By Harvest ETFs
In 2018, after Bitcoin’s first bull run, blockchain technology was only being discussed in terms of the cryptocurrencies it powered. When markets, investors, and the media were still stunned by crytpo’s first big splash, Harvest ETFs launched the Blockchain Technologies ETF (HBLK), a growth ETF based on a straightforward premise: that the uses of blockchain technology as a secure store of data will extend far beyond cryptocurrency. That premise has proven true.
Kushal Agarwal, portfolio manager at Harvest ETFs, explained how in the past three years this ETF has been able to capture the steady adoption of blockchain technology across a vast range of industries. He highlighted some novel uses of the technology that emerged since 2018 and pointed to how other sectors and industries may be making use of it in future. Agarwal explained that the steady adoption of blockchain was built into the initial investment strategy of the ETF.
“When we launched HBLK in February of 2018, blockchain technology was still at a nascent stage,” Agarwal said. “We could not be sure how it would develop in the future, so we created a segmented portfolio in two areas. One was large-cap technology companies, the tech and implementation leaders like IBM, Infosys, and Microsoft. These are the companies that were already playing a role in setting others up to use the blockchain. The other was in blockchain adopters.”
Agarwal explained that while the initial basket of adopters skewed heavily towards about 15 companies, it has steadily widened to 44 companies including payment processors, decentralized finance providers, software developers and companies like Docusign using blockchain to secure documents on their platform.
Why is Blockchain spreading?
Blockchain is an obvious and attractive technology for so many companies. An unalterable digital ledger of information, Blockchain is secured by an unendingly complex series of mathematical equations. That means the most sensitive information can be stored on the blockchain and accessed from anywhere with the confidence it hasn’t been altered. The uses are endless.
Blockchain is already being used by shipping and logistics companies to securely track massive shipments and individual packages. It is being used to validate labels, ensuring the bottle of organic olive oil or grand cru Burgundy you just bought is not counterfeit.
To Agarwal, the current ‘point of the spear’ in blockchain adoption is happening in the financial services sector. Beyond cryptocurrency, decentralized finance is attracting institutional investors to the tune of $200 billion. Once the space becomes more appropriately regulated, Agarwal expects the industry to cross $1 trillion.
The speed, accessibility, and security that blockchain offers companies is widely attractive to asset managers and other financial services firms too, lowering operational costs hugely. Banks like Credit Suisse, Société Générale, and CIBC are already participating in blockchain platforms for their internal transactions to lower risk and increase speed.
Blockchain is so much more than crypto
Beyond finance, there are also applications in the healthcare sector, where service providers can use blockchain to securely store and seamlessly access patient data, replacing the current fragmented network of electronic medical records providers. Blockchain is also key to the growing eGaming and iGambling space, which is increasingly taking place in the metaverse. Blockchain is being used to digitally secure and share key financial information, player avatars, and player statistics used to determine the top electronic athletes in this space.
We are also seeing ‘tokenization’ through the blockchain. While this is most popularly understood through NFTs of digital art, it goes far beyond bored monkeys. By securing a piece of intellectual property on the blockchain, artists, entrepreneurs and inventors are able to bypass archaic and expensive systems like traditional patents. This could potentially bring disruption to centuries-old systems of intellectual property rights, constant pain-points for innovators.
The depth and breadth of blockchain applications being accessed through HBLK, Agarwal explained, limits the ETF’s exposure to cryptocurrencies’ notorious volatility. The ETF does hold a set of crypto miners to access the upside from the underlying value of assets like Bitcoin. At the same time, the layers of diversification across subsectors and geographies built into the ETF keep it relatively insulated from that volatility.
To Agarwal, exposure to blockchain might include exposure to cryptocurrencies but it goes far beyond that narrow band. The sheer number of uses for the technology have set up a fascinating investment prospect in the years to come.
“I think of the blockchain fund as having exposure to high growth areas, like having exposure to internet companies in the late 1990s or early 2000s,” Agarwal said. “Blockchain is sort of in a similar phase right now. At the levels that suit an investor’s risk tolerance, HBLK is a way to participate in a potentially huge growth area and the long term trend of blockchain technology adoption.”
Quoted in this article
Kushal Agarwal, CFA