How to Invest in Blockchain Technology: A Complete Beginner's Guide
April 20, 2023
Investments in the blockchain space are going strong despite crypto prices trading well below their all-time highs. Venture capitalists invested over $33 billion in blockchain and crypto startups in 2022 compared to $31 billion in 2021, indicating that investor interest is strong. Read on to learn how to invest in blockchain and the various investment options this new technology offers.
What is Blockchain?
Blockchain is a decentralized ledger shared across a network of computers that stores data in blocks that are connected through cryptographic hashes, thereby forming a virtually unbreakable chain. This means it is essentially impossible to modify data once it’s added to the blockchain, making it immutable. Bitcoin has made public blockchains — often characterized as transparent, permissionless, and secure — popular.However, blockchains don’t have to be public. They can be permissioned and private as well, like the examples of Quorum and Hyperledger Fabric. Moreover, cryptocurrencies are just one of the many use cases of blockchain technology. Today, the blockchain is being used to track goods moving through supply chains, issue property titles, and share health data among different healthcare providers.
Why Are Investors Pouring Funds Into Blockchain Technology?
While crypto prices are still far from their recent highs, investors continue to pour funds into blockchain-based businesses because they believe in the potential of this relatively new technology. Let’s look at why investors remain so bullish on blockchain.
Blockchain technology cuts out the middleman and all the associated costs, thereby reducing costs for the specific use case to which it is applied. For instance, blockchain minimizes the cost of sending global payments. That makes blockchains a big step forward for companies keen to slash operational costs and boost efficiency.
First Mover Advantage
Governments, private sectors, and individuals acknowledge that blockchain technology has plenty to offer. What we are now seeing is traditional institutions rushing to grab a share of the blockchain market and gain a first-mover advantage. For instance, BNY Mellon, the oldest bank in America, moved into the digital asset custody business when it launched its digital custody platform in October 2022. Furthermore, high-profile investors like Mark Cuban are investing in blockchain companies as they strategically position themselves in this young and growing web3 space.
Potentially High Returns
Many people have become wealthy from investing in crypto assets. Bitcoin particularly stands out due to its high price in absolute terms. If you had invested $1,000 in BTC in February 2013, your investment would be worth $1,308,549.05 as of January 31, 2023, a total annualized return of 104.96%.Retail investors, institutions, public companies, and even some countries are investing in crypto assets - particularly Bitcoin - anticipating substantial growth in the digital asset ecosystem. The returns may not be as significant for crypto investors that got in much later, but investing in the right business or crypto network has still been shown to generate a high ROI, even in recent years.
How to Invest in Blockchain
Now, let’s take a look at how investors - both retail and institutional - can gain exposure to the growing blockchain industry.
Purchasing cryptocurrencies is the most obvious way to invest in blockchain. Beginners can experience blockchain at a practical level, while advanced investors can use it to diversify their portfolios. In addition to diversification, investors can buy crypto for speculative reasons. Moreover, they can buy the native tokens of projects they believe in or strategically acquire governance tokens of some top protocols in decentralized finance (DeFi) that hold a large market share. For instance, venture capital firm a16z owns millions of Uniswap’s UNI tokens, allowing it to vote on key decisions that could affect the DeFi projects in which it has invested.
Buy blockchain stocks
Investors can buy stocks of publicly-traded companies that use blockchain technology or offer blockchain services. For instance, IBM provides a blockchain platform that is a permissioned blockchain called Hyperledger Fabric. Furthermore, Amazon provides cloud staking through its subsidiary AWS, and Honeywell is using blockchain to digitize aircraft records.
Purchase blockchain ETFs
Besides blockchain stocks, investors can gain exposure from exchange-traded funds (ETFs) that invest in blockchain-related assets. For example, U.S. investors can invest in the Amplify Transformation Data Sharing ETF, Goldman Sachs Finance Reimagined ETF, and First Trust Indxx Innovative Transaction & Process ETF, among others. Blockchain ETFs track the price of blockchain and crypto company stocks. They may also track the price of digital assets themselves.
Fund early-stage blockchain startups
Investors with a sizeable amount of disposable capital can participate in funding rounds for promising early-stage blockchain startups. New startups are constantly entering the blockchain space, some with great, financially feasible, and creative ideas that may be worth your money. There are also equity crowdfunding platforms like BnkToTheFuture that enable smaller investors to invest in private Bitcoin and blockchain startups.
Invest in established private blockchain companies
Investing in established private blockchain companies may require a larger financial commitment than an early-stage startup. Also, accessing these private companies is not always possible without the right contacts or investor accreditation. However, the risk could be lower since the company already has a working product and a customer base. Alternatively, individual investors can put their money in public companies that invest in established private blockchain companies. Samara Asset Group, for example, is a publicly traded company investing in Bitcoin and tech-driven alternative assets. We invest in Bitcoin, blockchain businesses, and digital asset managers. It also offers retail and institutional investors the opportunity to invest indirectly in the crypto economy by buying Samara’s listed shares.
Blockchain Investing Opportunities & Risks
Forecasts show that the blockchain market is expected to grow considerably in the coming years, with some optimistic experts predicting it will surpass the $1 trillion mark (excluding the market cap of digital assets) by 2030.Moreover, the market is expanding into many areas, such as gaming, metaverse, and NFTs, while the DeFi space is beginning to accept collateral in real-world assets (RWAs). This means the blockchain sector has a lot of potential and opportunities. Also, new areas are constantly emerging as the industry and technology mature. Nonetheless, investors should be aware of the risks they expose themselves to when they invest in crypto, blockchain companies, and other blockchain-related financial instruments. NFL player Tom Brady and model Gisele Bundchen are good examples of investors that may incur losses from investing in a crypto company. According to a capitalization table that FTX’s ex-CEO Sam Bankman-Fried shared with Forbes in 2022, Brady and Bundchen owned 0.15% and 0.09% of the exchange, respectively, as of June 2021.This example shows that investors can lose money at any time, even if the decision seemed sound at the time of investment. The reason for this is that various unforeseeable factors can come into play later on and change the entire picture. So, what can investors do about factors outside their control? Well, they may demand to see a company’s recovery strategy for when things go awry. For example, they need to find out if the blockchain company they plan on investing in has put measures in place to help them recover their investments in the event of bankruptcy. Conversely, it may be harder to recover your investment if you’ve bought a cryptocurrency that has collapsed. Nevertheless, you can mitigate losses - to a large degree - in the first place by conducting due diligence, investing only what you can afford to lose, keeping a close eye on the markets, and only investing in established cryptocurrencies.
The Bottom Line
The blockchain sector has many investment opportunities that may provide returns. However, the investment risk is also high, and investors should take precautions to reduce this risk.Going forward, investors should learn from the mistakes of others and make better decisions before investing in this sector. For example, running thorough background checks to find out what financial moves blockchain companies are making behind the scenes is very important.Investing in promising companies is no longer enough. It's crucial for investors to thoroughly investigate a company's financial health and activity before investing.
What is blockchain investing?
Blockchain investing means putting money into digital assets directly or investing in companies that provide crypto or blockchain services or own blockchain-related assets. For example, you could buy Bitcoin on a reputable crypto exchange or purchase shares in a publicly-traded crypto company like Samara.
What companies are investing in blockchain technology?
Public companies like MicroStrategy and Tesla have invested in blockchain technology by adding Bitcoin to their balance sheets.
Which banks are investing in blockchain?
BNY Mellon, Citi, Goldman Sachs, and Morgan Stanley are among the leading US banks that have invested in blockchain companies. However, there are dozens of other banks that have entered the brave new world of crypto in the past few years.
How to make money investing in blockchain?
You can potentially make money by investing in crypto assets, blockchain stocks, early-stage blockchain startups, blockchain ETFs, and established blockchain companies. However, like with all investments, the risk/return profiles vary between the different types of blockchain investments.