Blockchain Technology: Investments and Risks. Part 1

Although initially developed as a platform for cryptocurrencies such as Bitcoin, more and more financial institutions and other industries are beginning to recognize the value of blockchain technology as a mean of allowing parties to enter into a wide range of transactions while reducing costs and hassle and increasing transparency. The potential of blockchain technology is only beginning to be utilized across a range of sectors as the industry begins to understand the range of benefits that can be obtained from doing business through the blockchain.

This post will discuss the recent rise of investment in blockchain technology, the potential risks related to such investments, and where we see blockchain technology going in the future.

Blockchain Investments — Facts & Figures

In 2017 investments in blockchain technology has soared. The price of popular cryptocurrencies such as Bitcoin and Ethereum have grown phenomenally, with an estimated $138 billion invested in cryptocurrencies this year alone. Furthermore, an estimated $2 billion has been invested in initial coin offering (ICO) funding so far this year, compared with $256 million in the entirety of 2016. In addition, private investments in blockchain companies have risen to $4.5 billion so far in 2017, up from $1.4 billion in the last nine months of 2016. As of September 2017, there are almost 70 hedge funds that focus specifically on digital currencies that have raised about $800 million thus far, with a target of $2 billion.

Although speculation in cryptocurrencies dominates the blockchain investment market, much of the private investment is being aimed towards blockchain start-ups, with an estimated 826 blockchain-related companies having received private investment this year. The best-funded sector is the payment infrastructure sector, followed by cryptocurrency mining and exchanges, blockchain technology development and banking infrastructure.

Blockchain Investments — Risks

Although the rise in investment is significant, there is some risk that the highly volatile nature of the blockchain industry is resulting in a bubble. Indeed, some commentators believe that the current rate of investment is unsustainable, with many finding parallels with the dot-com boom of the 1990s.

Other risks stem from the fact that blockchain technology remains cutting edge and in many industries, there is still a lack of understanding of how the technology operates and how it may be best utilized. The sheer volume of start-up companies that are associating themselves with blockchain technology makes it difficult for investors to know which company will succeed and which will not, as well as making it difficult to differentiate legitimate businesses with scammers.

At present, many financial institutions are continuing the technology, with 65% of banks expecting to incorporate the technology into their business model by 2020. Many of these banks are working with start-ups to enhance their blockchain capabilities. However, many of the larger financial institutions and leading companies in other industries remain reluctant to fully embrace blockchain technology on a large scale. As discussed above, one of the reasons for this lack of adaption is a lack of widespread understanding of the underlying technology. In addition, many of the well-established financial service providers, such as credit regulators, accountancy firms and lawyers, may be reluctant to embrace the technology for fear that it will make their industry redundant.

State regulation also remains an issue for blockchain technology. While a number of financial regulators, such as the British, German and Irish regulators, have adopted a progressive frame of mind towards regulating the technology, there remain some concerns over cybersecurity, money laundering and data protection. For example, the Chinese government has announced a ban on ICO’s due to a fear that the use of cryptocurrencies is making it too easy to extract funds from the country.

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