With the meteoric rise of cryptocurrencies, many are wondering how to invest in blockchain technology. Blockchain technology is where the real value lies in the cryptocurrency industry. The blockchain of a particular cryptocurrency is the infrastructure/network on which the token itself runs.
The token can be seen as a symbol of the value of the underlying network, much like how the price of a stock ticker is representative of the strength of a company.
What Is a Blockchain?
A blockchain is essentially an online record of transactions that is public and immutable. Once a transaction is recorded on the blockchain it is there to stay.
The applications of the blockchain are endless as it enables any kind of transaction to take place without any type of third party. This is due to the invention of something called a smart contract, first put forward by the Ethereum project.
A smart contract will execute automatically depending on the conditions that were coded. Instead of lawyers, bankers, accountants, brokers and all intermediaries, everything will be executed via cryptographic contracts and algorithms.
In a proof-of-work System (as opposed to a proof-of-stake system), blockchains are maintained by miners who verify transactions using the processing power of their individual computers. In return for this, the miners are rewarded with a fee for securing the network.
This is not the only way that the network is maintained and different cryptocurrencies will maintain their blockchain a little differently than others. The scope of blockchain technology is so large that now everybody is eager to invest in it.
In early 2017, IBM developed their own blockchain, IBM Blockchain, which will allow enterprise customers to build applications in IBM’s cloud using blockchain technology. Why would they do this? IBM’s reasoning is simple. They believe that having cloud-based blockchain offerings will set them apart from cloud computing competitors in the long term.
NASDAQ, the world’s second-largest stock exchange, has been dabbling in the blockchain business for a long time. In late 2015, NASDAQ announced that it had settled the first issuing of a private company’s shares to an investor through blockchain technology on the company’s Linq platform.
There are many ways to invest in blockchain technology. Below is a list of 3 of the most common ways to invest along with some of their advantages and disadvantages.
The most obvious way to invest in blockchain technology is through cryptocurrency. Simply choose your digital currency of choice and purchase it from an exchange, then hold it until it goes up in value.
This is quite a straightforward investment method, but there are some nuances to it. The first is that you need to familiarize yourself with getting a cryptocurrency wallet.
A cryptocurrency wallet is essentially a bank account for your cryptocurrency and only you have the password and private keys.
You need to make sure that you download the wallet from an official site only. There are a large number of fake websites which will let you download an infected wallet, and your funds will be stolen. This is known as a phishing scam and the cryptocurrency world is rife with stories of stolen cryptocurrency.
After you have chosen your wallet you will need to purchase some cryptocurrency from an exchange. You need to be very careful about which exchange you choose and what payment methods you use. You can expect to pay between 0-10% total depending on how you purchase your cryptocurrency.
Bank transfers can cost between 1-3% and credit cards generally incur fees of between 4-8%. However, credit card purchases are instant and bank transfers take between 3-5 days.
Another point to consider with regard to the exchange is the verification process, as it can take months to get verified on certain exchanges due to the influx of new users. And always remember not to keep your funds on an exchange as they are not safe. Withdraw your cryptocurrency to your local wallet where only you have the keys.
Investing in cryptocurrency is the most direct way to invest in blockchain technology as all cryptocurrency runs off blockchain technology or something similar such as IOTA’s Tangle. There is some work to be done and it will take time to get used to cryptocurrency and blockchain technology, but it is well worth the effort, especially as it is going to be the future of…everything.
Remember that if you purchase cryptocurrency it will be subject to capital gains tax. If you sell your cryptocurrency and make a profit on your investment then you have to disclose this information to the regulatory authorities. While they have been previously lax, regulatory authorities may well clamp down on this in the near future.
ICOs are another popular way to gain exposure to the Blockchain. ICOs are the initial coin offerings where investors can purchase tokens for new cryptocurrency companies. There has been something of an ICO mania the past couple of years, with speculators going wild. Unfortunately this has led to many scams and lost funds.
The most notable high-profile ICO disasters have been Tezos and the DAO (Decentralized Autonomous Organization). These cryptocurrencies generated huge amounts of funds in a short space of time but fell apart for various reasons.
Tezos did not have a clear vision or management infrastructure, and the president of the foundation, a banker, went rogue which led to infighting between the two founders and the Tezos Foundation. Currently, Tezos is fighting at least two class action lawsuits.
The DAO was an Ethereum-based decentralized investment fund project. Due to an error in the code, the funds were hacked, which led to a split in the Ethereum network and a new cryptocurrency.
It’s not all bad news though—there have also been huge success stories and ICOs are a great way to invest in blockchain technology. In order to invest, you can Google some of the up-and-coming ICOs. There are many online sites available indicating the launch dates of these ICOs along with their website.
Go to the website of the ICO and follow the instructions. Generally speaking, you will still need Ethereum or some other tokens in order to invest in an ICO.
They do not accept fiat money and you trade your Ethereum for the ICO token on the Ethereum blockchain. You can be one of the first investors in a new blockchain.
Of course, this does come with an awful lot of risk. ICOs have no product and are usually just a promise to do something in the future. You will most likely not have any recourse for lost funds unless the token in question is deemed a security by the Securities and Exchange Commission. If so, you may be able to file a claim, as people have done in the Tezos lawsuits.
You can also purchase ICO tokens when they get listed on exchanges. The best places to purchase new tokens like this would be Kucoin and Binance.
These are two Asian exchanges that popped up in 2017 and have experienced rapid growth. They are known for listing ICO coins quicker than all of their competitors.
You will not get the ICO token at the launch date, but you could still catch it at an early stage, within 0-6 months of its creation and before it becomes mainstream. An alternative to these two exchanges would be Cryptopia, which lists over 500 cryptocurrencies including new ICO tokens.
If you like the traditional method of stocks and derivatives then you can buy stocks of blockchain companies. Some of the larger publicly listed Blockchain companies include 360 Blockchain (CODE), BTCS (BTCS), BTL Group (BTL) and Coinsilium Group (COIN).
There are also a number of blockchain-related technology companies that do not specifically brand themselves as blockchain companies. Be careful not to get caught up in the hype; there are rumors of companies changing their names to include the term “Blockchain” in order to cash in on the hype.
Investing in stocks could be a better way forward for those who are unfamiliar with blockchain technology yet familiar with the stock market.
You can also go down the route of blockchain ETFs. These funds don’t invest in cryptocurrency directly but instead consist of shares of companies that do or funds that are closely associated with blockchain technology.
The Winklevoss twins have tried on a number of occasions to get the SEC to pass the green light on a cryptocurrency ETF that can hold cryptocurrency directly. However, this is unlikely to happen anytime soon and the SEC have been quite resistant. Other entities have tried to get ETFs listed with the SEC without success.
You can trade bitcoin futures through CME group or visit Deribit.com, BitMex or Bitcoinfutures.co. These can offer exotic options such as swaps, options, and futures.
Needless to say, you should know what you are doing and have at least five years of trading experience. The cryptocurrency market is volatile enough without trying to trade Himalayan Lookback options on Litecoin or Ripple.
A smart option could be to purchase shares in blockchain-related companies. The price of mining hardware manufacturing companies has skyrocketed, and hardware wallet manufacturers could be a good option with far less risk.
They operate using the traditional legal and financial infrastructure with a set of accounts and records. You will have the standard legal protection as a shareholder in these registered companies.
Cryptocurrency Investment Summary
These are the 3 primary ways to invest in Blockchain technology:
- Buying cryptocurrency directly through an exchange.
- Registering with an ICO.
- Investing through the stock market.
While the industry has changed the old investment principals stay the same. Only risk what you can afford to lose, don’t put all of your eggs in one basket and perform your due diligence on all investments.
If you do these things and put in the time and effort, then chances are you could be rich in a short timeframe. Just don’t lump everything into one ICO or cryptocurrency, as it is too volatile.