Investing in blockchain technology

Maybe it’s just me, but I think most of us all have that friend. They’re always telling you about the newest app, trend or get-rich-quick scheme. One of their favourite topics at some point in the past couple of years has probably been Bitcoin or cryptocurrencies. Bitcoin is making headlines again as it hit record highs nearing $42,000* in the first week of January. But then, just days later, on 11 January 2021, it fell over 10% to $34,200.** Arguably, some investors could be taking profits from the sudden rally and, with the exception of Tesla, you’d be hard pressed to find anything else up 300% over the last 12 months** during a continued global pandemic. But what is Bitcoin? And just how risky is it?

“Digital identity can be a powerful force multiplier to enhance social and economic opportunities for everyone. However, to fully realise that potential, governments, technology companies and other stakeholders must collaborate.” — Dakota Gruener, Executive Director of ID20202

What is Bitcoin?

Bitcoin is a form of cryptocurrency, which itself is a form of digital money. Cryptocurrencies are not issued by a central authority (like a bank) and, without getting technical, they operate in a blockchain, which is a technological ledger for transactions. Data can be entered but cannot be altered or erased. There are a number of cryptocurrencies, but Bitcoin is the ‘OG’ and one of the best known.

One of the reasons the price of Bitcoin has sky-rocketed again recently could be the pandemic. To prop up the global economy, central banks have been printing more money. As the supply of money increases, its value decreases, with inflation eroding its purchasing power over time. Typically, investors opt to buy gold in this type of environment because its supply is fixed. The same principle applies to Bitcoin so it’s like a “digital gold.” So why did its value plummet? Like any asset that increases in value too fast, it can spark a price correction, as some investors cash in their gains.

What are the risks?

Bitcoin is still relatively new and, because of its volatility, some people describe it as no more than “betting” instead of investing. It’s also based on new technology which makes it hard to fully understand. Unlike gold, Bitcoin also has no alternative use and its value is entirely derived from the trust its users place in it. One of the big threats facing Bitcoin in the future is that it may be vulnerable to hacking by quantum computers.

If it’s so risky, why do people invest?

The big appeal is the lack of a central authority and the fixed supply. There can never be more than 21 million Bitcoin. Traditional ‘fiat’ currencies such as the US dollar or UK pound typically devalue over time as I said earlier. Bitcoin is therefore particularly appealing to Libertarian’s and those who don’t trust the government. Some see Bitcoin as a better alternative to gold as gold supply still grows slightly each year and it’s much easier to move and store.

Bitcoin seems too risky, are there alternatives?

Yes. The blockchain technology behind Bitcoin has a lot of growth potential and applications outside of cryptocurrencies. One application of blockchain technology is digital identification.

The Digital Identity Alliance (ID2020) was founded in 2016 to do just that. According to ID2020, one in seven people globally lack the means to prove their identity. As such, they are without the protection of law, and are unable to access basic services such as healthcare and education, participate as a citizen or voter, or transact in the modern economy. For some, a reliance on national ID systems isn’t possible and there are risks of data misuse or abuse with storing large amounts of personal data on centralised databases. However, remember when I said blockchain can’t be altered or erased? This emerging technology can mitigate some the risks by creating a secure, decentralised system, ultimately providing greater privacy protection for users and more portability.

Investing in blockchain technology

The ID2020 is very unique and was founded by Accenture, Gavi, IDEO.org, Microsoft and the Rockfeller Foundation. Accenture, a holding in BMO Responsible Global Equity^ and Morgan Stanley Global Brands^, places a huge focus on technology and uses blockchain technology both internally and for clients to “connect networks of collaborative ecosystems that increase transparency and nimbleness.”***

Microsoft is also no stranger to blockchain technology with its very own blockchain service, Azure. Azure offers a simple solution to businesses to develop and maintain networks in more a “traditional” sense of a digital ledger. Unlike cryptocurrencies this is centralised and has Microsoft’s team of security experts behind it, including over $1 billion**** invested annually in cybersecurity research and development. Microsoft is a top ten holding in T. Rowe Price US Large Cap Growth Equity^ and Threadneedle Global Extended Alpha^.

Not convinced on the blockchain story?

While I could spend days reading about new and emerging tech, it’s not for everyone. You can still gain exposure to technology on the sector level to capture growth potential in the industry. AXA Framlington American Growth currently has 36%^ invested in the sector, Jupiter Asian Income 25%^, Liontrust UK Smaller Companies 22%^ and LF Blue Whale Growth has over half the portfolio in tech at 57%^^.

 

*Source: CNBC, Bitcoin hits fresh record high near $42,000, climbing 40% so far this year, 8 Jan 2021
**Source: CNBC, $150 billion wiped off cryptocurrency market in 24 hours as bitcoin pulls back, 11 Jan 2021
***Source: Accenture, Blockchain Index
****Source: Microsoft, Azure Blockchain Service
^Source: fund factsheet, 30 November 2020
^^Source: fund factsheet, 31 December 2020

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Remember, all investments can fall in value as well as rise, so you could make a loss. Before you make any investment decision, make sure you’re comfortable and fully understand the risks.Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.