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Blockchain investing: Tech promise remains amidst cryptocurrency’s volatile times

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Blockchain – or distributed ledger technology (DLT) – has been around for a decade or so, yet many still view it as just the technology behind cryptocurrencies and digital money. The true potential may, however, extend far beyond that with DLT having an impact on a swathe of industries.

2018 was certainly an annus horribilis for top cryptocurrencies, with Bitcoin (BTC), the ‘Big Daddy’ of them all and dubbed the “evil spawn of the financial crisis” by Eurozone central banker Benoit Cœuré, seeing its price plummet by over 80 per cent. The picture was similar for investment funds focused on investing in tokens or creating indexes.

While nearly USD700 billion was wiped off the total capitalisation of the broader market, last year saw more than USD2 trillion worth of Bitcoin transactions, up 61 per cent over the year before according to Satoshi Capital Research. Bitcoin itself has since mounted a recovery over recent months, up around 122 per cent year to date from the USD3,826 level on 1 January to trading above the USD8,500 mark late this May.

Despite the painful losses sustained for the majority of crypto hedge fund managers and investment funds last year, with a number of funds failing or fighting for survival in the so-called ‘crypto winter’, investment in the blockchain space remains undiminished.

This April, Reuters reported that start-up investments in the blockchain and cryptocurrency arena from the venture capital community were projected to reach new heights in 2019, citing figures from market data provider Pitchbook.

After the USD2.4 billion in funding the industry received from investors in 2018, the USD850 million raised this year (as reported on 17 April) appeared on track to beat all previous records. Deal value was also increasing, with the total number of deals for 2018 derived from 117 investments versus this year’s count standing at 13 according to the same report.

Blockchain use cases

The top five use cases for blockchain technology span: (1) Asset tokenisation for financial and real-estate assets; (2) Supply chain management and logistics; (3) Digital Identity; (4) Energy market; and, (5) Healthcare. But beyond that many pundits in the field expect that DLT and associated technologies have further applications across other industries.  With the rise of the Internet of Things (IoT) and connected devices, blockchain provides an efficient and secure way to manage, share and leverage an ever-growing amount of data.

Indeed, it is now even being applied to data rooms and potentially rendering data carriers obsolete, as evidenced last October by Drooms, Germany’s first virtual data room (VDR) provider, which is using blockchain technology for data to be archived securely in Drooms’ virtual NXG data room with blockchain protection.

‘Bad actors’ at play

But as Boris Zeleny, chairman of full-service investment bank NKB Group focused on blockchain technology, reflecting on the down turn in top cryptocurrency prices during 2018 before this year’s rebound, noted: “The correction in prices and bear market was absolutely the right thing to have happened last year. This whole blockchain/crypto idea was hijacked, if you like, by some really ‘bad actors’ – scammers and speculators.”

Serial entrepreneur Zeleny, who helped security software company AVG Technologies grow into a unicorn, added: “These protagonists [almost] destroyed it and just wanted to take advantage of Initial Coin Offerings (ICOs)…doing a pump and dump job. As such these people needed to get out of the market.”

Speaking from NKB Group’s London headquarters, where his co-founder Chris Baxter is based, the Slovak businessman acknowledged that while there are still many challenges in preparing for what he envisages as a “massive market” in blockchain/crypto ecosystem going forward, NKB aims to identify and pick the crypto winners of ‘Web 3.0’ from the pack.

Out of many ICOs on the market today, Zeleny, who last November correctly predicted a revival in crypto prices at some point before the first half of 2019, believed that “only a minority of the boom market ICOs” would likely remain in the end analysis.

He further ventured: “The next wave of digitised investments will come in the form of the securitisation of tangible assets and/or income streams (ie via Security Token Offerings (STOs)). The underlying value here is much clearer and will greatly help in the legitimisation of the value creation potential of blockchain technology. Everyone understands that there is an element of bad activity on the Internet, but no one says the Internet is itself bad. Blockchain is identical.”

Blockchain ETFs

Invesco, one of the largest investment managers in the UK, launched an exchange traded fund (ETF) with Elwood Asset Management this March tracking listed companies globally that have blockchain-related operations, with the index calculated by index provider Solactive AG..

Listed on the London Stock Exchange, the Invesco Elwood Global Blockchain UCITS ETF aims to deliver the performance of the Elwood Blockchain Global Equity Index by physically investing in the index constituents. The ETF offers exposure to global companies in developed and emerging markets that participate or have the potential to participate in the blockchain ecosystem and crypto/blockchain asset class.

Chris Mellor, Head of EMEA ETF Equity Product Management at Invesco, commenting said: “The potential for blockchain to drive real earnings is huge, but it is often hidden within companies involved in other areas. This ETF offers investors access to companies with real earnings now, but with the added potential of blockchain-related earnings not reflected in their share prices.”

The bulk of the index (45 constituents) is currently allocated to companies where the value attributable specifically to blockchain technology is either in the ‘developing’ or ‘potential’ phase.

That said, the number of index constituents could “expand to sixty” according to Mellor, and are comprised of a mix of companies spread geographically (c.35 per cent in the US, circa 30 per cent in Japan and circa 10 per cent in Taiwan), with the two largest sector allocations in the index currently being 46 per cent in information technology and 23 per cent in financials.

Companies in the index include IBM, based on its Blockchain expertise in the global supply chain logistics with consortium partners like Danish business conglomerate AP Møller Maersk and US retail giant Walmart), as well as Taiwan Semiconductor Manufacturing Company (TSMC).

“These are companies with assets that are well-positioned to capitalise on the emerging opportunities for blockchain, noted Bin Ren, CEO at Elwood, a specialist in the digital asset space. “Over time, however, we would expect the balance to shift naturally to companies with more significant direct exposure to blockchain-related earnings as the technology becomes more ubiquitous,” noted Bin Ren, CEO at Elwood, a specialist in the digital asset space.

Invesco’s Mellor speaking from Helsinki following client and investor meetings said: “This ETF offers investors a diversified portfolio of global equities with embedded exposure to the blockchain theme, which, in our view, is not fully reflected in their share prices. We launched the ETF with USD20 million of seed capital and have started to see funds coming in – mainly from private banks and private wealth sectors – who are looking for long-term thematic ideas.”

Noting heightened activity and appetite for blockchain exposure, especially among institutions, wealth managers and private banks, Mellor reflected: “The same sort of investors who are buying blockchain funds can typically be investing in the cybersecurity and fintech spaces. A well-diversified basket of equities through this kind of ETF provides investors with a long-term growth theme for their portfolios.”

After crypto’s winter  

David A Johnston, a blockchain pioneer and founder of Yeoman’s Growth Capital (YGC), touted as the leader in enterprise hybrid-blockchain investing in Fortune 50 companies adopting public blockchain protocols, commenting on the back of the “crypto winter” and investor interest in the space, said: “That was very helpful [depressed crypto prices]. But to put it in perspective we have still come a huge way.”

The executive, based in Austin, Texas, remarked: “When I became involved in crypto back in 2012 there was around USD100 million of digital assets. Today there are in excess of USD100 billion in such assets. So, compared to all the tradable assets globally it just shows how low we still are in the evolution,” said Johnston, who last December oversaw the YGC fund launch last December, in the midst of a crypto bear market.

The fund sought to invest in applications that are enterprise adoption focused, but required help integrating them to mainstream corporations to drive transaction volumes to the entire blockchain ecosystem.

Johnston added: “Whether it’s a bear or bull market, it’s still very early days in the evolution of the industry. Globally there are perhaps USD500 trillion in terms of all assets – stocks, fixed-income securities, currencies and commodities as well as real estate and everything else besides.”

“Naturally it’s going to take a while to convert the entire world’s value [assets] into blockchain-based assets,” posited Johnston. “But that is where we’re headed, because why wouldn’t you use a blockchain system that is faster, cheaper, more transparent, a better ledger and just a better accounting system.”

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