Blockchain technology is one of the major innovations in the financial industry, promising to reduce fraud, ensure fast and secure transactions and transactions, and ultimately help manage risk within the financial system. global interconnected.
The blockchain achieves this through advanced cryptography designed to resist hacking, thereby adding trust to the transaction ecosystem.
The blockchain offers many financial uses, which are not limited to the tracking of transactions and transactions. As our global financial system becomes more and more connected in the age of digital transformation, investors would be well advised to educate themselves on how blockchain is changing the system and how to obtain and regulate it. exposure to this development.
Here’s what investors need to know about the growing role of blockchain in financial services and the revenue potential and risk factors it represents, from tech startups to traditional banks:
- What is blockchain?
- Benefits of blockchain in financial services
- Risks facing blockchain and financial institutions
- Blockchain investments to buy
What is blockchain?
Blockchain is a digital collection of transactions that are tracked and recorded in a decentralized network. It is a distributed ledger, which means that there is no central network authority, or that no person or entity controls the network with the ability to corrupt the network. The blockchain consists of individual blocks of data, each containing a record of information, which are linked to each other in chronological order. These links cannot be changed, which is what gives the network confidence.
This revolutionary technology manages information transactions by securing them as they occur. The goal of blockchain is to reduce the cost of transactions and make them more efficient and faster.
The technology has many applications which can be integrated across different industries, providing investors with many opportunities. For starters, it is one of the technological foundations of cryptocurrencies like Bitcoin.
One industry with clear applications for blockchain is that of financial services, where companies are in a perpetual race to reduce transaction costs and frictions.
Benefits of blockchain in financial services
Blockchain has the potential to make the financial services industry more transparent, less susceptible to fraud, and less expensive for consumers.
Improve transparency. Blockchain can make the financial industry more transparent as users perform activities on a public ledger. This transparency can expose inefficiencies such as fraud, leading to the resolution of problems that could reduce risks for financial institutions.
Added security. As consumers become more active online, the digital world is fertile ground for scammers. With blockchain technology, this concern could be reduced. Payments and money transfers made on the blockchain are faster and more traceable than in traditional banking.
When information passes through different financial intermediaries, there is a risk of interception of this information, which increases the possibility of fraud. This gap in surveillance can be filled by the cryptographic algorithms of the blockchain which secures the exchange of information between the parties.
“In traditional finance, it can sometimes be difficult to get clean audit trails, which has resulted in serious economic losses in the past due to careless behavior or malicious actors,” says Ben Samaroo, co-founder and CEO of WonderFi, a decentralized financial company. Platform. “This risk can be significantly reduced with a combination of blockchain technology and machine learning to monitor and manage risk with a high degree of precision.”
Fintech companies, other companies that use large amounts of data need blockchain to strengthen data integrity.
“Since the blockchain network is distributed, it does not have a single source of failure,” explains Marie Tatibouet, marketing director at Gate Technology, a cryptocurrency exchange based in China.
This feature, according to Tatibouet, increases the resilience of the network, protecting it from compromise.
Lower costs. As investors move away from financial advisers to avoid higher fees, blockchain offers consumers the opportunity to benefit from lower costs associated with traditional financial services.
Financial technology companies have become an important part of the financial services industry, allowing investors to open accounts with digital advisers and make independent financial decisions. As fintech plays a bigger role in global finance, its relationship with blockchain will inevitably grow stronger.
This innovation can be beneficial for consumers, as investors get more for their money and they achieve a balance between automating financial services and lower cost.
“Institutions that adopt this new technology first will be able to streamline internal processes and provide their clients with lower cost financial services, effectively beating their competitors in terms of cost to capture more of the market,” said said Samaroo.
This ultimately benefits the ordinary investor who is looking to cut spending while accessing this new financial services environment.
Risks facing blockchain and financial institutions
Weighing against the promise that blockchain holds for financial institutions is a major risk affecting the bottom line: Traditional financial institutions are making money on transaction fees that could be lowered or eliminated with blockchain technology.
When it comes to transferring money, consumers have to rely on banks or third parties to process transactions.
But the adoption of blockchain could bypass third parties such as banks, which would eliminate the fees and other costs associated with these services. As a result, banks may face transaction-based volume and revenue issues.
The blockchain makes the infrastructure that belongs to financial institutions less important because it serves as a verification mechanism that “is not concentrated in the power of a single institution”, explains Thomas Shohfi, assistant professor at the Lally School of Management of Rensselaer Polytechnic Institute in Troy, New York.
What’s more, blockchain innovation is moving so fast that regulation has yet to catch up. Thus, potential policies impacting blockchain can be seen as another obstacle to integrating blockchain into financial services.
“Existing regulations present a significant barrier to blockchain adoption, as regulators will prioritize existing licensees over disruptors,” Tatibouet said.
Regulators are working to determine the pros and cons of blockchain technology to see if it is suitable for financial institutions and what the consequences are for businesses and consumers.
“This rigidity has so far stifled innovation,” says Tatibouet. “However, this view is changing as governments and other public organizations see the benefits of this technology.”
Blockchain investments to buy
For investors who wish to gain exposure to blockchain as it changes the financial services industry, there are several ways to approach this investment. One way is to buy from companies whose businesses are operated in blockchain technology.
“Financial or technology companies that see blockchain as a disruptive technology and want to be experts in it can sell their services to clients,” Shohfi said.
One company that falls into this category is International Business Machines Corp. (ticker: IBM), which focuses on the development of blockchain technologies. IBM also provides services to businesses to integrate blockchain for efficiency, scalability and growth.
Another approach that investors can take is to invest in cryptocurrency-focused stocks that serve as pure play for blockchain investments. MicroStrategy Inc. (MSTR) does the trick here. The software solutions company owns more than 105,000 bitcoins, a portfolio valued at more than $ 5 billion.
Square Inc. (SQ) is another company that invests heavily in Bitcoin and strongly believes in the blockchain network. The payment services company recently announced that it will launch a decentralized financial platform focused on Bitcoin applications.
Investors are aware of these stocks and their potential. MicroStrategy is up about 80% year-to-date, and Square has seen a 23% increase year-to-date. This compares to the roughly 20% return of the S&P 500 since the start of the year. Investing in these publicly traded companies allows you to invest heavily in the blockchain without being directly exposed to the volatility and speculation associated with certain cryptocurrencies.
For investors looking to further hedge their risk against Bitcoin speculation and volatility, exchange-traded funds may be a better option. The Amplify Transformational Data Sharing (BLOK) ETF provides investors with exposure to companies that are well positioned to profit from the development of blockchain technology. Since the fund’s inception in 2018, it has generated a return of 150%, making it a profitable investment option.