Note: The following is not formal investment advice. For that, find a licensed financial advisor.
Practically every day on the news, on social media, at work conferences, we hear blockchain, blockchain, blockchain.
Something that hot must be worth considering an investment in, right?
Before making any investment, you should first do your homework. Blockchain investments are no exception. However, blockchains are still relatively new. What we can do with blockchains and how they may add value to our lives was once purely theoretical.
But that’s all changing now, and it’s evolving at a breakneck pace.
You likely first heard about blockchain because of Bitcoin. Note that a blockchain is not necessarily a cryptocurrency like Bitcoin. Rather, blockchains are the engines that power a cryptocurrency vehicle like Bitcoin. Blockchains themselves are far more versatile than any single digital coinage alone.
So, just how do blockchains work, and what can they do? We’ll get to that below. Thankfully you, the humble retail investor, won’t need a degree in math or computers to place wise bets in the blockchain space.
Should you bet on a pure play blockchain stock, one that’s all-in on blockchain tech? Should you make safer bets on companies that utilize, but don’t entirely rely on, blockchains instead? Or should you invest in the hardware that powers blockchain platforms? Even if you don’t know anything about blockchain at all, we’ll help you get started.
What, Exactly, Are Blockchains?
Computer nerds and Bitcoin bros can probably skip this section and go straight to the stock highlights.
If you don’t know what blockchains are or how they work, keep reading. You should understand the basics of blockchain tech before taking an investment risk on it — and again, consult with a licensed financial advisor.
What’s a blockchain, exactly? The simple answer is it’s an public or private digital ledger that validates the authenticity of data entered into and processed through its network. At least, that’s the blockchain concept, anyway.
Did that definition get you scratching your head? If so, let’s break it down. We’ll start with why blockchain was invented.
Put simply: A blockchain protects data in ways encryption does not.
Computers are everywhere, and the modern world depends on them for nearly everything. That dependency puts all of us, and all our data, at a massive risk.
Any computer can be hacked. All data can be compromised. How can we protect data in a way that doesn’t require humans to monitor every computer on every network at all times?
Encryption is one way to protect data. Basically, encryption shields the data in layers of mathematical puzzles. A secret key code can instantly solve every puzzle in the encryption, granting access to the data.
Encryption isn’t perfect, though. Given enough time, hackers can break any encryption, in theory. That may not sound like a big deal when it concerns the nudes on your phone (it is, actually), but it’s definitely a big fuckin’ deal when we’re talking about banks, crypto exchanges, governments, and security firms. In addition, encryption can’t restore hacked data, nor can it verify if a hacker altered the data.
Way back in 1991, when people were still paying for porn, two cryptographers at Bellcore labs foresaw this security issue long before it threatened entire nations and global markets. Their solution, which we now call blockchain, could do everything that encryption couldn’t. But no one implemented a real, working blockchain until 2009, when Bitcoin first went live.
How Blockchain Works
The blockchain concept assumes two things. First, it assumes no computer is hack-proof. Second, it assumes online computer networks are here to stay, 24/7.
A blockchain is a program that runs all day, every day, on a decentralized network of computers. The blockchain maintains a record of all data entered into it. When it receives new data (a block), the new data is processed on top of all the data that came before it (a chain).
There are many different blockchain platforms. For example, Bitcoin and Ethereum are their own blockchain platforms. Some transportation and inventory tracking systems use their own blockchains. Regardless of their name, brand, or function, they all utilize the blockchain concept.
Here’s how the blockchain concept works.
Every computer on the network stores its own version of the record. When new data goes in, the computer compares its record against the P2P network’s records. If data on one record doesn’t match the data on other records, the network assumes the outlier data came from a compromised (hacked) computer, then corrects the record.
The data record is called a ledger, much like an accountant’s ledger. Just as accountants use a ledger to keep track of an account’s expenditures, debts, surpluses, and payments received, so too does a blockchain’s ledger.
If that’s still confusing, here’s an example.
Imagine a group of 1,000 accountants. These 1,000 accountants are located all over the world. Each accountant owns a ledger for tracking a bank’s financial activity. When this bank issues a loan, receives a deposit or payment, or makes expenditures, all 1,000 accountants record that transaction on their individual ledger.
Now, let’s say a disgruntled bank employee steals $100 from the vault. To conceal the crime, the employee finds one of the accountant’s ledgers. The thief secretly changes the ledger’s balance so it shows $100 less than it should.
If the bank only had one ledger, the thief might get away with it. But there are 1,000 ledgers around the world, each managed by its own accountant.
The next day, after the bank receives a new deposit, all 1,000 accountants update their ledgers to reflect this new deposit. Then they compare their ledgers to see if all 1,000 match.
One ledger does not match; it’s missing $100. Together, the accountants reject the altered ledger. The altered ledger is corrected to reflect what’s on the other 999 ledgers.
To beat the system, the thieving employee must alter at least 501, or 51%, of the ledgers at the same time. The chances of that happening are pretty slim. That’s not to say it’s impossible, though.
Which leads us to some downsides of blockchains.
Where Blockchain Goes Wrong
Some blockchains, such as Ethereum Classic, have been hacked by 51% attacks. Crypto exchanges — online marketplaces for trading cryptocurrencies — have also been hacked. One infamous case even bankrupted an exchange.
Part of Bitcoin’s success is due to its blockchain never being hacked (so far). However, in theory, bitcoin miners could wreck Bitcoin, or any blockchain, in “bad faith.” Going back to the 1,000 accountant example above, each accountant represents a computer, or node, on the blockchain. If 501 accountants conspired to change their ledgers, they could effectively “hack” their network.
Blockchains also possess another weakness. Some of the bigger ones, like Bitcoin, require a lot of energy to process data. That can slow things down, especially if there’s a spike in data. At the moment, Bitcoin transactions cost about $14. During the height of Bitcoin mania in 2017, transaction fees ran about $55.
No one knows if blockchain could become obsolete in upcoming years, either. The longevity of blockchain technology, and big crypto like Bitcoin, remains a mystery. For instance, quantum computing could one day crack Bitcoin’s encryption in seconds. (Quantum computers don’t exist yet, however.) Blockchains haven’t existed long enough to test their value against the Lindy effect, unlike, say, gold, which has reliably stored value for thousands of years.
How Big Is the Blockchain Market, and Why Should You Invest in It?
Blockchains sound pretty badass, yeah? Essentially, blockchains exploit the weakness which permits hacking — an internet connection — and turn it into the network’s greatest strength.
The full potential of blockchain technology has yet to be realized. Until recently, most financiers, politicians, banks, and big businesses scoffed at blockchain tech, namely due to Bitcoin’s perceived hype.
But Bitcoin is just one blockchain (as well as one cryptocurrency). Today, there are hundreds, and we’ll see more. Since blockchains only recently received mainstream acceptance, any predictions for the global blockchain market should be taken with many grains of salt.
So, just how much is the blockchain market worth? That depends. If we include crypto, blockchain is worth well over $2 trillion, more than tobacco ($1 trillion) but less than oil and gas ($3 trillion). Bitcoin, of course, holds the lion’s share of the crypto market (approximately 50%).
The numbers become less impressive if we nix crypto. Research firms valued the non-crypto blockchain market anywhere between $3 billion and $3.7 billion as of this writing. While those figures may seem tiny compared to other, older technologies, consider where the market is headed.
According to ReportLinker, the non-crypto blockchain market could swell to roughly $40 billion by 2025, putting its compound annual growth rate (CAGR) at a whopping 67%. Grand View Research is more optimistic, predicting blockchain will achieve 82.4% CAGR from 2021 to 2028.
What About NFTs?
You may have heard about NFTs, or non-fungible tokens. NFTs are essentially digital certificates of authenticity for original digital works such as texts, images, or even tweets. Digital works, by the very nature of being digital, makes them easy to copy.
Yet, in the past few months, NFTs fetched prices on par with original, physical works crafted by famous painters or authors. Some sold for millions of dollars, despite countless copies (sans blockchain certification) being available online for free.
As it goes with anything on blockchain, NFTs could create sustainable revenues outside of the digital art world. Last year, Juniper Research estimated video game companies could experience 30% sales growth from microtransactions alone. Microtransactions are purchases for digital in-game items, like weapons or vanity pets, made with real-world cash.
With NFTs, players might shell out big bucks for exclusive items only they, and they alone, can wield. Which is great news for elitist gamers, but bad news for casual players and players in lower income brackets.
In other words, NFTs — and by proxy, blockchain — may usher in a new wave of high-art consumption, serve as a lucrative source of video game revenue, or fizzle out as a short-lived bourgeoisie fad. Time will tell.
Further complicating matters, blockchains may provide novel solutions for trivial and not-so-trivial problems. Some enthusiasts believe blockchain could prevent voter fraud. Others say blockchain can stop looping weed sales, where a customer buys more licensed weed products than allowed under state law.
You can see where this is going. Blockchain’s potential for high levels of market growth is real, but growth will depend on two critical factors. First, programmers must utilize blockchain tech to solve complex problems, problems that have eluded other real-world fixes. Second, the public must recognize a particular blockchain’s utility, and, more importantly, they must use it.
The Most Promising Blockchain Companies to Watch Right Now
If you want ideas for betting on cryptocurrencies, stay tuned for our upcoming guide on crypto investments. For now, we’ll look at non-crypto stocks involved in blockchain technology.
Before you begin investing in blockchain technology, first consider there are a few ways to potentially rake in gains.
Option One: Pure-Play Blockchain Stocks
This option is the riskiest, since pure plays offer only a single service or specific set of services. Pure plays may also go bust if blockchain tech fails to keep up with new advancements, or if blockchain is replaced by something better. However, smart or lucky investments in pure play could reap the biggest rewards compared to the other options below.
Pure play blockchain stocks include crypto mining companies, blockchain investment firms, and blockchain/crypto ETFs.
For asset managers, watch Silvergate Capital ($SI), which invests in multiple aspects of blockchain and digital payments. Silvergate’s stock exploded 1,600% over the last year, thanks to pandemic lockdowns, online shopping activity, and crypto hedging against dollar inflation.
Another blockchain investor worth watching is Galaxy Digital Holdings ($BRPHF), up 1,100% over the last year.
If you prefer an exchange-traded fund (ETF) to manage investment picks for you, look into Amplify Transformational Data Sharing ($BLOK) or Siren Nasdaq NexGen Economy ($BLCN). Amplify’s stock price quadrupled over the last year, and Siren (formerly Reality Shares) doubled over the same period.
Option Two: Established Big Tech Firms Invested Heavily in Blockchain
These firms want their own blockchain tech, and in many cases are currently selling or planning to sell their blockchain services to others. These investments are less risky than pure plays since they profit from other goods or services, but the returns will probably be smaller, too.
Some examples of bankable Big Tech stocks in the blockchain space are Tesla ($TSLA), Amazon ($AMZN), Alphabet ($GOOGL), Microsoft ($MSFT), and MicroStrategy ($MSTR). For more on how the Big Fellas could perform in the future, check out the Bullish Guide to Investing in Big Data and Cloud Computing.
Option Three: Ancillary Businesses
Some industries will support blockchain tech without actually investing in or managing blockchain technology. Ancillary businesses may pose lower risk than pure plays, but may be higher risk than Big Tech firms since they lack multiple streams of revenue.
One key ancillary stock to watch is NVIDIA ($NVDA), which makes GPUs. Its price more than doubled over the last year, and it may keep increasing as demand for its graphics processors increases, too.
NVIDIA’s $40 billion acquisition of Arm means it could corner the GPU market for years to come. GPUs are important in the blockchain space since blockchain networks require fast computers, and powerful GPUs maintain the needed speeds.
Another ancillary stock worth watching is Visa ($V). Yes, the credit card company. Besides its stock climbing 276% over the last year, Visa conducts much of its business through blockchain now. As of January, the company also offers a Bitcoin rewards card, giving users crypto incentives for spending cash.
Option Four: SPACs and Initial Coin Offerings
These investments raise first-round funding for a blockchain company or cryptocurrency. They are some of the highest risk investments listed here, but could be incredibly lucrative if successful.
A special purpose acquisitions company (SPAC) targets a specific company, raises capital for that target, then brings the target into the public stock exchanges (a “reverse merger”). Right now, potential SPACs are only targeting cryptocurrency exchanges such as eToro and Coinbase, but that could change as blockchain technologies become more pervasive.
Initial coin offerings (ICOs) are much like IPOs, except they only raise capital for a particular cryptocurrency. If you chip in and get lucky, you could see hefty gains. (Or quick losses, if the crypto goes nowhere.)
Option Five: Invest in Ethereum or Other Smart Contract Blockchains
Ethereum, the world’s second largest crypto, jumped 24% at the end of March (outperforming Bitcoin, which only grew 5% during the same period). While most crypto prices have historically been tied to Bitcoin’s, Ethereum’s latest climb had nothing to do with Bitcoin. Why?
Bitcoin essentially stores value like gold does. And like gold, Bitcoin doesn’t do much else.
Ethereum is different. Ethereum is a blockchain servicing platform powered by its own cryptocurrency (called ether). Users on Ethereum can execute smart contracts or tap into other financial services processed through its blockchain. A smart contract is a self-executing digital contract which certifies a transaction and can unlock built-in actions once the contract completes.
Most NFTs mentioned earlier are being processed by Ethereum. Visa now conducts certain transactions on Ethereum, too. Who knows? Ethereum could one day replace Bitcoin as the King of Crypto. After all, to access Ethereum’s services, you gotta pay with ether.
Alright, which blockchain investments should you avoid? While Bullish usually highlights examples of bad picks along with good ones, that’s not possible at the moment. Blockchain hasn’t been around long enough for us to identify clear losers.
We would, however, suggest you think twice before investing heavily in crypto. The crypto market is saturated, incredibly volatile, and most vendors don’t accept smaller cryptos for payment anyway.
I Have $1010 to Invest in Blockchain Technology. How Should I Spend It?
When investing in stocks, you should play a long game. You should also diversify investments to minimize risk. Big gains come from smart picks then sitting on those picks for years. Blockchain and crypto is its own beast, though. Here are some ideas:
To maximize diversity, you could split $1,010 into five equal portions.
Start by putting $202 into one or more pure play blockchain stocks.
Put another $202 into a Big Tech firm or two invested in blockchain.
Then, put another $202 into one or more ancillary stocks.
If a blockchain SPAC looks promising to you, drop $202 on it. Later, if you aren’t feeling its reverse-merger target, you can ask for your $202 back. (And invest that elsewhere.)
Lastly, you could put the final $202 into cryptocurrency. Though inexperienced investors should consider investing that, if not the entire $1,010, into blockchain ETFs. An ETF is a stock that’s basically a diverse portfolio managed for you. ETFs are relatively low-risk compared to any individual company’s stock (or any individual crypto).
However, there’s another path for that $1,010 and blockchain: Put all of it into Bitcoin.
Granted, Bitcoin isn’t a stock. No cryptocurrency is. But in terms of performance, Bitcoin blows every blockchain-related stock out of the water and straight to the moon. Over the last five years, Bitcoin’s price grew nearly 15,000%. Compare that with Tesla (1,400%), NVIDIA (1,600%), Alphabet (194%), and Amazon (469%) over the same period.
(Of course, if purely aiming for gains, two blockchains even beat Bitcoin by price growth in the last five years. Ethereum grew about 26,000%, and Dogecoin — the “joke crypto” based on a meme — grew 46,000%.)
Keep in mind every investment comes with risk. With crypto, there’s even greater risk than with stocks. Every crypto’s price volatility can make them horrible investments if you don’t know what you’re doing. (Even seasoned investors have lost big on crypto bets.)
As always, nothing you read here today is investment advice. For that, find a licensed financial advisor. Unfortunately, for the adrenaline junkies reading this, there aren’t many advisors for crypto, but there are a few. Any investment made is an investment you risk losing, so do your homework, invest only what you can throw away, and good luck!