Blockchain is a peer-to-peer distributed ledger technology (DLT) system that is decentralized. It makes the records of digital transactions transparent and unchangeable. Blockchain is a relatively new and exciting technology that has gained a lot of interest from investors. Some think of the blockchain platform as being tied to Bitcoin, but the blockchain is only used to record the vast number of Bitcoin transactions and is an independent technology platform for digital transactions. Here are the important factors to consider before investing in blockchain and the common ways to invest.
Consider working with a financial advisor as you diversity your portfolio into cryptocurrencies and related technologies.
What Is Blockchain and How Does it Work?
A blockchain allows data to be stored and distributed to every member of the blockchain. One thing that blockchain does not permit is for data to be changed. Once it is written digitally on a blockchain, that information will be immutable. It can never be changed.
On Bitcoin’s blockchain, there is a record of every transaction that has ever been made. When you take part in developing a blockchain for Bitcoin, you receive a Bitcoin. But, Bitcoin is not blockchain. Many types of data can be stored on a blockchain including inventories, database information, voter registrations and more. When information is stored into blocks stacked on top of each other, that is called a blockchain. Each block of information is given an identifying number or hash. If information is stored on IBM’s blockchain, for example, everyone on the network has equal access to it through the peer-to-peer, transparent network of computers connected by nodes.
Factors to Consider Before Investing in Blockchain
Five factors are generally considered before investing in blockchain technology. Investing in blockchain technology does not necessarily mean that you are buying Bitcoin. There are other companies, cryptocurrencies and projects you can investigate. Here are the factors you should consider before investing in a blockchain investment project:
- Is the project addressing a real issue? If a company wants to get in on blockchain technology, it should have goals and objectives concerning completing a project by legitimately utilizing the technology. Pfizer, for example, worked with another company to determine the efficacy of using blockchain technology to manage the inventory of pharmaceutical products.
- Does the project have a working product? Some blockchain investment projects still do not have a product in development. If you are looking at an investment project and this is the case, beware. The development of a product could be years down the line. This increases the risk and decreases the value of your investment in the project.
- Who is working on the project? The overriding characteristic you need in the personnel working on the project is experienced in using blockchain technology. Blockchain technology is not always easy to understand. The business should also have competent people in marketing and promotion. To gather this information, you need to explore the social media profiles of the primary individuals on both Twitter and LinkedIn. See if the project has a following.
- Has the project formed partnerships? A project should form partnerships with other companies that are eager to try the blockchain technology or with individuals already established in the business. Are institutional investors looking at the project? If the project has been around for a while with no partnerships and limited interest, exercise caution.
- Does the project have earnable tokens? If the answer is no, then what motivation is there to have an investment in the project since miners are part of the lifeblood of any blockchain project? Why should a miner invest time when there is no return in the form of a nonfungible token. You also need to know the number of tokens that exist so you can determine price appreciation.
How Do I Invest in Blockchain Technology?
Blockchain technology is more than Bitcoin. The technology promises to deliver transparency, trust and security of data for the companies that use it. Blockchain builds blocks of data onto other blocks providing security for all who are authorized to use the data in the blocks. Common ways to invest in blockchain are:
- Well-established company’s stocks. Blockchain technology is new, different and risky. For that reason, if you are risk averse, try investing in the stocks of companies that are using the blockchain technology but are well-established enterprises on their own. Examples are Microsoft, Paypal, and Square among many others.
- Retail investors can own a blockchain ETF. Exchange-traded funds may hold the stocks of companies using blockchain or the stocks of companies that make use of the technology for innovation.
- Invest in companies that own cryptocurrencies. Blockchain technology is the engine that drives cryptocurrencies. Tesla is an example of a company with a large investment in cryptocurrency.
- Blockchain penny stocks. If you are a risk-taker, invest in blockchain penny stock. Investing in penny stock is very risky and their investments in blockchain or Bitcoin makes them even more risky.
- Crowdfunding. Crowdfunding has become a mainstream method of raising startup money. You can invest in tokens with the goal that the price may increase if the company or service becomes popular.
The Bottom Line
Blockchain technology is a new and exciting technology that is used to insure security, preserve value, and store data in blocks of digital currency. Investing in blockchain technology is not necessarily investing in Bitcoin or other digital currency. There are available investments through the stock of other companies, by purchasing ETFs and crowdfunding, along with others. Blockchain may have an exciting future but it may be a while in the future.
Tips on Investing
- Do you need help diversifying and balancing your investment portfolio? A financial advisor can help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
- Cryptocurrency has a low correlation to the U.S. stock market because its value depends on different factors than does the stock market. You can use a cryptocurrency or blockchain investment to diversify your portfolio.
- If you have questions about how to handle taxes on crytocurrency gains check this article on the subject.
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