If you've been keeping up with the trending topics in the cryptocurrency space these past few years, you must have surely heard the term "blockchain." Blockchain is a decentralized registry that acts as the backbone for cryptocurrency and digital transactions.

In this article, we will explore blockchain. We will identify the factors that make it a hot trend and potential investment opportunities.

What is Blockchain Technology? 

To begin, let’s understand the difference between “centralized” banking and “decentralized finance or banking” (a.k.a., DeFi). Traditional financial institutions are managed by a centralized governing body. For example, a central bank (e.g., a reserve bank) is an institution that manages the currency and monetary policy of a state or formal monetary union, and oversees their commercial banking system. In contrast, DeFi is the collective name given to an ecosystem of financial applications built on top of the blockchain–what we call decentralized banking. Stated another way, DeFi is a financial service ecosystem that’s open-source, permissionless, transparent and without any central authority. In this case, users have full control over their assets and can interact with the ecosystem through decentralized applications called “dApps.” As DeFi applications run on smart contracts—which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code—this ensures that these dApps run without any human intrusion. As these financial applications are built on a public blockchain, its code is transparent and open for everyone to see.

In the simplest terms, a blockchain is a record-keeping technology that can be described as a digital ledger or database that is not centralized with any regional authority or government. This decentralized database stores different sets of information which are structured into blocks. These blocks are further chained together, hence the name blockchain. Each of these database blocks has limits to the amount of data that can be contained in them. Once filled, the block is linked to the previously filled blocks, thereby forming a chain of data blocks. This chain is referred to as a blockchain.

How Does Blockchain Technology Work?

Blockchain technology relies mainly on cryptography to secure data. Cryptography is a secure means of storing data in which the plain regular text is altered into incomprehensible text. The fundamental purpose behind this conversion is to ensure that only those recipients for whom the text was directed can read and process the information. Thus, the data remains concealed for the rest. Cryptography helps achieve several aims, including protection from theft, forgery, alteration, and aids in user authentication.

Going further, concerning alteration and user authentication, unlike traditional transactions, which require a central authority, government, or organization looking over fiat currency transactions, to secure the transactions of cryptocurrencies, an algorithm is needed. Called Proof-of-Work (PoW), this algorithm looks over all the transactions of cryptocurrencies, thereby making the system work.

When it comes to managing the blockchain data set, with the help of a peer-to-peer network—or “P2P” network of computers—and a timestamping server, it is independently managed to ensure that the database is protected in its original form in the long term. This being said, the primary purpose of blockchain is to create digital records of transactions, contracts, or certificates that cannot be deleted or changed. Instead, blockchain can be added to in that it relies on a decentralized system to add new information using a “consensus mechanism” that sees multiple participants use the science of encrypting and coding data to validate new entries.

 Why is Blockchain Technology a Good Investment?

Due to the promise of improved trust, transparency, speed, and efficiency that our traditional systems don’t offer, blockchain has transformed into an attractive investment. When reviewing this technology’s economic gains and potential, we learned that in 2018, the global blockchain market was valued at around $1 billion, and is expected to reach $40 billion by 2025. In fact, Blockchain technology has been estimated to boost global gross domestic product (GDP) by $1.76 trillion over the next decade.

Having long been associated with cryptocurrencies such as Bitcoin and Ethereum, blockchain has applications across multiple industries, where companies implementing this type of technology gain a competitive advantage over rivals. For example, organizations in logistics, retail, healthcare, education, and other industries use blockchain technology to ensure trust and transparency in their activities. As such, for those with an eye toward the future, investing in blockchain technology is an excellent opportunity for savvy investors who would like to allocate capital to companies that can benefit the most in blockchain-related services.

What are Ways in Which to Invest in Blockchain?

There are many ways in which to invest in blockchain technology. For example, aside from directly buying digital currencies, looking into crypto-mining companies such as Riot Blockchain (Nasdaq:RIOT) and Marathon Digital Holdings (Nasdaq:MARA) are popular company’s that investors (who are bullish on Bitcoin and cryptocurrencies in general) have invested in. That being said, investing in blockchain technology doesn’t necessarily have to be a cryptocurrency play. It can also involve investing in companies that have invested in cryptos or offer crypto-related services. You see, as cryptos rise, the likely hood of companies who heavily invested in blockchain technology and cryptocurrencies, the stock prices of these types of companies rise in correlation. An example of solid publicly traded companies who have a substantial stake in blockchain technology and cryptocurrencies are:

  • MicroStrategy (bought $2.2B worth of Bitcoin) (NasdaqGS:MSTR)
  • Square (NYSE:SQ)
  • PayPal Holdings (NasdaqGS:PYPL)
  • JP Morgan Chase & Co. (NYSE:JPM)
  • CME Group (NasdaqGS:CME)
  • Overstock (NasdaqGS:OSTK)
  • Tesla (bought $1.5B worth of Bitcoin) (NasdaqGS:TSLA)
  • International Business Machines Corporation (NYSE:IBM)
  • Honeywell (NYSE:HON)
  • DocuSign (NasdaqGS:DOCU)

Besides investing in individual stocks, some exchange-traded funds (ETFs) provide exposure to blockchain technology as well–mainly for diversification, low cost, and less risk. These include:

  • Goldman Sachs Finance Reimagined ETF (NYSEArca:GFIN)
  • Capital Link NextGen Protocol ETF (NYSEArca:KOIN)
  • Amplify Transformational Data Sharing ETF (NYSEArca: BLOK)

Although Blockchain is still in its early days of real-world implementation, it has been around for more than a decade. No doubt, it promises significant change to the entire financial system and other industries in years to come. For that reason, it is wise for serious investors to focus on companies that will benefit more from this transformational technology’s growth now and in the future.