Should You Invest in Blockchain Stocks? (w/ How-To)

Investing in stocks can be beneficial for anybody who wants to save for retirement and work toward a financially secure future. Technology stocks have experienced some of the most impressive growth – and impressive crashes – in recent years. In other words, investing in technology can be lucrative while also being risky.

At Addition Financial, many of our members have been asking about investing in blockchain stocks and wanting to know about the benefits, risks and best methods for finding blockchain stocks to buy. Here’s what you need to know about investing in blockchain stocks.

Can You Invest in the Blockchain?

Let’s start by addressing a common question that points to a misconception about blockchain. We sometimes get asked by members if they can invest in the blockchain. The answer is not directly, and we’ll explain why.

There is not only one blockchain, there are many. A blockchain is a distributed digital ledger, which means that it’s essentially a database. The “distributed” part means that instead of being housed in a central location, as would be the case with a business ledger, the ledger is distributed among users.

Blockchain technology is the technology that allows data to be added to a database in a way that protects the data and ensures its accuracy. So, any easy way to think about it is that you can’t invest in the blockchain, but you can invest in blockchain technology by investing in companies that are supporting blockchains, using them or exploring their potential uses.

Why Invest in Blockchain Technology?

Are blockchain technologies a good investment? Many of the investing experts we’ve spoken to believe that they can be. Let’s review some of the reasons that you might want to put some of your money into blockchain technology stocks:

  1. Blockchain technology solves problems that affect multiple sectors and industries. The nature of a blockchain is that it is secure because new data must be verified by consensus before being added to the chain and may only be changed by consensus. That makes it useful as a way of improving security.
  2. While you may have first heard about blockchain as it relates to cryptocurrencies such as Bitcoin and Ethereum, it may be used in a variety of ways that have nothing to do with digital currency. For example, it can be used publicly to store information about property sales or privately to store trade secrets.
  3. Leaders in nearly every industry are investigating the potential uses of blockchain technology and it’s reasonable to expect that more companies will adopt it in the future, making investing in them an investment in blockchain technology, too.
  4. Because blockchain is still a relatively new technology – and assuming it lives up to predictions – there is a lot of potential for your investments to grow if you get in early.

We’d be remiss if we didn’t also mention some of the risks of investing in blockchain technology. The biggest risks, and these apply to investing in any new technology, are that it won’t be widely adopted or something better will come along to replace it. It’s for that reason that we would recommend diversifying your investments. Make blockchain technology part of your investment portfolio, not all of it.

Should You Invest in Cryptocurrency or Stocks?

Before we dive into how to invest in blockchain technology, we want to address the issue of cryptocurrency investing and whether that’s a good idea.

If you’ve been paying any attention to the world of cryptocurrency, you may have seen some extraordinary numbers that could make you believe that you can get rich investing in cryptocurrency. Let’s talk about the reality of crypto trading.

It is true that some people have made a lot of money trading cryptocurrency. However, it’s equally true that people have lost a lot of money. The reason is that there are some significant risks associated with buying cryptocurrency – and while that’s true with any stock, there are some special risk factors with cryptocurrency:

  • Lack of regulation – Cryptocurrencies are decentralized, which makes them different from fiat currencies such as the United States dollar. With no regulating authority, buying cryptocurrency can be risky. Virtual currencies only have value because people believe they do, and are not backed by gold or anything else.
  • Volatility – Cryptocurrency prices can be wildly volatile. Bitcoin, which is the oldest cryptocurrency and the most stable, has been shown to have an hourly deviation of nearly 1%, which is high compared to other investments. Some digital currencies have hourly deviations as high as 7% or 8%, which makes buying them risky. 
  • Cryptocurrency scams – As is the case with any financial transaction or investment, there is a risk that someone will try to scam you into a phony cryptocurrency investment. Always do your research.
  • Market adoption – While the use of cryptocurrency is on the rise, there is still a low market adoption rate and it may be difficult to spend if you need to do so.
  • Liquidity – There may be some difficulty pulling your money out of cryptocurrency, making a lack of liquidity a problem for some investors.

We should note that volatility is a risk with any stock investment. The stock market is constantly changing and world events and other factors can cause stock values to increase or decrease rapidly. 

A good way to approach buying cryptocurrency is to buy a small amount to start and don’t look at it every day unless you have a high tolerance for risk. It’s a new asset class with a market cap of over $2 trillion as of March 2022, and it makes sense to incorporate it into your portfolio, but proceed with caution.

How Can Beginners Invest in Blockchain Technology?

If you want to invest in blockchain technology, here are some steps to help you understand how beginners can get started with blockchain investments.

#1: Learn About Blockchain Technology

You don’t need to become an expert in blockchain technology, but we do recommend learning a little bit about the history of blockchain technology, how the technology works and its potential uses before you choose your investments. A solid knowledge base will make you a more successful investor.

#2: Keep the Risks in Mind

As we mentioned above, there are significant risks associated with investing in blockchain technology and cryptocurrency. Crypto itself is a new asset class and its volatility makes it a risky investment. The same risks apply to investments in companies that deal directly in cryptocurrency. It’s important to go into blockchain and crypto investing with the right mindset about the risks.

#3: Research Individual Stocks Before Buying

Anybody who wants to invest in crypto or blockchain technology should know the importance of research, which is something that applies to any stock investment. The risk associated with buying stock in any individual company is that if the company fails, you will lose your investment. There are thousands of cryptocurrencies available for purchase and some will undoubtedly vanish.

If you do decide to invest in individual companies, be sure to research them well. There are lots of big companies that have begun to use blockchain technology, including Walmart and Amazon. There’s less risk associated with buying stock for an established company than there is with buying stock for a start-up. Using an investment app can help you find the information you need to choose stocks.

Minimize Your Risk by Investing in a Blockchain ETF

One way to minimize your risk while still reaping the benefits of blockchain technology growth and adoption is to invest in a blockchain ETF (exchange-traded fund) instead of buying individual stocks. With an ETF, you’ll be investing in every company in the fund and your risk will naturally spread out among them, reducing the likelihood that you’ll lose money.

Blockchain ETFs can be broken down into four categories that cover a broad range of investments:

  • Companies that own cryptocurrency, such as Tesla or MicroStrategy.
  • Crypto exchanges and miners. For example, Bitcoin is the first and most famous cryptocurrency exchange, and Marathon Digital Holdings or Riot Blockchain Inc are companies that perform Bitcoin mining.
  • Tech companies may supply hardware that supports blockchain systems or cryptocurrency mining, and some examples are Advanced Micro Devices and NVIDIA Corp.
  • Financial Services Firms, which manage crypto assets, as well as global banks that are developing blockchains for their own use. HSBC is an example.

There are eight blockchain ETFs that the SEC has approved as of this writing. Here’s a list, so you can review them and decide whether you want to invest in them:

  • Amplify Transformational Data Sharing ETF (BLOK)
  • Bitwise Crypto Industry Innovators ETF (BITQ)
  • Capital Link Global Fintech Leaders ETF (KOIN)
  • First Trust Indxx Innovative Transaction & Process ETF (LEGR)
  • First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT)
  • Global X Blockchain ETF (BKCH)
  • Siren Nasdaq NexGen Economy ETF (BLCN)
  • VanEck Digital Transformation ETF (DAPP)

Investing in a blockchain or crypto ETF can help you get your feet wet with blockchain investing while keeping your risk within reason. We should note that there are other ETFs that focus on futures-based cryptocurrency trades. Those are extremely risky and you should use caution when investing in them.

Manage Your Asset Allocation

Our final piece of advice would be to keep an eye on your asset allocation after you invest. Because crypto and blockchain investments can be volatile, it’s essential to spread out your investments. 

A good rule of thumb is to subtract your current age from 110 to determine what percentage of your investments should be in stocks. So, someone who’s 40 should have no more than 70% of their investments in stocks – and only a small percentage should be blockchain or crypto.

We can’t tell you whether to invest in blockchain stocks, but we hope that the information we have provided here will help you understand the benefits and risks and get started with your own research if you want to add blockchain investments or crypto investments to your portfolio.

Do you need help sorting through potential blockchain investments? We have the assistance you need! Click here to read about Addition Financial’s MEMBERS Financial Services program and schedule an appointment without one of our financial professionals.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.