bitcoin as an investment is simple: you could gain 10,000% or more but the most you can lose is 100%. You would also be in good company as a coin hoarder – technology entrepreneurs the Winkelvoss twins are estimated to be sitting on a haul of as much as 1% of all Bitcoins.
Altcoins: 21st Century Penny Stocks
Altcoins are new digital currencies created as an alternative to Bitcoin. Despite the name, only a small minority of altcoins today were designed to compete with BTC head on as a general purpose currency. Most aim to fill a specific niche which Bitcoin cannot be use for, or does not serve well. New innovations are popping up all of the time, but most altcoins fit into one or more of the following categories:
Straight Alternatives to Bitcoin: General purpose currencies and payment systems which make changes to things such as energy efficiency (for example by using Proof of Stake rather than Proof of Work), transactions confirmation times, the accessibility of mining to ordinary users, inflation rate and total number of coins, and so on.
Feature Coins: Integrating advanced technology beyond that which is included in BTC, to enable things like built-in digital asset registry and exchange features, enhanced privacy provisions, information publishing and data verification, advanced account control options, voting services, escrow, and a whole lot more besides.
Niche Community Coins: These are coins designed to appeal to niche communities or demographic groups, for example video game players.
Cause Coins: These will have an economic structure and feature set designed to further specific charitable or social causes.
Niche Use Coins: Designed to be ideal for a specific set of uses, such as ‘microtransactions’ which enable people to spend very small sums of money on access to premium content, ad-removal on free content, and topping content creators, without payment processing fees eating up most or all of the payment.
Country Coins: Marketed for use within a particular geographic area.
The economics of these altcoins often works in a way that is very similar to Bitcoin, with the value of the coin inherently reflecting the value of the network to its users. Because of this, and the fact that they are often set up as small scale start-ups with cheap coins available to buy, investing in altcoins is often described as being similar to trading in penny stocks.
Crowdfunding: ICOs and App Tokens
Crowdfunding is a popular method of raising seed capital amongst start-ups in this industry.
Some Proof of Stake altcoins have used this method by ‘pre-mining’ the total coin supply and selling them in an ‘ICO’, which stands for ‘initial coin offering’, before launching the network publicly. Major coin networks such as Ethereum, NXT and Bitshares started off this way.
Crowdsales or ‘pre-sales’ of tokens have also been a popular way for apps and services that use blockchain technology to raise start-up funding. These apps may include a token which is intended only for use within that particular app or for a specific set of services, but with an economical model which is very similar to the digital currency economics described about. A limited number of tokens are issued to create scarcity, and customers are required to buy these tokens in order to access the software’s features. Pre-sales allow potential customers to buy tokens before the service is launched for preferential pricing, but also allow investors buy tokens in anticipation of a price rise if the service proves successful.
Often the tokens sold in these crowdsales are issued over the Bitcoin blockchain or using altcoins with built in asset registries.
Specialist crowdfunding companies like Swarm are a good place to find information about these sales, as are community forums and other websites for protocols such as NXT, Counterparty and Bitshares.
Start Ups & Angel Funding
If you are an angel investor then you will find plenty of good opportunities to invest in exciting digital currency businesses. AngelList is popular network site for tech start-ups and investors, making it a good place to start.
Bank Stocks & Major Integrations
Major financial services companies are increasingly experimenting with blockchain technology to improve the services they are able to offer clients at the same time as reducing costs. Many of them are quite public about what they are working on, such as NASDAQ, UBS Bank and LHV Bank. If you believe in the revolutionary potential of this technology but want to stay within the familiar comfort of the traditional stock markets then one option is to follow the latest news and invest in stocks from the companies who are best placed to integrate it into their established business model.