What is Blockchain and How do You Invest in It?

Kenna Castleberry

Blockchain has become a large subject within deep tech thanks to the popularity of the cryptocurrency Bitcoin. For companies looking to invest in blockchain, it’s important to understand what blockchain is and the key players who are using it.

Blockchain works like a database but isn’t actually one. A database can easily be altered, while blockchain’s purpose is to be unhackable. Blockchain works by grouping data into “blocks” of information. These blocks are then chained together, with each chain having a timestamp and a hash code (a mathematical code). If two blocks are produced concurrently, there is a fork. Block-time is the amount of time it takes to create a block of data, which is important for companies who utilize blockchain.

Blockchain was originally created in 1991 by Stuart Haber and W. Scott Stornetta with the purpose of having unhackable timestamps. Due to blocks only being created chronologically and linearly, it is difficult to go back through the blocks and edit information. Also, because of the hash code in every chain, any alterations change the hash code, which in turn alerts the blockchain entirely and shows a potential hack. Since Blockchain is so secure, it takes a lot of power and energy to work. Many blockchain systems, including Bitcoin’s, uses a network of computers, called nodes, in different geographic locations. Nodes provide an extra level of security, as they can cross-reference each other to fix any errors in the blocks.

Blockchain has been applied in many different industries, but its most popular use is in cryptocurrency, like Bitcoin. Here, blockchain works as a ledger to record every transaction, increasing transparency and security. There are different types of blockchain systems, Bitcoin’s system is public, so anyone can use it. The other systems are private, permissioned (allowing individuals with approval), and consortium (where multiple companies work with one blockchain). Blockchain has also been applied to healthcare with confidential records, to voting systems for reducing voter fraud, to banking. Companies like Walmart and IBM are using it to track food shipments. This way, if the food is toxic or spoiled, they can find the source of the rotten food. Starbucks is using blockchain to track coffee farming in Costa Rica, Rwanda, and Columbia to improve the transparency around pricing.

Blockchain’s effectiveness and increased efficiency will shift our economy, according to the Harvard Business Review. One of the biggest shifts will be a lack of transaction fees, due to blockchain saving banks money because of its efficiency. Blockchain’s cost doesn’t yet make it as affordable due to the energy needed to power the nodes, but in the coming years, as the industry grows, perhaps blockchain will become more accessible. Not only will blockchain minimize transaction fees, but can also make more optimized contracts and records for businesses like law firms or hospitals.

How to Invest in Blockchain

With blockchain’s benefits, it’s no surprise investors want to finance blockchain companies, including startups. The capital markets around blockchain will continue to grow as more people use Bitcoin and other blockchain products.

There are many ways to invest in blockchain. The simplest is to buy Bitcoin directly. Many investors also invest in single-use blockchain applications, as they have little coordination with a third party, and have low risk. ETFs also can be a method for investing in blockchain. As blockchain becomes more popular in the coming years, there will be more opportunities for investments and diversification of capital markets.

References:

Conway, Luke. 2020. “Blockchain, Explained.” Investopedia. February 1, 2020.

IBM. 2021 “What Is Blockchain Technology? – IBM Blockchain.” Www.ibm.com. 2021

Iansiti, Marco, and Karim Lakhani. 2018. “The Truth about Blockchain.” Harvard Business Review. March 6, 2018.

Rossolillo, Nicholas. 2021. “How to Invest in Blockchain Stocks.” The Motley Fool. January 13, 2021.

Wikipedia Contributors. 2019. “Blockchain.” Wikipedia. Wikimedia Foundation. March 14, 2019.

Image Courtesy of Freepik.com

 

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