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Blockchain: what exactly is it all about?
You have probably heard of Blockchain and cryptocurrencies. But what exactly is this technology and is it worth investing in?
Blockchain is a disruptive technology with countless applications – and a booming market that has attracted a significant number of investors. From the ability to trade cryptocurrencies to investing in companies developing new applications of the technology, the pace of new opportunities is fast. But is it the right time to invest? Find out about the benefits and risks involved of Blockchain.
What is Blockchain and how does it relate to investing?
Blockchain is a technology that tracks and stores information, inspired by the ancient method of ledgers, except that instead of recording information in a physical book or digital file, Blockchain is decentralised and stores information on multiple computers that are fully synchronised across the world.
This technology should not be confused with cryptocurrency or bitcoin. The latter are digital currencies, whereas Blockchain is the technology that enables them to be used. It is the way it does it that makes it revolutionary. It is designed to resist any attempted sabotage by acting as a virtually tamper-proof and efficient registry, which sets it apart from traditional databases. Blockchain can therefore record and share the transactions of any asset instantly, transparently and securely.
The most direct way to invest in Blockchain is to buy a cryptocurrency. Some of the best known are bitcoin or ether, and every time you buy one of these coins, you are using the underlying Blockchain. These currencies may also exist on other networks. For example, we can directly buy ether directly on the Ethereum network, or we can buy so-called "wrapped tokens" (digital representations) that do not need to be "lodged” on the original network that created them. However, no purchase of cryptocurrencies is required in order to invest in the Blockchain market. Several financial instruments currently allow this, such as Exchange Traded Funds (ETFs), which we will discuss shortly.
What are the practical applications of Blockchain in the financial world?
Blockchain is often referred to as the "protocol of trust" because, being decentralised, it cuts out the middleman. Unlike traditional databases, with Blockchain records cannot be altered once they are entered into the network/blockchain (unless the consensus mechanism is compromised), and are stored securely and reliably on the network. In addition, the transparency and immutability of the records allows transactions to be traced back from the original block to the current block.
Originally, developed to authenticate financial transactions, this technology has now found many other applications in the financial market. It can also be used to make payments in financing processes and to process claims in the insurance market.
While new ways to apply Blockchain technology in different areas are being discovered every day, it is currently proving to be the most promising and advanced in the banking system and international trade.
What are the benefits and risks of investing in Blockchain?
Like any investment, Blockchain has benefits and risks that need to be considered before making a decision. The main benefits include security and privacy – after all, it is a fully decentralised database that can be accessed anywhere in the world. This feature makes Blockchain particularly attractive to investors in unstable markets.
On the other hand, this technology has gained a reputation for being unstable. While the underlying cryptography is highly secure, the currencies associated with the Blockchain are subject to speculation, making them highly volatile instruments. Indeed, they have been shown to multiply in value within days and collapse within hours. As the identity of the person responsible for creating the technology remains a mystery, this adds to its aura and appeal, but can also make some investors less comfortable.
In addition, the technical complexity of this type of investment can be a major challenge for new investors. The fact that it does not rely on intermediaries and is not regulated also has a downside: it leads to a lot of fraud through misleading or unethical management – the bankruptcy of the FTX brokerage firm being the most high-profile case.
How to gain exposure to Blockchain technology
When it comes to investing in the crypto asset market, the simplest way is to buy the underlying cryptocurrency, which requires prior research into the capitalisation, security and transaction speed of each cryptocurrency. Bitcoin (BTC) is the most widely known, followed by Ethereum (ETH), both of which account for over 75 % of the market capitalisation.
However, you can also invest in Exchange Traded Funds (ETFs) of companies developing Blockchain solutions, or ETFs that directly hold crypto assets. Many well-known companies, such as IBM and NVidia, are developing applications of this technology and several others are emerging in the public and private markets.
Decentralised finance (DeFi) markets, for example, which aim to gain greater autonomy over consumers' assets through direct custody, stand out. Lenders, credit institutions and even insurance companies are part of this growing sector.
Banco Carregosa, supporting you in your investment decisions
Investing in Blockchain should be seen as a decision with potential, but also with high risk. If you are interested in starting to invest in this area, make sure you make informed decisions based on reliable data. In such a volatile and sensitive market, it is important to rely on expert advice. The Banco Carregosa team is available to help you make the financial decisions that best suit your profile and your investment objectives.