In this interview, we discuss the future of the blockchain investment theme, and whether its potential is currently being underestimated. In addition, we take an in-depth look at the Invesco Blockchain ETF, unpacking numerous sub-themes such as crypto mining, token investments and blockchain payment systems.
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Christopher Mellor heads the team that provides support and analysis for Invesco’s range of equity ETFs.
As such, he works closely with the Invesco product development team on ideas for new products. His main task, however, is acting as the in-house expert on existing products.
Invesco launched the Dynamic Biotechnology & Genome ETF [PBE], its first thematic ETF, in 2005. Today, it is one of the largest investment management companies in the world, with assets under management of $1.4trn as of 31 December 2022.
It has some 140 ETF products, out of which almost 100 are equities. Of those, around a dozen are thematic ETFs based in Europe. These focus on a range of themes, from clean energy to wind and hydrogen, among others.
A bottom-up blockchain focus
The Invesco CoinShares Global Blockchain UCITS ETF [BCHN.L] is a good example of the company’s exposure to tech-related themes.
While blockchain has plummeted in popularity over the past year, “the reality is that there is still a place for crypto and blockchain more broadly,” says Mellor, emphasising that “it may be a slower burn, and that could actually be good news.”
While most people have a hard time “holding their noses” and buying stock when it’s performing poorly, that’s an ability that current holders of Invesco’s blockchain ETF seem to have in common.
The ETF is an equity product, so it holds companies directly exposed to the blockchain theme, rather than crypto assets. It thus offers exposure to companies across the blockchain spectrum, “whether that means cryptocurrency miners, the suppliers to those miners, specialist chip manufacturers or the energy providers for crypto mining activity in Bitcoin.”
“The reality is that there is still a place for crypto and blockchain more broadly,” says Mellor, emphasising that “it may be a slower burn, and that could actually be good news”
Mellor underlines that, beyond mining, there is “a very strong enterprise use case” for blockchain. When it comes to supply chain management and “the back-office plumbing of the financial services world”, blockchain is uniquely suited for mass adoption, he argues.
Invesco partnered with one of Europe’s largest digital asset management firms, CoinShares [CS.ST], in launching the ETF. Analysts at CoinShares assess companies according to their exposure to blockchain activities using a range of measures, assigning a “blockchain category score” to each one.
There happens to be a bias towards Japanese and Korean companies in terms of weightings in the fund, which Mellor explains is due to those countries being in an area of the world “where regulation and insight are much more focused on blockchain technology”. Their abundant representation in the fund is “not by design; it's by bottom-up analysis [showing] that those are the companies with the greatest opportunity”.
An abundance of use cases
Blockchain is already used by the IBM Food Trust network, a system that brings together food producers, retailers and suppliers using blockchain technology to track the supply chain of food deliveries.
“Being able to directly track the movement of say, a head of lettuce from the plot in the greenhouse where it was grown, to the refrigerator where it was kept in the lorry”, all the way to its final retail destination, provides “potentially huge benefits in terms of disease control and cost control”. Members of that consortium already using the technology include Walmart [WMT], Carrefour [CA.PA] and Nestle [NSRGY].
In this case, blockchain is acting as a “shared record-keeping system”, where each step in the supply chain accurately records what has been transferred. That tracking was once done with carbon copy paper, but it’s now done on a centralised IT system powered by blockchain.
As of 1 March, the seventh-largest holding in the fund is MicroStrategy [MSTR] with a weighting of 3.65%, which represents one of the token investments held by the fund.
While MicroStrategy is itself a software-as-a-service company, its management team has invested a significant portion of their treasury assets in Bitcoin. That effectively makes MicroStrategy “a listed entity that gives exposure to the performance of the Bitcoin price”.
While that isn’t a common trait among companies in the ETF, it furthers Invesco’s aim of providing exposure to the performance of blockchain. And since the ETF only invests in companies, it’s one of the ways it offers exposure to the coin’s price.
As for blockchain payment systems, “Block [SQ] is a great example”. The financial services and mobile payments company enable mobile point of sale for retailers. They’re in the fund because they also support the use of Bitcoin in trading and payments on their mobile app in the US and UK.
The fund holds shares of Block at a weighting of 2.22%.
Regulation is the future
Recent years have seen technology experiencing “growing pains”, Mellor emphasises: “we're still in the early days. It’s important to remember that the use of blockchain and the development of the technology is only about 10 years old.”
While he characterises this period as an “incredibly interesting and volatile ride”, Mellor believes that blockchain technology “has been proven to be robust”, and that we’re now “well beyond the proof-of-concept stage”. Nevertheless, “we're still in the foothills of a journey to the peak of the mountains.”
“We're still in the early days. It’s important to remember that the use of blockchain and the development of the technology is only about 10 years old”.
One key to getting up that hill to mass adoption of cryptocurrency will be regulation—something that governments in Japan and South Korea have been wise to make a priority of.
Regulation is, in general, a positive for this space. It means that you're setting in place adequate consumer protection [and] a foundation for how things work within the law.”
It allows consumers to deal with questions such as whether capital gains will need to be accounted for when paying for goods with cryptocurrencies.
“Those kinds of complications actually become clearer with regulation. And clarity is really what's required here.”
The Invesco CoinShares Global Blockchain UCITS ETF is up 15% year-to-date, and down 38.8% over the past 12 months.
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