Since its murky beginnings in 2009, Bitcoin-related technology has evolved into an increasingly mainstream alternative currency that has become popular around the world. According to venture capitalist Marc Andressen, blockchain technology is the most important invention since the Internet.

An open and completely decentralized online ledger, blockchain technology is primarily used to verify transactions within digital currencies though it is possible to digitize, code and insert practically any document into the blockchain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority. (For more, see Why Governments Are Afraid Of Bitcoin.)

In fact, the technology behind Bitcoin has become a rising trend behind many startups. Even mainstream companies have begun to display interest in blockchain technology. Recently, more than a dozen banks partnered in a coalition to review how blockchain technology could be integrated into the financial sector. Such banks include Bank of America Corporation (BAC), Deutsche Bank AG (DB), Bank of New York Mellon Corporation (BNY), and Royal Bank of Canada (RY). Microsoft Corporation (MSFT) has also expressed interest in blockchain technology, having recently formed a partnership with blockchain firm ConsenSys for the purpose of creating tools that give coders the ability to build apps utilizing a similar technology.

Investors and Startups Eye Applications for Blockchain Technology

With the increased interest surrounding blockchain technology, more investors are pondering how they can jump on board and take advantage of this rising tech trend’s profit potential. Blockchain technology, which offers a method for recording transactions in an online ledger quickly and accurately, could have profound applications for both the e-commerce and banking industries. Along with facilitating international transactions, blockchain technology could make bank transfers much faster. (For more, see Blockchain Technology To Revolutionize Traditional Banking.)

Investors interested in getting on the blockchain technology bandwagon will find it is now easier than ever to do so. In early November, Digital Currency Group launched what it refers to as "the largest early-stage investment portfolio in the digital currency and blockchain ecosystem." Additionally, according to a recent report published by SecondMarket, the amount of venture capital being funneled into Bitcoin firms was anticipated to exceed $1 billion by the end of October. Companies have even become so interested in the technology that many have begun to play around with the idea of creating their own private blockchains.

Tech startups are adopting blockchain technology with the goal of disrupting a variety of industries, particularly those that have been dominated by central authorities. The technology, which is moving towards democratization and decentralization by removing the middleman, has now advanced far beyond cryptocurrency, offering the potential to dramatically change everything from finance to the Internet. Secure online transactions and consumer privacy are just a few of the issues now being tackled by blockchain-based startups. Moreover, other startups are investigating the ability to utilize the blockchain for powering IoT devices. (For more, see The Internet Of Things In 2015.)

Challenges Facing Blockchain Startups

Of course, one of the questions that prospective investors naturally have about blockchain startups is whether they even have a chance at success. While the blockchain revolution is still relatively young, many companies are already proving their ability to make the technology work. Nevertheless, blockchain startups are not without challenges. Among the most significant of these challenges is the fact that most consumers simply do not understand the extremely complicated concept of blockchain technology. In order to overcome this challenge, Bitcoin startups will need to find ways to precisely explain what they do in easily understandable language.

Blockchain startups also face a number of technical challenges, including privacy, due to the fact that the blockchain is based on a public record of transactions. To prevent privacy issues, startups need to ensure that transactions cannot be traced back to individual users. Despite such challenges, blockchain startups demonstrate a tremendous amount of potential, as evidenced by the number of startups entering the blockchain technology space.

Companies Succeeding with Blockchain Technology

Among the startups leveraging blockchain technology for IoT devices is 21 Inc. The Silicon Valley-based startup received a total of $116 million in funding in March. According to the firm, the funding will be used to embed Bitcoin mining chips into connected IoT devices and cell phones.

BTCJam is yet another startup using blockchain technology to change how things are done. The P2P lending platform, headquartered in San Francisco, specializes in providing Bitcoin-based loans. Over the last year, the company has lent more than $15 million.

One of the ways in which blockchain technology could potentially change the world involves cloud storage. At the moment, cloud storage services are based on a centralized system, meaning users are required to place their trust in one storage provider; blockchain technology has the ability to decentralize this industry. Storj is just one company that is currently beta-testing the concept of developing cloud storage based on a blockchain-powered network with the goal of improving security while decreasing dependency. The company even offers users the opportunity to rent out storage capacity they do not need, similar to the way that property owners rent out extra space on Airbnb. If successful, the move could create entirely new marketplaces.

ProofofExistence, a smart contract platform, was one of the first non-financial startups to make use of blockchain technology. The platform uses blockchain technology to store encrypted information, thus enabling a transaction that cannot be replicated to be linked to a unique document. (For more, see Bitcoin 2.0 Applications.)

The Bottom Line

Given the incredible opportunity for decentralization, blockchain technology offers the ability to create businesses that are both flexible and secure. Whether such startups will succeed in deploying blockchain technology to create products and services consumers will trust and adopt remains to be seen. Nevertheless, this is definitely a space investors should watch. The demand for blockchain-based services is on the rise, and the technology is maturing and advancing at a rapid pace.

The potential applications for blockchain technology are almost without limit. At the moment, several of these applications are still either in the development stage or in beta testing. With more money being poured into blockchain-based startups, consumers should not be surprised to see blockchain services and products becoming more mainstream in the near future.

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