Investing in Blockchain start-ups? Read this first!

With Blockchain technology making headlines over the past year, it’s not surprise that there have been a many of Blockchain companies raising large amounts of capital around the world.

Although initially developed as a platform for cryptocurrencies such as Bitcoin, more and more financial institutions and other industries are beginning to recognize the value of blockchain technology as a mean of allowing parties to enter into a wide range of transactions while reducing costs and hassle and increasing transparency. The potential of blockchain technology is only beginning to be utilized across a range of sectors as the industry begins to understand the range of benefits that can be obtained from doing business through the blockchain.

What are the risks?

•  The highly volatile nature of the blockchain industry can potentially be leading to a bubble. Indeed, some commentators believe that the current rate of investment is unsustainable, with many finding parallels with the dot-com boom of the 1990s.
• Blockchain technology remains cutting edge and in many industries, there is still a lack of understanding of how the technology operates and how it may be best utilized.
•  Adoption is not guaranteed.  65% of banks expecting to incorporate the technology into their business model by 2020 but larger financial institutions and leading companies in other industries remain reluctant to fully embrace blockchain technology on a large scale, likely due to lack of widespread understanding of the underlying technology.  In addition, many of the well-established financial service providers, such as credit regulators, accountancy firms and lawyers, may be reluctant to embrace the technology for fear that it will make their industry redundant.
• The high volume of start-up companies that are associating themselves with blockchain technology makes it difficult for investors to know which company will succeed and which will not, as well as making it difficult to differentiate legitimate businesses with scammers.

Raising capital through Initial Coin Offerings

An Initial Coin Offering is a fundraising tool that trades future cryptocoins in exchange for cryptocurrencies of immediate value.  An investor gives the ICO bitcoin or ethereum, and receives a new crytocurrency instead. ICOs have been described as “unregulated issuances of cryptocoins where investors can raise money in bitcoin or other [cryptocurrencies],” which is accurate, especially if you underline the word “unregulated.”

China made a move to ban ICOs in August 2017.  The boom has fueled a jump in the value of cryptocurrencies, but raised fears of a potential bubble.  Investors in China contributed up to 2.6 billion yuan ($394 million) worth of cryptocurrencies through ICOs in January-June, according to a state-run media report citing National Committee of Experts on Internet Financial Security Technology data.

Notable experts have spoken up about blockchain and ICOs:

“I think blockchain is a super interesting technology but there are a lot of fads going on right now … There are a lot of these initial coin offerings which are in my opinion are absolute scams and people should be very wary of things that are going on in that area,” Jimmy Wales, founder of Wikipedia, told CNBC in an interview on October 13, 2017.

Despite these risks, blockchain technology companies will likely continue to make headlines for the foreseeable future.

Keep your eyes on NAI500 for more reports about investment opportunities and trends.