What Is Blockchain Technology and How Is It Related to Investing?

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Unless you've been living under a rock, you've certainly seen the term “blockchain” in the headlines. What the heck is it?

Blockchain is the software behind Bitcoin and other digital cryptocurrencies, but it can do a lot more than help savvy web users buy and sell Bitcoin, Ethereum, and other digital currencies.

Let's learn more about blockchain technology and how you can expect it to impact your money.

What Is Blockchain Technology?

Blockchain is a system of tracking resources using a distributed digital ledger. In simple terms, that means many people hold a record of every transaction that takes place in the system. It is most useful for tracking assets and asset ownership and enabling secure, near-instant transactions.

One of the best uses for blockchain technology would be the stock market. Each share of stock is an asset, which today is represented digitally. Those shares are bought and sold, held in accounts of investors around the world. With blockchain, we could hypothetically track every share of stock in every major company with a trusted and distributed ledger.

Each time a new transaction takes places for a tracked asset, a new record is added to the ledger. Once a certain number of transactions take place, they are bundled up and written as a block, which is distributed to all holders of the ledger.

Because many users hold a copy of the ledger, it is incredibly difficult to manipulate. That makes the system virtually hack-proof. Also, because the distributed ledger can be held in many places, transactions can be verified almost instantly with a local copy. So the transactions happen faster.

How Blockchain and Bitcoin Are Related

When you think of blockchain, you also likely think of Bitcoin. While the two are related, they are not synonymous, and it is important to understand the distinction.

Bitcoin is a digital currency. It works like dollars, euros, pounds and other currencies, and it trades on exchanges around the world. You can convert Bitcoins to almost any major currency, as well as other cryptocurrencies, typically for a fee from an exchange operator.

New Bitcoins are created from a resource-intensive process called “Bitcoin mining,” which rewards those who handle maintenance for the entire system. If you want to mine for Bitcoins, you can do it on your own computer; however, you probably won't make any real money with it. Most Bitcoin miners use specialized equipment that do nothing but the kind of process required for Bitcoin mining. You can also download and host a copy of the always-growing Bitcoin blockchain ledger, currently around 185 gigabytes.

Bitcoin is the first use of blockchain technology. In other words, blockchain-enabled Bitcoin. And Bitcoin is just one example of what you can do with blockchain. Other popular cryptocurrencies (known as altcoins) include Ethereum and Litecoin. Each of these currencies operates on its own blockchain ledger.

Check out our review of broker YCharts, which offers you to access data for leading cryptocurrencies including Bitcoin.

Where You Can See Blockchain in Action Today

You can find blockchain in the world today even outside of the world of cryptocurrencies. In fact, if you use an American Express card with Membership Rewards points, you may have already used blockchain without realizing it!

American Express uses blockchain to run a portion of its popular rewards program. Each point works just like a Bitcoin as far as the ledger is concerned. You can now cash in points with blockchain enabling the process in the background.

Blockchain is used for a wide range of other purposes as well, including logistics, web hosting, contracts and bookkeeping. Blockchain is also useful for many government purposes, including potentially handling voting and elections. Because of the transparency and anonymity blockchain can provide, it is ideal for casting secure and confidential ballots online.

This technology could also serve many valuable uses with medical records, making them both secure and transportable across doctors and hospitals.

Expect Faster and More Secure Digital Transactions

Over the coming years, blockchain may make its way into every part of digital banking, finance, and commerce. It could ultimately drive everything from your bank account and investments to your monthly credit card statement. The possibilities of blockchain are nearly endless, and while it is a decade old, we are still on the new frontier of possibilities with blockchain.

Now when you are at a dinner party and someone brings up how silly it was to invest in Bitcoin, you could counter that while Bitcoin may not change the world, blockchain has the potential to revolutionize much of our financial and digital lives.

While it is good to have a basic understanding of how it works, you certainly don't need to be an expert in blockchain. Just know that it is working silently in the background to power more and more of your digital asset tracking. Growing use of blockchain is certainly something to be excited about.

Eric Rosenberg

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time. He has in-depth experience writing about banking, credit cards, investing and other financial topics and is an avid travel hacker. When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers and spending time with his wife and little girls.

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