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Everything you need to know about blockchain

Reading time: 18 minutes

In the past few years, you may have noticed the term 'blockchain' thrown about with increasing frequency. It's understandable when you consider the fact that many individuals are comparing the significance of blockchain technology to that of the World Wide Web in the 1990s. But what is it? How does it work? Most importantly, how you can you position yourself to capitalise on - what could be - an enormous growth opportunity. Read on to find out!

blockchain

Blockchain definition

In simple terms, the definition of blockchain is a shared, digital ledger, or database, of financial transactions which are saved on multiple computers in different locations. The database constantly grows as new transactions or 'blocks' are added to it. This forms a continuous chain of data where the records are public and verifiable. As there is no central location, it is harder to hack as the information exists in millions of different places.

What is blockchain technology and why is it a game-changer?

There are three principal technologies that combine together to create a blockchain. These include private key cryptography, a distribution network with a shared ledger and an incentive to maintain the network's transactions, record-keeping and security. These combine to make blockchain technology a decentralised, transparent and immutable system.

Decentralisation

Most traditional forms of payments are centralised. For example, your bank stores your money and to pay someone else you have to go through the bank. This has several vulnerabilities:

  1. All the data is stored in one spot making it an easy target for hackers.
  2. If the centralised entity shut down or became corrupted nobody has access to the information it possesses.

In a decentralised system, such as the one created by using blockchain technology, the information is not stored just by one single entity. Everyone in the network owns the information and can access the history of transactions but cannot change it. This immutability is another key pillar of blockchain technology.

Immutability

Once something has been entered into the blockchain it cannot be tampered with. There is no possible way to 'fiddle with the books'. This is because the underlying technology uses cryptographic hashes. In the context of payments, this means transactions are taken as an input and run through a hashing algorithm which gives it an output of fixed length and fixed size. This means that each hash could identify a very large set of calculations or string of data.

Transparency

Perhaps the most interesting aspect of blockchain technology is the fact it offers a high level of transparency and privacy at the same time. A user's identity is hidden behind complex cryptography and can only be identified by their public address.

At the same time, while the user's identity is secure, you can still see all the transactions that have been done on their public address. This level of transparency does not exist within the current financial system which is why blockchain technology is changing the field of finance as we discuss later on in this article.

How does blockchain work?

Let's say David wanted to send money to John. Using blockchain technology this transaction would be represented online as a block. This block would be distributed across the blockchain network which is a special kind of peer-to-peer network where the workload is partitioned between participants rather than one central server.

Once the network verifies that the transaction is valid, the block is then added to the chain and reconciled across the network, creating a permanent record. David's record of ownership of the money then moves to John. In essence, the technology helps to cut out the middleman but with full transparency and privacy.

Blockchain explained in the real world

One of the first real-world uses of this technology was in cryptocurrencies such as Bitcoin and Ethereum. This is because of the fact that the technology allows digital information to be distributed and not copied, meaning each data piece can only have one owner which is essential when dealing with payments; in effect, a digital ledger.

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Bitcoin blockchain

In 2008, someone using the pseudonym Satoshi Nakamoto created Bitcoin. As the Bitcoin blockchain is decentralised, it is not controlled by one central authority, unlike traditional currencies which are issued by a central bank. Instead, the Bitcoin blockchain is maintained by a network of miners (sometimes called 'nodes'). These nodes are purpose-built computers that solve complex mathematical problems in order for the transaction to go through.

Imagine David makes a Bitcoin transaction. This transaction would originate from David's digital currency wallet which will have a private key. This key is David's digital signature which provides the mathematical proof the transaction has come from that wallet.

If more people make more transactions then these will all get grouped together into a block which will be organised by strict cryptographic rules. This block will then be sent out to the Bitcoin network and once validated will be added onto the previous blocks, thereby creating a blockchain.

This may sound like a very long and convoluted way to make a transaction but remember that all these transactions are transparent and listed on the Bitcoin ledger (which you can search for using a Bitcoin explorer). It also requires several parties to authenticate the transaction and if one part of the network went down the whole network would not collapse.

Ethereum blockchain

After the hype - and success - of Bitcoin, a number of other companies created blockchain platforms that were more friendly to use in the real world and by corporations. The world's second-largest digital coin by value - after Bitcoin - is Ethereum. This is essentially a blockchain platform that specialises in smart contracts and has a digital coin named 'Ether' linked to it.

The Ethereum blockchain is public, just like Bitcoin's, and allows people to build decentralised apps on its platform, specialising in smart contracts. These are contracts that are automatically executed when certain conditions have been met from all intended parties. This level of automation helps to speed up the process.

Blockchain wallet

A blockchain wallet is a software programme which enables users to buy, sell and monitor their balances for digital currency such as Bitcoin and Ethereum. It's important to note that a blockchain wallet does not store cryptocurrencies. They simply keep a record of all the transactions related to the currency (your public and private keys) and stores them on Blockchain.

There are different types of blockchain wallets available. Hardware wallets are hardware devices such as USB pens that store private keys for a user. There are also software wallets, such as desktop, online and mobile apps, that store private keys for any transactions made.

Blockchain technology itself, its uses and the services around it are big business. It's why many major companies are pouring billions of dollars into its development. However, there are some blockchain stocks which stand out from the rest. Before we look at these, let's cover how you can learn more about, or improve your knowledge of, blockchain technology.

Blockchain stocks

To demonstrate just how many investors are interested in blockchain stocks, you just need to look at Riot Blockchain. This was a penny stock which in 2017 went from just $8 per share to $40 per share when they changed their name from Bioptix Inc to Riot Blockchain.

The company was a maker of diagnostic machinery for the biotech industry. After changing its name and rebranding itself to have a focus on buying cryptocurrency and blockchain businesses, the stock shot up on investor hype. Subsequently, the company was investigated by the SEC (Securities and Exchange Commission).

This is an example of why investors need to do their research before buying into the potential of blockchain technology. However, there are some well-known large corporations that are investing billions into the technology which investors should know about.

Top 3 blockchain stocks for 2020

According to a report by the World Economic Forum, around 10% of global gross domestic product (GDP) is likely to be stored on blockchain by 2027. Companies at the forefront of providing blockchain services will be high on investors' lists for 2020 and far beyond. Below is a list of just 3 blockchain stocks investors may find interesting for 2020 and beyond.

#1 IBM blockchain

IBM is one of the leaders in the development of blockchain technology. The company is supported by more than 1,500 experts in the field, participating in more than 500 blockchain projects. One of these projects is the IBM Food Trust platform which launched with Walmart in 2018. The aim was to improve food safety processes through an integrated supply-side blockchain.

According to Forbes, IBM "may be the biggest and most successful enterprise blockchain company of all." One of the reasons is because the company helped create Hyperledger Fabric, after donating 44,000 lines of code to the project which formed the core of a new blockchain with faster speeds and increased privacy. The Hyperledger Fabric is the gold standard for corporate blockchain projects.

Over the past seven years, IBM's share price has suffered as they lacked the innovation of their counterparts such as Microsoft and Apple. However, it is firmly at the centre of blockchain development and investors will be searching for signs this will help with the company's bottom line and signal a turn in fortunes for its share price.

what is blockchain

Source: Admiral Markets MetaTrader 4, IBM, Monthly - Data range: from 1 June 2008 to 4 December 2019, accessed on 4 December 2019 at 3:31 pm GMT. Please note: Past performance is not a reliable indicator of future results.

In the long-term monthly chart of IBM's share price above, it is clear to see the downward trend from mid-2013 to the end of 2018. Investors will now be interested to see if IBM's share price can build on its momentum higher throughout 2019, into 2020. While blockchain technology is new, it helps to be at the front and centre of its development.

Did you know that you can invest in thousands of stocks and ETFs from 15 of the largest stock exchanges in the world through an Invest.MT5 account? Accounts can be opened with just a €1 minimum deposit and you can start investing from just $0.01 per share with minimum transaction fees of just $1 on US stocks. You can also gain access to the MetaTrader 5 trading platform provided by Admiral Markets completely free! Get started right now by clicking the banner below:

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#2 Alibaba blockchain

Alibaba, China's biggest e-commerce and technology company, has already filed 90 patents for blockchain technology. In November, Ant Financial, the fintech arm for the Alibaba Group, launched the testing stage for its blockchain network aimed to support small and medium-sized businesses.

The group has also partnered with the Chinese government for using blockchain in healthcare. The Chinese government has already announced that they want to lead the world's standard for blockchain technology. Alibaba looks set to capitalise from this as not only have they built a large blockchain-patent library, they are already using the technology in its e-commerce subsidiary Lynx and T-Mall, giving them a real-world and practical advantage.

blockchain technology

Source: Admiral Markets MetaTrader 4, BABA, Weekly - Data range: from 28 February 2016 to 4 December 2019, accessed on 4 December 2019 at 4:07 pm GMT. Please note: Past performance is not a reliable indicator of future results.

In the long-term weekly chart of Alibaba's share price above, it's clear to see that the company has performed well - even before they excelled in adopting blockchain technology. The success of its e-commerce platform lends a great deal of support to investors who are still wary of the potential of blockchain. The combination of success in both areas could be a very powerful driver of Alibaba's share price throughout 2020 and beyond.

#3 Mastercard blockchain

Mastercard is third in the world among top blockchain innovators with over 100 blockchain patents filed. The company's advancement in blockchain technology is interesting as the technology itself is designed to make centralised intermediaries obsolete.

However, the company is using the technology to lower transaction costs and increase fraud protection. With more than $21 billion in fraud losses incurred by banks in 2015, there is a huge advantage in using technology which enables transparency and privacy at the same time, alongside the immutability of it.

The way Mastercard has approached blockchain technology is evident of a forward-thinking, innovative company which shareholders and investors will be pleased about.

blockchain wallet

Source: Admiral Markets MetaTrader 5, MA, Monthly - Data range: from 1 May 2006 to 4 December 2019, accessed on 4 December 2019 at 5:07 pm GMT. Please note: Past performance is not a reliable indicator of future results.

The long-term monthly chart of Mastercard's share price shows a very impressive uptrend. While its share price is trading at a high level it has done so since 2006. The way in which the company has adapted to this new technology which threatens parts of its business could mean that the uptrend is here to stay.

How to invest into blockchain stocks

Buying and selling shares in blockchain stocks such as IBM, Alibaba and Mastercard can be done it just three simple steps:

  1. Open a share trading account.
  2. Download your share trading platform.
  3. Open a trading ticket and take your first trade!

How to open your Invest.MT5 share trading account

To open a share trading account simply visit the Admiral Markets homepage and click on the green button labelled Create Account:

blockchain explained

To sign up for a live or demo trading account simply fill in the details required such as your name, email and password:

blockchain stock

Once this is done you will have instant access to the Trader's Room! From here, you can open live or demo accounts:

riot blockchain

After clicking the green button labelled Open Live Account, you can select the account you wish to open. For stocks and shares investing select Invest.MT5:

what is a blockchain

From here you can open your Invest.MT5 share trading account after filling out an application, uploading required documents and going through a verification process. Once this has been done, and your application has been approved, you are ready to download your MetaTrader 5 share trading platform.

How to download your MetaTrader 5 share trading platform

From the Trader's Room homepage, navigate to the bottom and select the MetaTrader 5 for PC or MetaTrader 5 for Mac download links:

blockchain definition

Simply follow your computer's prompts to complete the download of your MetaTrader 5 share trading platform.

blockchain explorer

An example of the Admiral Markets MetaTrader 5 trading platform showing the price chart of Apple shares, the MACD and Stochastic trading indicators, a list of symbols showing the different stock market regions available and an open order ticket.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

How to place a trade in the MetaTrader 5 share trading platform

Open up your share trading platform and follow these steps to place a trade:

  1. Open the Market Watch window by selecting View from the menu at the top of the platform or by pressing Ctrl+M on your keyboard. This will open up a list of tradable symbols on the left side of your chart.
  2. Right-click on the Market Watch window and select Symbols or press Ctrl+U on your keyboard.
  3. This will then open the window shown below which details all the markets available for you to trade on. From here you can add a wide variety of shares to your Market Watch window by selecting the relevant share or country and clicking Show Symbol.

bitcoin blockchain

An example of the Admiral Markets MetaTrader 5 trading platform showing the Symbols window.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

After clicking the OK button in the Symbols window you can now view the different instruments in the Market Watch window. To view a price chart of a company's share price, simply left-click on one of the stock symbols in the Market Watch window and drag it onto the chart area. From here you can now open up a trading ticket:

  1. Right-click on the chart.
  2. Select Trading.
  3. Select New Order, or press F9 on your keyboard.
  4. A trading ticket will open for you to input your entry price, stop loss and take profit levels and your share trading size (volume).

blockchain info

An example of the Admiral Markets MetaTrader 5 trading platform showing a trading ticket.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

To learn more about the MetaTrader 5 trading platform, feel free to watch the video below:

Why invest with Admiral Markets?

Here are just a few reasons why you should consider buying and selling shares with Admiral Markets:

  • Trade with a well-established, highly regulated company which includes regulation from the UK's Financial Conduct Authority.
  • Access the fastest and most popular online share market trading software called MetaTrader which you can use on PC, Mac, Web, Android and iOS operating systems.
  • Open an Invest.MT5 account with just €1 minimum deposit and invest from just $0.01 per share with minimum transaction fees of just $1 on US stocks.

Did you know that you can also access free real-time market data at no extra cost? You can also build a portfolio of dividend-paying stocks to create a stream of passive income. To get started simply click on the banner below!

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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