How to Invest in Blockchain Technology and Gain the Highest Returns
25 August, 2020
Blockchain technology development by world's leading tech companies and its adoption promising economic growth potential for businesses has opened up lucrative investment opportunities. Nevertheless, market players need to have the knowledge and awareness of the prospects of this new technology, the investment options, and key market players before making any decisions.
Historically, blockchain technology was best known as the transaction ledger of Bitcoin. Nowadays, blockchains transcend cryptocurrency applications and emerge as a promising transformative technology in many industries, such as financial services, logistics, energy, healthcare, retail, and many more.
The main drivers of growth behind blockchain technology are the need to simplify business processes and the need for reliable supply chain management. These drivers will push the estimated growth of the blockchain market from $3 billion in 2020 to a projected $39.7 billion in 2025.
Counting on the earlier market performance, and the future predictions painting an encouraging financial picture, an increasing number of businesses are looking for ways to integrate blockchain technology and gain revenues. Read on to learn about some of the most profitable ways to invest in blockchain.
What is blockchain?
Blockchain is a type of distributed ledger of transactions with a synchronized database shared across nodes, i.e. computer systems, of a network, with no central authority.
Addition of valid transactions to the blockchain is guided by the advanced cryptographic algorithms that secure the network. These algorithms make the blockchain immutable, meaning that once the information appears on the network, it cannot be tampered wıth. Any node in a blockchain can independently verify the network transactions.
Decentralized, immutable, and inherently secure nature of blockchains makes them an attractive medium for peer-to-peer exchange of information and funds. Secure consensus used to validate actions on the network builds trust between its members.
Blockchains can be public or private. A public blockchain is accessible to everyone and Bitcoin is the most successful example. Private blockchains, on the other hand, have limited user rights and require authentication for access.
Reasons to invest in blockchain stocks
Both companies and individuals have solid reasons to invest in blockchain. Companies that invest in blockchain usually do so to adopt this technology into their business operations for the advantages it offers such as:
- Decentralization. Verification of any business operation can happen without depending on third-party validation.
- Transparency. Business transactions become fully visible and traceable. Therefore, customer-facing companies increase their credibility and loyalty to their brand.
- Security. Blockchains make business transactions immutable using advanced cryptography algorithms to secure the data.
- Trust. Since there are no intermediaries involved, and business transactions are immutable, with ensured privacy for users and organizations, blockchain-powered systems earn more trust than other digital solutions.
Deloitte’s research shows that companies introducing blockchains into their operations are able to create new revenue streams and significantly improve their decision-making processes. At the individual level, reasons to invest in blockchain have different scope.
Let’s take a look at some solid reasons to consider investing in blockchain technology.
Immense growth potential
As mentioned earlier, the blockchain market growth is projected to reach nearly US$40 Billion by 2025, at a compound cumulative growth rate of 67.3%. This market growth is associated with an increased number of business venture funding and investments in blockchain technology. With its core area in financial services, blockchain technology is expanding to new application areas by day.
In the next five-year period, blockchain is expected to play a significant role in the retail industry and supply chains. Both these sectors have traditionally been profitable ventures for investment. On the other hand, the significance of blockchain in the financial industry will continue increasing. As a result of these developments, a fertile investment climate will emerge, including cryptocurrencies, Initial Coin Offerings (ICOs), and fast transaction services.
Even though blockchains were initially enabling cryptocurrency transactions, they have found their place in fiat currency transfers as well. Banks and financial service companies have utilized blockchain technology for securing online customer transactions, creating compatibility between fiat and cryptocurrency.
Blockchain compatibility with emerging technologies
Modern technologies such as Artificial Intelligence, the Internet of Things, and immersive technologies (AR/VR/MR) will play a transformative role in human lives in the coming decade. When combined with the blockchain, these technologies will have a better value proposition. The compatibility of these emerging technologies will expand their areas of adoption. From an investment point of view, this synergy will provide low risk and high gain opportunities.
Adoption of blockchain technology top brands and governments
An increasing number of companies and governments are adopting blockchain technology to increase the efficiency of their management. Some of the leading companies that have integrated the technology in their operations are IBM, Amazon, Bank of America, Mastercard, Microsoft, and Google.
These companies understand that blockchain investments will give them a competitive edge. On the other hand, many governments around the world (US, Germany, Canada, Estonia, etc.) are implementing blockchains for a variety of operations. Individuals must be quick to spot this investment opportunity backed by large companies and governments.
Blockchain investments with high returns
Cryptocurrency most often comes to mind when thinking about blockchain investment. However, it has utility in other areas too such as stocks, ETFs, startups, etc. They promise a much higher return on investment (ROI) with less associated risks and speculations.
Stocks of blockchain companies
Blockchain company is a relatively broad term that refers to both the company that specializes in blockchain products and services as well as the ones that only implement the technology in its operations. Stocks of blockchain companies are similar to general stocks and are broadly accepted as one of the safest forms of investment.
Most of the companies that specialize exclusively in developing blockchain products and services are relatively new to the market, and investing in these companies is considered high risk and high gain. The less risky option is companies that use blockchain technology as a part of their business operations, such as FedEx, IBM, or Microsoft.
Exchange traded funds (ETFs)
The ETFs are investment funds traded on the stock exchanges, similar to stocks. In simple terms, ETFs can be viewed as a stock basket that meets a specific goal. Similarly, blockchain ETFs own public business shares in companies that either have blockchain products and services or have business operations backed by blockchain technology.
ETFs are a brand new and emerging investment area. There is a professional management team behind the ETFs that actively trades and manages the stocks. This somewhat saves you from the cumbersome decision-making process. ETFs are low cost, easy to purchase, and offer risk-mitigating diversification.
The value of ETFs is likely to rise with the widespread adoption of blockchain technology. Before investing in blockchain ETFs, it is essential to research the available options and compare their market parameters.
Digital assets and cryptocurrency
Cryptocurrency is the most common method of investing in blockchain and it’s fairly simple. It is enough to set up an account on a cryptocurrency exchange like Coinbase or Gemini and start trading. Investments in cryptocurrency are at high risk due to speculation based volatility.
Digital asset investment is a broader area. Anything from gold to art to real estate can become a digital asset through the tokenization process. Tokenization allows the conversion of anything that has value into a digital token that exists on the blockchain.
For example, imagine that you are an art investor but do not have enough funds to buy an artwork that costs $1 million. An art dealer tokenizes this artwork into one hundred token and values each token at $10,000. By buying two of those tokens, you can now own 2% of the artwork. All the while blockchain guarantees proof of ownership, and that your investment is safe.
As many of the blockchain companies have not reached the public offering level, a more feasible way to benefit from them is through angel investing. Angel investors are typically the first people to provide funding to a startup and get equity in the company in return.
Innovative startups employing blockchain technology emerge in the market regularly. Often these startups fail to deliver the promised value and cease to exist in the first three years. However, the ones that succeed usually become very valuable, and make up an excellent chance for good returns on investment.
There is a way to earn cryptocurrency, such as Bitcoin, by doing useful work of mining and contributing to the blockchain. The primary reason for investing in crypto mining is getting tokens as a reward for verifying blocks and adding them to the blockchain. In other words, crypto tokens are an incentive to motivate people to support, legitimize, and monitor a blockchain network.
Miners who discover the solution to the hashing puzzle first get reward tokens. Mining is a probability game. The chance to be the first to solve a hashing puzzle is relative to the total mining power on the network. Investing in more computing power improves the chances of being rewarded.
Due to the relatively high cost associated with mining (computing devices, electricity costs), investors can participate in the so-called mining pools where a group of miners join their computing power and share the rewards. The return on investment of crypto mining depends on the real costs of mining and the amount of mining power involved.
A pick-and-shovel investment is a term that was coined during the California Gold Rush time. During this time, manufacturers of picks and shovels earned more money than the gold miners themselves. It is a strategy that promotes investing in technology that is needed to produce goods and services rather than the final output itself. It is often considered a less risky strategy as you don’t have to endure the risks of the market.
In terms of blockchain, this would mean, investing in infrastructure, software, or any other mechanism necessary for blockchains to work. For this type of investment, you can choose to purchase stock options of public companies or invest in startups. Some of the most popular software pick-and-shovel companies on the market are IBM and Amazon, and the successful hardware pick-and-shovel companies are Bitmain and NVIDIA.
Public companies that utilize blockchain technology
Some of the companies mentioned here were once private companies that decided to go public in order to raise their capital. Stocks of these companies are traded in the open market, so whenever they launch an innovative blockchain project, it’s a great opportunity for investors to purchase their shares and get returns.
Ever since its founding, IBM has continually evolved as a company. Among many other services, they now also offer blockchain-as-a-service, a public cloud service that other companies can use to build secure networks. Their blockchain-as-a-service is built on top of the Linux Foundation Hyperledger Fabric. IBM contributed to the development of Hyperledger alongside a host of other companies.
IBM’s blockchain network serves many governments and business giants such as Walmart and Visa. These along with many other companies see IBM as a reliable long-term blockchain partner. Their blockchain services find applications in supply chains, food industry, global trade, finance, healthcare, and many more.
As part of its leading AWS cloud infrastructure service, Amazon offers purpose-built tools for blockchain, which allows customers to create and manage their networks. The company also has the potential to incorporate the technology into its massive e-commerce business. Currently, Blockchain makes up for a small percentage of Amazon’s revenue, though, as the technology evolves, this number is expected to grow.
NVIDIA is the leading manufacturer of graphic processing units (GPU). GPUs are essential computation components for artificial intelligence, autonomous vehicles, and gaming. They are also key hardware components for cryptocurrency mining. The role of NVIDIA in the future of blockchain is still not clear, but the company remains best positioned to provide the most effective solutions for GPU based crypto mining.
Bitmain is a multinational semiconductor company that designs state-of-the-art integrated circuits. Bitmain offers products including chips, servers, and cloud solutions for blockchain applications. Currently, the company holds the positions of the world’s largest designer of application-specific integrated circuit (ASIC) chips for bitcoin mining.
Bitmain is one of the most influential companies in the cryptocurrency industry because of its high-grade hardware. Their Antminer is the most popular device for Bitcoin mining in the market. Bitmain also owns the AntPool and BTC.com mining pools.
Square was co-founded by Twitter’s creator Jack Dorsey. The company offers software and hardware solutions for financial and mobile payment services. Their Cash App is a peer-to-peer payment platform that allows users to buy and sell bitcoin. Square also has a team of bitcoin developers, known as Square Crypto.
CME Group is the world’s leading and most diverse derivatives marketplace offering securities for stocks, indexes, foreign exchange, and more. It is the only platform that offers bitcoin futures contracts. Bitcoin futures allow investors to gain exposure to Bitcoin without holding the cryptocurrency and enables them to speculate on the future price of Bitcoin. CME Group charges a fee for every transaction made on its exchanges.
DocuSign is a pioneer of e-signature technology that helps companies in their digital transformation via electronic agreements management. The company actively uses blockchain technology in its business, enabling customers to register their contracts on the Ethereum blockchain.
HIVE Blockchain Technologies
HIVE Blockchain Technologies is the first publicly listed blockchain infrastructure company that bridges blockchain and cryptocurrencies to traditional capital markets. HIVE owns GPU-based digital currency mining facilities in Canada, Sweden, and Iceland. These facilities continuously mine digital currencies like Bitcoin and Ethereum. The deployments provide shareholders with exposure to the operating margins of digital currency mining as well as a growing portfolio of crypto-coins.
Overstock is an internet retail company that was among the first to accept Bitcoin as a form of payment. In 2018, the company introduced tZERO, a security token trading platform, allowing investors to trade tokens. Overstock also founded Medici Ventures, a company that invests in blockchain ventures spanning from finance to agriculture. Medici Ventures now owns a US$2.5 million stake in GrainChain, an agricultural blockchain company that tracks the distribution of harvest production.
Blockchain stocks to watch for
One of the most attractive properties of blockchain technology is its versatility of application. From the investment perspective, this offers many exciting opportunities. Investors can consider both purely blockchain companies and the companies that base part of their operations on blockchain technology. Below are just a few of the stock opportunities to keep an eye on in the near feature.
Bank of America
Bank of America (BofA) is very attractive in terms of investments for its participation and involvement in blockchain adoption in the financial industry. They have one of the largest blockchain patent portfolios, following IBM as the leader. BofA has filed for patents in inventions ranging from blockchain-powered ATMs to hardware wallets.
A large number of patents mean that BofA is seriously committed to expanding blockchain applications across industries. From the valuation perspective, owning patents means that BofA will be able to develop products as intellectual property and license them to other companies. Historically this type of development spells a very good opportunity for investors to extract returns in equity. Additionally, BofA is continually hiring experts in blockchain technology, another indicator of the seriousness of their involvement.
Mastercard (NYSE: MA)
At first sight, it may be surprising to see Mastercard on this list. The widespread adoption of blockchain-based cryptocurrency would mean an end to Mastercard business operations as the payment intermediary. Nevertheless, Mastercard is embracing the change and expanding its territory to include blockchain technology.
Similar to Bank of America, Mastercard is one of the leaders in Blockchain patents. In more practical terms, Mastercard has created application program interfaces that enable developers to build blockchain-related applications.
Mastercard is using blockchain to optimize food supply chains. Additionally, they recognize its potential to improve transaction efficiency and thus eliminate billions of dollars in fraud. Mastercard has a partnership with R3 that focuses on cross border transactions promoting financial inclusion and boosting global prosperity.
Fujitsu (OTC: FJTSY)
Fujitsu, a leading information technology company in Japan, established its own international Blockchain Innovation Center in Brussels, Belgium. This center emphasizes the company’s commitment to developing distributed ledger technologies. Fujitsu sees blockchain revolutionizing the way consumers and enterprises buy, sell, and exchange goods and services.
One particular area of expertise that Fujitsu plans to develop in the Innovation Center is the use of blockchain for the design and implementation of Smart City services. Smart City technology has recently gained a lot of investment interest.
Fujitsu is the developer of DocumentFlow, a web-based application that uses blockchain technology to track the validity of any digital file or asset. DocumentFlow is part of the Fujitsu Flow suite of blockchain-as-a-service offerings. Fujitsu has a solid list of developed blockchain projects and emerges as a good option for stock investment.
The attractiveness of blockchain solutions can be clearly seen in their extraordinary growth potential, the involvement of big companies and governments, and compatibility with other major technological directions. There are many ways to invest in blockchains like purchasing stocks of blockchain companies and ETFs, angel investing in startups, trading cryptocurrency and tokenized assets, pick-and-shovel strategy, and crypto mining.
Some of these opportunities are at the high gain end with high-risk factors, while some of them are on a more mild-risk level calling for long term investments. As a forward-looking investor, you now have the basic knowledge and understanding of blockchain technology. Of course, research and good intuition are the same old crucial tools that need to be applied before making an investment in blockchain technology.
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