How to invest in blockchain technology
door Jochem Wieringa
Blockchain technology is booming. Large investors are tapping into this trend and have invested over 1 billion dollars in blockchain related companies in 2015. Most companies that received this investment are working on user-friendly blockchain related applications and will launch their products in 2016. Users of some of those applications will not even realise they are using blockchain technology, just like most Internet users don’t realise they are using TCP/IP technology. Blockchain technology will become more and more mainstream this way, and we expect this boom to start in 2016, when the initial 1 billion investment results in actual products.
How do you, as a private investor, invest in this boom? You don’t have the connections nor the budget that the professional investors have. Still it is possible to invest in blockchain technology if you know how to. We will explain the basics of navigating this market and how to invest in blockchain technology.
1. Invest what you can lose
To invest in the blockchain scene is risky. The market has not matured yet, and even startups with a very promising product might simply be too early to succeed commercially. We’ve seen this in the early days of the Internet boom as well. So only invest in blockchain startups what you are willing and able to lose. Don’t bet your retirement money on it.
That being said, you can invest with different levels of risk even within the blockchain ecosystem. The more safe bet is to invest in established companies that invest in blockchain technology themselves, but don’t rely on it for their success. A good example is the publicly listed company Overstock. They believe in blockchain technology and invest a part of their resources in building a stock exchange called “t0” where stocks can be traded on a blockchain. If blockchain exchanges will become successful (which we think they will), then Overstock shares will rise. But even if they don’t succeed in this, the value of an investment in Overstock is still grounded on their success as an online retailer.
If you are willing to invest with more risk, you might consider to invest in purely blockchain related startups. The additional risk this route entails, offers greater reward if it succeeds. While startups have a bigger chance to fail than established companies, the upside when they are successful is easily a three figure percentage or more.
2. Invest in infrastructure
Another way to spread your risk, is not to invest in one or a few single startups, but to invest in the underlying infrastructure for the ecosystem. This means investing in blockchains themselves, rather than in the applications built on top of them. That way, you don’t have to be able to predict which applications will succeed or fail, but rather bet on the underlying technology. The most popular example of a blockchain to invest in, is the Bitcoin blockchain. It is simple to invest in this blockchain: just buy some bitcoins. There are some very user friendly websites where you can do that, for example Coinbase. Transfer some money, click buy, and your first blockchain investment is a fact. The Bitcoin blockchain is not the only blockchain investment opportunity however, as it might very well be that the Bitcoin blockchain runs into limitations and / or that other blockchains turn out to be better suited to become one of the leading blockchains in the future.
Which blockchains qualify for investment? Our main criteria to invest in a blockchain are:
- useful features that other blockchains lack
- a thriving community of developers and enthusiasts
- a competent and dedicated development team
- promising product roadmap
- likelihood of mass adoption
Most blockchains (there are a several hundred) don’t tick all of those boxes and are merely opportunistic copies of other blockchains that don’t bring much new to the table. We find Ethereum, Counterparty and Dash very interesting and invested in those by buying their respective coins ETH, XCP and DASH. We also have a few blockchains on our radar that have not launched yet, but that we will definitely invest in.
3. Invest via crowdfunding
For many startups, crowdfunding is the most attractive way of acquiring investment. Crowdfunding saves a startup the hard road of finding one big investor, but instead aims to raise investment from a large number of small private investors. Popular non-blockchain examples from crowdfunding platforms like Kickstarter include Oculus Rift, where every crowdfunder invested an amount as small as $275 to the company in return for the first copies of their product. This resulted in Oculus Rift raising an investment of nearly $ 2,5 million from around 9500 investors during their crowdsale. As an added bonus to the investment itself, the young company had 9500 enthusiastic customers before they even finished their product. Crowdfunding in the blockchain ecosystem is even more interesting than in other markets. That is because blockchain technology itself offers a very good way to issue stocks in a company. More on that in this article. In short: by issuing stocks on a blockchain, a startup can sell part of their company to early investors without all the costs and hassle involved when listing your company on a traditional stock exchange. Instead of buying the company’s first product, the crowdsale investor buys a digital share in the company. Blockchain crowdsales are not only a good way for private investors to invest in promising startups, we at CryptoCrunch also invest via crowdsales. An example of a crowdsale we participated in is Augur.
4. Invest in digital assets
How does an investor in a crowdsale monetize his investment? He can sell the digital assets that he purchased in the crowdsale on an exchange where digital assets are traded on a blockchain. By buying those assets from a crowdsale investor, another investor can invest in a company even when he missed the crowdsale. This way of working is not very common yet, as blockchain based exchanges hardly exist and legislation on the legal status of a digital share is vague or nonexistent. We think however, that blockchain based exchanges will become a major part of worldwide economic traffic in the future and legislation will catch up. One of the first of those blockchain based exchanges is t0, the abovementioned exchange that Overstock launched a few weeks back. Overstock even got approval from the legislator to issue their own shares on t0. They are not the only player to acknowledge the future potential of blockchain based exchanges for digital assets. The New York Stock Exchange and NASDAQ are also working on such exchanges, amongst other well-funded companies. Blockchain based exchanges will make it easy to invest in digital stocks of companies worldwide in the near future.
This article provided a short overview of some of the ways a small private investor can invest in blockchain technology. There is much more to tell about this topic, so stay tuned for Part 2 on how to invest in blockchain technology.