Does blockchain technology have value for investors?
The creators, developers and investors of blockchain (commonly known as crypto) compare the current state to the internet of the mid-90s. At the time, few people understood how much our lives would depend on email, engines. search, social media and an endless array of websites. Looking back, it seems to have happened all at once, but we’ve waited years for the user interfaces and features that make the Internet user-friendly – and powerful.
The same can be said for crypto. It seems that the most interesting projects don’t solve day-to-day problems or create value in a user-friendly way. So it makes sense that investors are wondering if there is something out there.
Perhaps one of the reasons crypto was not accepted is the lack of a ‘killer app’. Functional and easy-to-use applications that rely on blockchain technology will eventually drive greater adoption and attract more people to the blockchain ecosystem.
Regardless, Bitcoin has already shown value and can be transferred safely and efficiently over the internet through a decentralized computer network. This astonishing step opens many doors to innovation.
What about the risks?
It is still very early in the development of the blockchain and the risks associated with using or buying crypto assets are high. You can think of it as early stage venture capital investments: many will fail, but a few could create massive value in what’s called Web 3.0.
In addition to the typical risks of venture capital, crypto investors should also consider:
Regulatory risk – Rules issued by regulators around the world continue to beat the drum. Some countries have outright banned the possession and trading of crypto assets. It’s unclear what others will do to limit crypto or delegitimize the properties of specific crypto assets. Governments are not likely to stand idly by if the monetary power of their central banks is eroded.
Extreme volatility – Another important consideration is price fluctuation. Imagine if venture capital investments were trading in real time, every day, all day. The volatility would be just as dramatic. As an example, the price of Bitcoin went from over $ 64,000 to $ 31,000 per coin a few months ago. Dips of this magnitude are not uncommon in crypto and can lead fearful investors to make bad decisions at the wrong time; just as they have historically done in traditional investing.
Information asymmetry – Crypto projects do not have regulatory filing requirements like publicly traded companies. Information about the development and improvements of these projects is usually only known to a small group of people.
Technological complexity – If someone is unfamiliar with the source code running these protocols, how would they know if there are any fatal flaws? Capitalism will eventually flush out the winners and losers, but for now specialist knowledge seems to be needed.
Storage room – Investors should do additional due diligence to find suitable custodians, or if they choose to guard themselves, on how to secure their keys. One need only look at reports earlier this year of an investor seeking permission to dig a landfill in England to recover a hard drive containing $ 280 million in cryptocurrency.
What Should Investors Do?
As our lives become more and more digitalized over the next few decades, it will be important to stay on top of crypto. As with any investment, you will need to do your homework and really understand what you are investing in before committing your money.
At Bangor Wealth Management, we will continue to closely monitor the maturation of this technology to help our clients explore its potential to achieve their goals.