Understanding and investing in the Blockchain

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In the past couple of years the term “Blockchain”, has been thrown around. As of late it’s becoming much more mainstream and something that’s of interest to both private investors and lay people alike. There’s been a lot financial professionals touting this as the next big invention, a paradigm shift similar to what the Internet did to the world.

Let’s get down to what a blockchain actually is. Simply put it is a certain kind of digital database (or ledger) that is able to store transactions. But there is a multitude of ways it differs from the traditional type of ledger.

  • From a financial standpoint what it does is stores transactions in the form of a digital block, each subsequent and preceding block references the prior one.
  • Each block that represents a transaction is only added to the entire chain if it’s been verified through cryptographic algorithms done through using a significant amount of computing power. This verification process is integral to the uniqueness of the system and crucial in eliminating any possibility of fraud.  Basically, it means that a block cannot be altered. Here’s why this is important.
  • This entire database is distributed which means that all users know when there has been additions to the blockchain. The public distribution of the ledger makes it both transparent and decentralized.

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A real world example of the blockchain technology at work is bitcoin. In the most pure form the blockchain records bitcoins that have been owned and each individual transaction of the cryptocurrency through a vast range of computers, as opposed to it being centrally located in one ledger. This technology has caught the attention of many large banks.

Wall Street Getting in on the Action

A great selling point for the blockchain is that it does away with the middleman in a transaction. It makes transactions faster and less expensive compared to the current systems being used.

Banks Like Goldman Sachs want to adopt this system to use with regular currency as opposed to just bitcoin. The blockchain can be instrumental in issuing shares and tracking banking and payments across the board. There is even more potential beyond regular currency as a lot of analysts see the blockchain being utilized in other areas aside from finance.

The blockchain has the potential to redefine a myriad of varying industries. There’s the possibility to be able to track voting systems, automobile registrations, and even securing academic records.

At its core, blockchain is a chance to bypass a lot of the bureaucratic mess in multiple industries. There comes a point when more resources are dedicated to the process itself than the actual transaction. It goes back to cutting out the middleman and allowing for more transparency and efficiency.

Blockchain Companies

Not only are these big banks adopting the technology, they’re also investing in companies using the blockchain as the crux behind their business. For example, the New York based Digital Asset Holdings released a statement in February, 2016 that Goldman and IBM recently raised $60 million in their latest round of funding for the company.

Digital Asset Holdings began in 2015; its purpose is to develop software that uses blockchain to trade established financial and digital assets. The purpose of their technology is to make the entire process quicker and cheaper.

The company has already announced that it will be developing the technology for the Australian Securities Exchange (ASX). This is a great first step for the technology to gain even more mainstream recognition. Not to mention it is going show an even greater proof of concept for anyone out there wondering about the validity of the tech.  Companies like these are going to be avenues for investors to get in on the action.

How to Invest

There are a couple ways for private investors to get involved with investing in the blockchain.

  1. For those who of course have the capital and know how, angel investing and funding in startups will be the best way to get in on the ground floor. Investing in these startups built on blockchain technology have some risks, but with greater risk the reward grows. Cryptocurrency has become an accepted form of payment in the past couple of years and entered many mainstream businesses. The amount of investors and entrepreneurs interested in this area has grown at an incredible rate. There is without a doubt a potential Google or Apple in the midst that will lead the blockchain revolution.
  2. Another simple way to get invested is to just buy bitcoin. There are multiple reasons behind this. One is the fact that it can be seen as a sort of digital hedge, similar to gold and can have a potential high return on investment. It’s a new type of asset class that a lot of people are still getting used to so there is of course going to be periods of high volatility. There are multiple ways to acquire bitcoin now. For those looking for their own type of virtual bank, there is Coinbase and Circle to just name a few. These act as both an exchange and a bank. There is also another option that allows the user to trade between other bitcoin owners. Local Bitcoins, is for individual traders and can allow for a slight variation of cost per bitcoin, there’s more of an inherent risk here, but another decently safe option.

The best website to utilize for the price per coin is the blockchain info website.

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3. Another roundabout way to get invested in blockchain technology is to just invest in the banks that are funding blockchain companies or utilizing it. Specifically there are some funds out there that shares can be bought in. An example of one of these funds is Bitcoin Investment Trust (GBTC), which holds bitcoins to track the price, similar to how the (GLD) gold trust works.

Barry Silbert started the trust, a member of Digital Currency Group, a group that invested over seventy-five bitcoin and blockchain based startups. They just recently bought up the blockchain news website CoinDesk.  Silbert said his main reason for starting the trust was so that a lot of casual investors could get into bitcoin without having to figure out where to buy it and store it. He considers it an easy play to get involved in the blockchain industry.  The trust is up some 20% since it began trading in May of 2015..

Accounting Aspect

Not only is there a great investing opportunity to be had, but there’s an opportunity to be able to utilize the blockchain through simplifying accounting and saving potential billions for various companies.

Accounting and auditing are large costs throughout the world of business. Utilizing blockchain accounting would be effective in cutting a business’s costs. All internal transactions would be entered internally. With this the ability to be audited by outside regulators would be simple as the entire process of transactions is recorded and available for viewing.

Additional Resources

Once the fundamentals about blockchain are understood, then it’s time to go down the rabbit hole and learn how to utilize the technology and the potential implications behind it. There’s no better way than to read books written by the professionals on the matter.

The first book of interest in Mastering Bitcoin by Andreas Antonopoulos. Antonopolous is a consultant to multiple bitcoin based start ups. He his a professor at the University of Nicosia, where he teaches courses on Digital Currencies. On the side he runs his own bitcoin podcast.

His audience he’s targeting is for programmers out there. It helps aide them in the process of the actual code behind the working mechanisms of a cryptocurrency. As well as how to use them and develop software along the blockchain. For non-programmers, there’s a lot of knowledge not pertaining to code that explains the technologies in more depth.

Another book of note is The Science of the Blockchain written by author Roger Wattenhofer. He’s a professor at ETH Zurich and formerly worked at Brown University and was involved with Microsoft Research.  He’s a prolific writer who has published over 250 articles on the science of cryptocurrency.

He goes through the route of explaining the systems through the scientific method, starting from the basics of building the systems. He also shows the different ways algorithms are created for the sole purpose of developing a blockchain.

For those out there more inclined to the financial and economic aspects of bitcoin, Blockchain: Blueprint for a New Economy by Melanie Swan is a great book. Swan is the founder of the Institute for Blockchain Studies. Their sole purpose is to look at the implications inherent in spreading the decentralized technology.

She decided to write the book when it became intuitive to her that blockchains were more than just a new way to utilize digital currencies but a new era akin to the advent of the computer and Internet age. Everything will be more secure as well as private, while being traceable at the same time. It sounds like a paradox but that is why blockchain is so important.

Blockchain is ushering in the new age that will allow for large-scale global projects to be undertaken that just weren’t feasible under the current models that currently exist.  It is an alluring investment that will pave the way for the future.

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Mike Colagrossi is an analyst at ActivistStocks.com covering activist investors and major deals at hedge funds. He also regularly contributes to SeekingAlpha.com and has a strong interest in alternative investments and emerging markets.