Blockchain in the real world

Nov 10th, 2021 | By | Category: Equities

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By Gregg Guerin, Senior Product Specialist for First Trust.

Gregg Guerin, Senior Product Specialist for First Trust.

Gregg Guerin, Senior Product Specialist for First Trust.

For most investors, Blockchain means crypto. Some believe Bitcoin (or other digital currencies) are a valid asset; others think it’s a Ponzi scheme. But investors rarely pause to consider the underlying technology, Blockchain, and its vast applicability in the real world.

If you take just one thing away from this piece, let it be that Blockchain is a solution to perhaps the greatest problem the Internet has faced since its inception: Trust. The potential investment opportunity it offers is simply too big to dismiss as a fad.

What is Blockchain anyway?

Any transaction is fraught with “counterparty risk” – where someone involved in a transaction might not fulfil their obligations (or worse, commit fraud). Even banks, with their huge risk departments, can end up losing colossal amounts of money this way. (Just ask Credit Suisse, which recorded a $5.5bn loss when Archegos exploded earlier this year.)

The e-commerce growth we’ve seen in the past few years represents only a tiny fraction of the real trade opportunity in a connected world: most transactions fail to happen because parties simply don’t trust each other enough. That’s the problem Blockchain solves.

If you think Amazon’s big now, consider the relative wealth of the Medici family, back in the 15th century. They dominated capital and trade with an elegant innovation, double-entry bookkeeping,  which made it easier to detect errors (or graft). Doing business with the Medici family was simply safer, and they benefited enormously.

But there was still a risk: someone could still alter the books, or just burn them. Our modern-day equivalent would be when transaction records are hacked and compromised. When a centralized record-keeper goes out, the whole network of counterparties collapses.

Because of this risk, much of our modern-day Internet currently follows a decentralized model, where companies maintain multiple servers. In case a server gets compromised, only some information becomes vulnerable.

But a distributed model is even better. In a distributed model, all records are maintained continuously all over the network. To change a record anywhere – the majority of the other record-holders have to agree it’s a legitimate change. Blockchain ushers a new era in distributed trust.

How do businesses profit from Blockchain?

What makes Blockchain such a significant theme is the size of the opportunity. The markets it disrupts are vast and deep, yet rarely receive many headlines.

For example, transferring money across borders is still prohibitively expensive. Remittance flows to low- and middle-income countries reached $540 billion in 2020. For context, this is about the same as total foreign direct investment into these countries.

But the fees paid to transfer remittances are exorbitant: Imagine having to pay a 7% commission to your bank with every paycheck. Lowering this rate is the opportunity JP Morgan is eyeing as it launches its own Blockchain platform, Onyx.

It’s a classic example of the two ways to profit off Blockchain. With every solution implemented there’ll be Active Users (in this case, JP Morgan) and Active Enablers, which provide the know-how and the hardware.

We believe the way to profit from blockchain is to hold both Enablers and Users.

For example, while cross-border supply chain has come into focus during Covid, this 20 trillion-dollar industry is still held back by trust issues. Back in 2018, Maersk and IBM first launched the TradeLens supply chain platform which enables an electronic ledger that creates a transparent, secure transaction record. In this case, Maersk is the active user, and IBM the Active Enabler.

Blockchain is real

The way to tell just how big a business trust is, is to see what happens when it vanishes.

Back in 2015, restaurant chain Chipotle experienced a terrible E.Coli outbreak. What made it worse was that neither the restaurant nor the CDC could trace the source. As a result, Chipotle had to close large parts of its chain, and its shares fell by 44% in the three months following the outbreak.

Walmart isn’t prepared to take such risks. Partnering with IBM, it launched its own Blockchain solution to monitor its vast supply chain.

As a rule, Active Enablers profit from Blockchain on the top line, through increased sales revenue. In the above examples, we see IBM profiting from multiple companies looking to deploy Blockchain solutions. With Active Users, the gains show up on the bottom line. The nitty gritty of managing supply chains is not as sexy, perhaps, but it manifests in a superb competitive advantage.

I’ll leave you with this thought…

When people ask me “what can you do with Blockchain”, I’m tempted to reply: it’s like asking “what can you do with the Internet?”

The Internet has allowed us to exchange information in a flash. According to the Harvard Business Review;

“The Internet protocol unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions.”

But the needle on trust has barely moved. Blockchain is now changing that. We believe it’s one of the biggest opportunities out there.

FEATURED PRODUCT

First Trust Indxx Innovative Transaction &
Process UCITS ETF

– Tracks the Indxx Blockchain Index providing
exposure to companies that actively invest
resources into products or services that enable
and use blockchain technology

– Listed on London Stock Exchange in pound
sterling (BLOK LN) and US dollars (LEGR LN)
and on Borsa Italiana in euros (BLOK IM)

– Houses $170m in assets and comes with an
expense ratio of 0.65%

Accessing this Blockchain phenomenon

Effectively identifying and capturing those companies already utilizing blockchain technology can be fraught with difficulties and pitfalls. Blockchain, while a cutting-edge “technology,” is not confined to “technology” stocks, far from it. Often investors are guilty of misreading the label, with many “blockchain funds” instead offering investors exposure to crypto and the like.

The First Trust Indxx Innovative Transaction & Process UCITS ETF (BLOK LN) is a truly unique fund, with a global exposure diversified across the US, Japan, Europe, and Emerging Markets, allocating to 100 large-cap stocks. BLOK strikes a balance across Financials, Technology, Semiconductors; as well as growth and value factors while identifying those companies which are “active enablers” and those that are “active users”. By selecting only those companies that have devoted material resources to the use or development of Blockchain technology, and with an active equal-weighting methodology, we believe that investors can efficiently capture this transformative technology in a daily-traded liquid UCITS fund.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

This report was prepared by FTGP and reflects the current opinions of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security or strategy.  Investors should review the fund documentation, including the risk associated with an investment, before making any investment decision.   

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