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Point of View

Time to join the blockchain gang?

We look into blockchain – the technology behind Bitcoin

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It’s likely you’ll have heard of the digital currency known as Bitcoin, a form of money that’s not issued by any government. However, the technology behind it – blockchain –  could have far-reaching potential.
 
Clever minds have started to realise that blockchain contains the seeds of something genuinely revolutionary. It’s the biggest innovation – with the greatest potential impact on investing – that you’ve never heard of.
 
The blockchain was originally invented by the mysterious Bitcoin creator Satoshi Nakamoto back in 2009 to solve the problem of devising a new currency backed by no central banks or governments. Each blockchain is a giant decentralised electronic ledger with duplicate copies on thousands of computers around the world.

Irrefutable record

All these records of every transaction are lumped together into ‘blocks’, then bound together cryptographically and chronologically into a ‘chain’. This encryption process, known as hashing, is carried out by every computer on the network. If they all agree on the answer, each block receives a unique digital signature.
 
As a result, no transaction recorded can be altered or deleted retrospectively – so in effect it’s an irrefutable record of transactions. It’s proof of ownership and provenance.
 
It hasn’t taken long for people to realise the blockchain is bigger than Bitcoin…  earlier this year, for instance, the Nasdaq began using blockchain technology to power its pre-IPO trading of shares in private companies.
 
Sir Mark Walport, the UK Government’s chief scientific adviser, argues the technology could expand far beyond a trading tool. He says: “It is a database that can track who owns what – be it financial, physical, electronic assets, a diamond, an antiquity, a unit of currency or what’s inside a shipping container.”

Improved security

According to a report by the World Economic Forum, more than $1.4 billion had been invested in blockchain technology in just three short years and, by 2027, an astonishing 10% of global GDP is likely to be stored on blockchain platforms.
 
What does this mean in practical terms? For a start, the costly and time-consuming legal documents that deter smaller investments will vanish. It will also increase security – if the technology detects a discrepancy, such as double shares, the transaction is automatically disabled.

Challenges to overcome

There are problems, of course. Speed, for instance, as the distributed network may not scale up to handle an enormous number of frequent trades or updates. There’s also a very uneven response from regulators. And although to date hackers have struggled to attack such a widely distributed network, the greater the number of items stored on the blockchain, the greater their incentive to figure that out.
 
So, for now, it’s probably best to steer clear of investing in blockchain start-ups – but start thinking about those investments you’ve shied away from because you haven’t understood the market. Everything is about to become a whole lot easier.
 

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.