Here’s a guide to help explain terminology and facts to clients and would-be investors.
What are crypto-currencies, and how are they different from blockchain?
Crypto-currencies, such as Bitcoin and Ethereum, are a new investment class achieving global adoption, developed using blockchain technology. Bitcoin was the first application of blockchain technology and is the most popular crypto-currency in the market today.
What is blockchain technology?
Blockchain is a secure protocol for providing an immutable ledger of transaction and data. The ‘block’ in ‘blockchain’ refers to a ‘block of information.’ It is distributed and maintained over a peer-to-peer network, without the use of a central authority. In other words, a blockchain establishes ‘who owns what’ between individuals who may have different objectives. Unlike financial ledgers, this new type of ‘blockchain ledger’ is not only more secure but can be applied to many sectors outside of finance – any sector/business/transaction that necessitates agreement and simultaneous coordination among multiple participants around the globe.
Blockchain’s innovation is the way it distributes and verifies ledgers through automation, cryptography, and decentralization. Importantly, there is no single source (or middleman) for the data— it is distributed among all participants.
What are the risks and characteristics of blockchain technology?
Although initially perceived as risky and still a nascent technology, blockchain has passed the initial acceptance phase as a new technology, and its use among companies is rapidly growing. There is virtually no risk when using blockchain technology. In fact, it’s more secure and transparent than traditional ledgers used by banks, for example. In our opinion, perhaps the only reason why there was initially perceived risk was because the first widely accepted application was bitcoin. This crypto-currency was initially used among a small niche of users to purchase risky and/or illegal items (really no different than using cash for illegal or risky activities and purchases). Once that facade has faded, the legitimacy becomes apparent. For example, there are now traditional investment vehicles that provide exposure to this emerging market and technology.
What are the uses of blockchain technology?
Blockchain is poised to become the next generation of transactional security, data storage, multi-participant authentication, supply chain management, and record keeping. Its use is far-reaching in terms of the modernization of global business transactions. These include health care, finance, real estate, logistics and manufacturing. Akin to Galileo pointing the first telescope at the sky– no one could have predicted all the things we’ve discovered in the universe since then.
Which companies are using it?
Many major companies are already investing in blockchain technology, and many industries stand to gain from its growing use. Technology companies such as Intel, Amazon and Microsoft operate servers and technology which host and run blockchains. Additionally, IBM, Daimler, and Mastercard either use blockchain technology in their financing operations or in their supply chains.
Finally, FedEx is actively exploring ways to utilize blockchain technology to track its shipments around the globe. As you may imagine, this development would potentially reduce costs and increase security for the millions of packages FedEx moves around the globe on a daily basis.
How do you invest in blockchain technology and its promise?
Investing in blockchain technology and the companies that embrace it has the potential to be a lucrative complement to an otherwise traditional investment portfolio. While crypto-currencies are known for their volatility, the technology behind them isn’t. There are arguably two ways to gain exposure to this emerging technology: buy individual stocks in those companies working & investing in the space or buy an ETF with a blockchain focus. For example, blockchain themed ETFs generally follow traditional indexes, such as the Reality Shares Nasdaq Blockchain Economy Index, which is designed to capitalize on the profits of companies that are committing material resources to developing, researching, supporting, innovating and/or utilizing blockchain technology for both their use and use by others. Reality Shares’ blockchain focused funds, symbols BLCN and BCNA, are ETFs designed to invest in companies utilizing blockchain technology—both globally for BLCN and locally specific in China for BCNA.
Reality Shares Blockchain ScoreTM
To better evaluate companies investing in blockchain technologies, Reality Shares created a rule-based methodology— the Blockchain Score. The Blockchain Score methodology analyzes blockchain companies on a global scale, calculating Blockchain Scores for companies based on a comprehensive analysis incorporating seven unique factors. These factors include the potential for an increase in economic profit, operational efficiencies, and transformational business practices. The ETF’s then use this scoring system for the basis of investing the portfolios.
The ETFs BLCN and BCNA use the Blockchain Score methodology to analyze and measure the potential return, and probability of success, for each company’s involvement with blockchain technology.
It’s not every day that we witness the birth of a new asset class. Blockchain technology, and the crypto-currencies built on top of it, are among the newest asset classes that investors have witnessed in generations. Rather than being scared off due to misinformation and a lack of knowledge about the technology, we hope we’ve educated investors so that they may make educated decisions about how to capitalize from this exciting new asset class.
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