Like every promising investment area, blockchain has risks and offers opportunities, and to understand these, it is important to understand aspects of the technology.
“High-net-worth investors need to know about which industries blockchain is going to have a huge impact on. It’s happening already today in companies that have to manage huge supply chains, and there’s a huge market in things that are represented and bought and sold as NFTs,” says Kunal Bhasin co-leader of KPMG Canada’s blockchain services practice.
Sectors that rely on transparent information that can be shared widely and not tampered with benefit from blockchain, says Kareem Sadek, partner in risk consulting and also co-leader in blockchain services at KPMG Canada.
What to consider when investing in blockchain technology
Interest soaring in cryptocurrency, but volatility holding many back
Research firm CB Insights’ report on blockchain for the third quarter of this year found that global venture funding to blockchain (and cryptocurrency) startups reached US$15 billion in the first nine months of 2021, up 384 per cent year over year from 2020. There was nearly US$1 billion in funding to startups in Canada that are building the digital infrastructure to safely and permanently store data and records in the cloud.
Those who analyze and follow blockchain say there is no optimal percentage of blockchain-based investments to have in a portfolio, because the technology is still relatively new and even good new businesses can be risky.
Here are a few things that investors who are looking at the technology should know:
Blockchain is not bitcoin and it’s not cryptocurrency
Think of them as relatives. Cryptocurrency is a medium of exchange, like a dollar or a euro, except it is expressed in digital code rather than as a piece of paper or a coin. Bitcoin is simply one of the better known forms of cryptocurrency. Blockchain is the technology — the digital infrastructure that lets cryptocurrency exist. But blockchain manages all kinds of data.
What blockchain does
Blockchain keeps a ledger of all transactions that anyone enters into its system. But there is no central database, so there is no central clearing authority. Once information goes into the blockchain it is permanent and can’t be altered by anyone else. This can be useful for transferring funds, trading shares, keeping track of who owes money, goods or services to whom and even running elections.
Where blockchain can be a game changer
Blockchain is already streamlining the way companies manage their supply chains — a key move forward after the major disruptions in supply chains during the pandemic. It has huge potential in sectors that have fractional ownership, such as aircraft, real estate and possibly soon, driverless cars — people want access to such goods by being part-owners, not necessarily with full responsibility. In healthcare, encrypted patient information can be shared by different providers without breaching peoples’ privacy. Blockchain can also be used for a tamper-proof electoral system that would let people vote on their smartphones or tablets, with the results counted independently and instantly.
Why blockchain matters (and why investors are watching)
“Blockchain represents a widespread shift in thinking about technology, trust and value, and that is driving its global momentum,” says Paul Stapleton, Chief Technology Officer at Fidelity Clearing Canada. “With blockchain, we are encouraged to think differently about how value is stored and transferred between individuals and between corporations.” Data on the blockchain can’t be owned by one person or company, for example, because everyone has access to it. On the other hand, the blockchain can certify who owns the original version of a song, a poem, a photo or a video. In March, an NFT of the world’s first tweet, by Twitter co-founder Jack Dorsey, sold for about US$2.9 million.
Since the data that goes on the blockchain can’t be altered, what if it is wrong in the first place? What happens if data someone wanted to protect, such a patented technology, gets blockchained? What criteria should investors look at when considering whether to back particular blockchain startups? And just as there was a big tech bust in 2000, what if interest in investing in this area wanes and values drop in a blockchain bust?
SOURCES: PWC, The Canadian Association of Alternative Strategies & Assets
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