Blockchain and Bitcoin both start with B and are closely related, so people can be forgiven for mixing up the two. As an investor, though, it’s important to understand these at a more fundamental level before you risk any money in the crypto arena.

To begin with, let’s clear up the definitions; then later add some more information to enhance our understanding.

Definition of Blockchain, Bitcoin & Cryptocurrencies

Blockchain is the technology that makes most cryptocurrencies possible. 

Bitcoin is the original cryptocurrency and largely the model for those that came later.

Blockchain was invented alongside and as a part of Bitcoin, but now has many more use cases.

Cryptocurrencies are digital forms of money that use cryptography and encryption to constitute “coins” (actually, digital numbers) and verify transactions.

Of course, there’s a lot more to the matter. For those exploring these topics for the first time, a little more background and detail will be helpful to embed these ideas in your mind and eventually grasp the investing potential.

Back to blockchain

Blockchain is the set of algorithms and standards that make bitcoin work. This software is responsible, among other things, for ensuring that crypto-transactions are recorded securely and indelibly. 

Everything that happens to Bitcoin is recorded on a blockchain. The blockchain is often described as a ledger, like a book of accounts in which account transactions are recorded. Taking the metaphor a little further, every exchange is written down in this ledger in pen – transactions can’t be repudiated or challenged (without some very heavy mathematical and digital lifting.)

What separates blockchain from other secure information-recording systems is that it exists on a peer-to-peer (P2P) network. There is no central computer which everyone who uses blockchain has to trust and needs to access. Instead, security and trust are baked into the software, not its owner or the specific device that runs it. Blockchain uses this distributed property to allow users to confirm transactions without any central clearing authority. Clearing simply amounts to verifying that a transaction is real and legitimate. 

In the world of finance, the most obvious example of a central clearing authority is a stock exchange, or at least the clearing houses employed by stock exchanges. In this example, a stock cannot be sold by an equity investor to a friend without formalising the sale; the transaction needs to be confirmed and recorded by the exchange. This anti-fraud function of the stock exchange would become redundant if share transactions were hosted on a blockchain. 

The flow of events from a transaction request, through validation to block creation and completion, works like this:

Source: MLSDev.medium.com

Blockchain’s role in Bitcoin

Blockchain was developed specifically to support Bitcoin by a mysterious, anonymous inventor who used the nom-de-hacker Satoshi Nakamoto. Because the entire standard is open-source, meaning that the code it’s comprised of is publicly available, some enterprising programmers have stripped out the blockchain element from the larger bitcoin codebase and modified it to use in other ways, including other cryptocurrency blockchains. Some of these use cases and potential future uses are discussed further below.

What we should emphasise now is that you cannot buy blockchain. Blockchain is a digital technology – it does not have a price because it does not have an owner and is not an asset, financial security, or currency. However, you can buy and sell Bitcoin, Ethereum, and other cryptocurrencies. 

What is bitcoin?

Bitcoin was the first decentralised digital currency. Though many competitors have followed in its footsteps, the same principles underlie all of them.

Just as fiat currencies like the US dollar or Swiss franc are the money that moves through the global banking system, Bitcoin is one of the currencies that travel over the blockchain network. 

Like every currency, bitcoin has a value relative to other currencies known as an exchange rate. As the demand for bitcoins and fiat currencies fluctuates, so does this exchange rate. Bitcoin valued in US dollars has the trading symbol BTC/USD, while bitcoin valued in euros is BTC/EUR. 

If you buy bitcoin and the price subsequently goes up (i.e. a Bitcoin becomes worth more in US dollars), you can then sell your bitcoin and thus turn a profit. Conversely, if you buy it and the BTC/USD exchange rate falls, you stand to make a loss. Cryptocurrencies are notoriously volatile: they can be traded just like forex traders do with fiat currencies, but they are not normally considered investable assets.

Bitcoin is sometimes called “the people’s currency” because it has no central issuing authority and is not overseen by any country, government, or bank. Instead, the number of bitcoins that can ever be in circulation is determined by the standard’s architecture. These coins are mined by computers that process complex algorithms.

How bitcoin, and cryptocurrency more generally, derive their value is still an open debate. Critics still call it a ponzi scheme that operates on the “greater fool theory”, while crypto enthusiasts level much the same accusation at fiat currencies. Central banks, they reason, can devalue their national currencies at any time by allowing more of it in circulation, while bitcoin at least has the virtue of scarcity.

How else are blockchains used?

Though bitcoin was a remarkable innovation, its most enduring legacy may be the technology that underpins it. Blockchain has much wider applications than running cryptocurrency networks.

Some in the tech world continue to see blockchain as being potentially disruptive to the economy and traditional industries – as the internet has been and AI threatens to become. Some of its potential uses are likely still to be discovered, but smart investors and commentators attempt to foresee likely developments. 

Widespread use of blockchain in major industries is still in its infancy, though there are already several new digital industries in which Blockchain is integral

Smart contracts

Though a comprehensive legal framework for this is far from complete, blockchain proponents assert that any contract can be converted to computer code, stored, replicated, and supervised by a blockchain. This can then be supported by “ledger feedback” like transferring money and receiving an associated product or service. The advantage to this would be that no third parties like lawyers would be needed to argue over and enforce the contract, which would happen automatically.

Therefore, in the future, anything that a contract can relate to – for example real-word items like property or shares – can be managed by a smart contract. In theory, no more real estate agents, lawyers, or stock brokers would be required, though this happy outcome remains somewhat utopian.

NFTs

NFTs (Non-Fungible Tokens) are tokenised versions of digital assets that can be traded on a blockchain. Unlike Bitcoin, which is also traded over a blockchain, NFTs are unique and so cannot be traded like fungible commodities, but only bought and sold using cryptocurrencies such as bitcoin. 

One possible application for NFTs would be the sale of digital artworks. Sadly, early efforts at displaying this use case were poorly conceived and executed, giving NFTs a bad name.

Other ways blockchain might be used

Given that almost every aspect of industry, commerce and even government involves tracking data and transactions, it would seem that many supply chains are ripe for the inclusion of blockchain technology. The framework is certainly versatile to support numerous applications, some of which are hard to imagine today. 

However, existing systems of accounting and inventory management continue to work as intended. If blockchain should gain widespread acceptance, it will probably be in a field where these prove to be inadequate to the task and a highly distributed system of secure recordkeeping becomes desirable.

How to invest in bitcoin and blockchain

Bitcoin

Bitcoin is a cryptocurrency that can be bought and sold on a cryptocurrency exchange and stored in a digital wallet. Derivatives of bitcoin and other cryptocurrencies include Exchange-Traded Funds that specialise in the market. Shares in these can easily be purchased through your favourite trading app.

People who buy and hold cryptocurrencies for years are known as “hodlers”. The idea behind doing so is the belief that these digital coins will receive ever wider adoption from the general public as well as institutional investors and, as a result, become more valuable in the future. In a sense, buying crypto is seen as a hedge against major fiat currencies, much like precious metals.

Blockchain

To invest in blockchain means to invest in the shares of companies that are adopting or developing blockchain technology. This can include established players in the manufacturing, financial, and other services sectors that are bringing in new technology to improve their product or service and/or reduce costs. 

In addition, technology start-ups looking to disrupt existing ways of doing business through novel applications of blockchains are worth watching. For the moment, most investors in the tech arena have their eyes firmly glued to AI, meaning that it’s quite possible that some blockchain unicorn is about to gain traction.