You have heard of Blockchain and you know Bitcoin is all the rage - but what’s the difference between them? And what are the investing opportunities in both?
Blockchain and Bitcoin both start with 'B' and are closely related to cryptocurrencies so people can be forgiven for mixing up the two -- until they read this article…
Let’s clear up the definitions upfront and then add some more information to bulk up our understanding.
Blockchain is the technology that underpins most cryptocurrencies.
Bitcoin is the original and best-known cryptocurrency.
Blockchain was invented alongside Bitcoin but now has many more uses.
Cryptocurrencies are digital money that uses cryptography and encryption to mint the new coins and verify transactions.
Phew, that's clearer! For those exploring these topics for the first time, a little more background and detail will be needed to embed these ideas in your mind, and really grasp the investing potential.
Contents: Blockchain vs Bitcoin
- What is Blockchain?
- What is Bitcoin?
- How else are Blockchains used?
- How to invest in Bitcoin and Blockchain
What is Blockchain?
Blockchain is the underlying technology that makes Bitcoin work - and most crypto-enthusiasts would agree - what makes Bitcoin so game-changing.
Everything that happens to Bitcoin is recorded on the Blockchain. The Blockchain is a ledger - meaning a book of accounts in which account transactions are recorded.
What separates Blockchain from any other ledger is that it sits on a peer-to-peer network.
[ P2P is the same technology behind file sharing apps like Napster. The files were shared on multiple computers so if one computer shuts down, the P2P network stays intact. ]
Blockchain uses this property of P2P to allow users to confirm transactions without a central clearing authority. Clearing is simply verifying that a transaction is real and legitimate.
For those interested in finance, the most obvious example of a central clearing authority is a stock exchange, or at least the clearing houses employed by the stock exchange. In this example, a stock cannot be sold by an equity investor to his or her friend, the transaction needs to be cleared by the exchange. Were stocks to be traded on a Blockchain, the clearing function of the stock exchange would become redundant.
The flow of events from a transaction request, to validation to ‘block creation’ then completion works like this:
Going back to the blockchain and its relationship to Bitcoin...
Blockchain was developed specifically for Bitcoin by the mysterious anonymous inventor Satoshi Nakamoto.
Because it is all open-source, people have stripped out the Bitcoin Blockchain from the Bitcoin code and modified it for use in other ways, including other cryptocurrency Blockchains. We will discuss some more of these use cases and potential future uses further below.
What is Bitcoin?
Bitcoin is the first decentralized digital currency.
Just as fiat currencies like the US dollar or Swiss franc are ‘the money’ that gets transacted through the banking system- Bitcoin is the money for the Bitcoin Blockchain.
Like every currency Bitcoin has a price relative to other currencies known as an exchange rate. Bitcoin valued in US dollars has the trading symbol BTC/USD, Bitcoin valued in Swiss francs is BTC/CHF etc.
If you buy Bitcoin and then the price goes up, for example a Bitcoin becomes worth more US dollars and then you sell the Bitcoin, you can turn a profit. However if you buy it and the BTC/USD exchange rate goes down i.e. the price falls, then you stand to make a loss.
Bitcoin is often called “the peoples’ currency” because it has no central issuing authority and is not overseen by any country, government or bank. Instead, Bitcoin is mined by computers processing complex algorithms and transactions are recorded on a blockchain.
It is still a source of debate about how Bitcoin derives its value. Critics call it a ponzi scheme that works on the ‘greater fool theory’ while among proponents the most popular valuation model is known as Plan B, which prices the cryptocurrency based on scarcity among other factors.
How else are Blockchains used?
As you are now beginning to realise, blockchain has much wider applications than cryptocurrency networks. So much so, that some in the tech world see Blockchain being as disruptive to the economy and traditional industries as the Internet has been.
How is Blockchain being used already?
Widespread use of Blockchain in major industries is still in its infancy, but there are already two new digital uses for which Blockchain is integral.
The concept is that any legal contract can be converted to computer code, stored, replicated and supervised by a blockchain. This can link to ‘ledger feedback’ like transferring money and receiving an associated product or service.
The reason to do this would be that no third pirates like lawyers or agents would be needed to argue over and enforce the contract, it would happen automatically.
Anything that a contract can relate to - for example real-word items like property or shares - can be turned into a smart contract.
NFTs (non fungible tokens) are tokenized versions of digital assets that can be traded on a blockchain. Unlike Bitcoin that is also traded over a blockchain, NFTs are unique so cannot be traded one-for-one but only bought and sold using cryptocurrencies such as Bitcoin.
Amazing ways Blockchain might be used
Given that almost every aspect of industry, commerce and even government involves tracking data and transactions, most are ripe for the inclusion of blockchain technology. Here are some very quick possibilities:
- Cyber security
- Financial services
- Supply chain audits
- Real Estate
- Transport and Tourism
How to invest in Bitcoin and Blockchain
Bitcoin is a cryptocurrency that can be bought and sold using a cryptocurrency exchange and stored in a digital wallet. Derivatives of Bitcoin and other cryptocurrencies such as Exchange-Traded Products can be accessed with an investing app like FlowBank.
People who buy and hold cryptocurrencies for years are known as ‘Hodlers’. The purpose for doing so is in the belief that these digital coins will receive wider adoption from the general public as well as institutional investors and as a result become more valuable in the future.
You cannot buy blockchain. Blockchain is a digital technology - it does not have a price because it is not an asset, financial security or currency.
To invest in blockchain means to invest in the shares of companies who are adopting Blockchain technology. This can include established players that are bringing in new technology to improve their product or service and/or reduce costs as well as start-ups looking to disrupt the existing companies in the industry they are targeting.
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