Investments In The Financial Services Industry Is Pushing Blockchain Startups To Grow In 2021

In recent months, cryptocurrency leaders have cast legitimacy and staying power of crypto as an asset class. Financial services companies such as PayPal Inc PYPL and Visa Inc V have even gone as far as to adopt cryptocurrency as a payment method over the last year. 

With all signs pointing towards this trend continuing, the development of user-friendly blockchain systems introduced by startups is set to receive a boost from the investment world, particularly in Europe. 
In this article, we’ll cover what exactly blockchain technology is bringing to the table, and then we’ll dive into the primary challenges it faces that will need to be overcome. 

What Blockchain Brings To The Table

Blockchain is simply a digital ledger of transactions that are duplicated and distributed across an entire network of computers. Each block in the chain has a number of transactions, and every time a new transaction occurs on the blockchain, every participant’s ledger is updated to reflect this. The chain itself offers features such as individual transaction encryptions and anonymous identities.

In short, blockchain promises to be the accountability solution to cryptocurrency, which has always had a prevailing issue of trust. Bitcoin was specifically designed to use blockchain as a management database so that no one person is in charge of transactions. The people who use Bitcoin are the same people running the database. 

Organizations have been slow to embrace Bitcoin, but more are joining up. Tesla, for example, has invested over $1.5 billion into BTC and has even said that customers will be allowed to use it to purchase their vehicles.

Meanwhile, the Guggenheim Fund (one of the top asset management companies in the world) recently filed an amendment to the SEC for the ability to invest $500 million in the Grayscale Bitcoin Trust, representing nearly 10% of its total net asset value.

As greater levels of trust begin to be established in cryptocurrency, it’s likely we’ll see more organizations turning to blockchain technology to secure transactions with customers. However, there are still significant challenges that could impede or slow down the adoption of blockchain as well, and these challenges will ultimately need to be resolved if the technology is to become truly accepted by the mainstream.

The Hurdles Blockchain Still Faces

Blockchain technology is intuitive and has the potential to change how people and organizations view cryptocurrency and perform transactions. There are still a number of hurdles blockchain companies and startups need to overcome in order to see widespread success. 

Despite the fact that 87% of respondents according to a Central Blockchain Council of America survey believe blockchain will positively impact the financial industry, only 10% of the same respondents said that they actively use it. 

The three largest hurdles for blockchain are scalability, speed, and stability. 

First, blockchain technology hasn’t quite been tested for scalability. As payment history has increased with cryptocurrency, there is a chance the entire system could buckle. With bitcoin in particular, the main problem is the limited rate at which the network can process transactions, because of the limited size of the blocks (or records) in the BTC blockchain.

As for speed, a similar issue emerges. When more and more transactions are trying to occur at a given time, the nodes within blockchain technology will slow down. This could mean wait times during peak hours.

Finally, the stability of blockchain technology needs to be secured. Blockchain can meet the needs of a small population of users, but the lack of testing in a larger sample size poses risk. When trying to integrate with existing technology, corporate governance, and organizational needs at a company, blockchain technology may not be totally stable.

Potential network hacks, such as the 51% attack, can be detrimental to a blockchain system. This is when hackers can prevent blockchain nodes from validating new transactions after gaining 51% control or more of a network’s mining power, and it represents one of the biggest blockchain security threats today. This is why investors are looking at blockchain security startups that are dedicated to solving this hurdle. 

The positive aspect of these hurdles is that blockchain technology may be able to survive them on the first real test. With that said, these unknowns hold a large number of investors back. There’s also the fact that nearly 60% of respondents according to a PwC survey last year indicated they are unsure of how to take advantage of blockchain technology. Educating the public on how the technology functions and the benefits it brings may be an additional hurdle. 

How The Investment Space Is Changing

With all of the above benefits and hurdles covered, it’s time to look at the investing space in regard to blockchain technology startups. There are a few important trends occurring in the investing world that are being caused by this technology. Overall, it’s believed that blockchain technology can bring features such as 24/7 global trading and lower trading costs than capital markets. 

These benefits are leading to investments in tokenization, fund administration, and Central Bank Digital Currencies. All three of these areas are impacted by blockchain technology and startups are hoping to take control of and improve these spaces to facilitate on-chain transactions. 

But rather than throw funds to the technology themselves, there seems to be a trend for investors to keep their money towards the security side of blockchain. With the recent pandemic, digital payments have increased which has shed new light on the potential for cryptocurrency and blockchain by extension. Some companies have even been able to raise millions of dollars in funding for digital banking technology, which shows just how far this field has come. 

Conclusion

In conclusion, investors are more likely to jump on board with cryptocurrency as blockchain technology develops further and integrates modern technology into financial systems.  

Financial services is changing significantly as an industry, and many organizations within the sector are already turning towards blockchain companies that offer features such as low transaction costs and general scalability. Despite the fact that blockchain companies still have a number of hurdles to overcome, the future seems bright for this new stage of currency.

Benzinga's Related Links:

• What is Blockchain? • What You Need to Know • Benzinga
• U.S. Crypto Tax Overview for 2021
• PayPal Plans To Take Curv To Improve Crypto Payment Security

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