Which functions make blockchain more revolutionary?
Blockchain, the technology behind Bitcoin, is the focus of attention and attracts investors from all over the world. Distributed ledger technology first caused a stir in 2018 when the world discovered its high, disruptive potential. Although the possibilities of the technology were initially misunderstood, the impressive soaring of cryptocurrencies ultimately forced investors to take an interest in them. After the Internet revolution, blockchain as a global and cross-industry disruptive technology is likely to stir up a wide range of sectors - such as supply chain management, banking, real estate and healthcare. Disruptive technologies are innovations that replace the successful series of an already existing technology, an existing product or an existing service or completely displace them from the market and make the investments of the previously dominant market participants obsolete. Investing in cryptocurrencies is similar to funding early-stage startups. However, since these special start-ups do not obtain capital through conventional channels, but rather through so-called ICO (Initial Coin Offerings), they are not listed on stock exchanges. As part of the investment recommendations, the topic focuses exclusively on pooled investments, which primarily focus on companies that are active in the blockchain economy and generate the majority of their sales in this industry. It includes companies that operate in many different areas: venture capital and investment services, cryptocurrency mining, cryptocurrency exchanges, consulting, software development and even hardware manufacturing.
"The idea of the blockchain was first described in the Bitcoin White Paper" Bitcoin: A Peer-to-Peer Electronic Cash System "."
Blockchain is a shared, distributed computer-to-computer ledger that facilitates the process of recording transactions and tracking assets on a business network. Blockchain owes its name to the way in which transaction data is stored: in blocks that are linked to form a chain. As the number of transactions grows, so does the blockchain. Blocks record and confirm the time and sequence of transactions, which are then logged into the block chain, within a discrete network that is determined by rules agreed by the network participants. Although initially associated with digital goods, it can be used to track tangible, intangible, and digital assets and businesses across all lines of business.
The idea of the blockchain was first described in the Bitcoin White Paper "Bitcoin: A Peer-to-Peer Electronic Cash System". The person behind the pseudonym Satoshi Nakamoto, whose author is still unknown, describes existing, serious problems in dealing with monetary values. Central institutions such as banks, insurance companies or governments are accused of abuse of trust in dealing with monetary values. The bursting of the speculatively inflated real estate market in the USA, which led to the financial crisis in 2008, is mostly used as an example.
Finding the pearls in this still highly fragmented new market is difficult even for experts as the technology is only at the beginning of its development. It is impossible to predict who will become the big winner in the end. The blockchain or distributed ledger technology makes, among other things. a multitude of innovations in the financial services sector possible.
Originally developed as the technological basis for the virtual currency Bitcoin, it can be used to record transactions from user to user in digital payment and business transactions without the need for a central office that legitimizes each individual transaction. The catalysts of this market segment are likely to be the introduction of specific blockchain-based applications that succeed in generating substantial sales and showing competitive advantages. A resurgence of the cryptocurrencies would also have positive effects on the technology. Above all, the few crypto miners or Bitcoin trading venues listed on the stock exchange benefit from this. Their price trend shows a high correlation with Bitcoin, by far the most important crypto currency (see Figure 1).
"Blockchain ETFs own shares in companies that are active in the field of blockchain technology or that benefit from it in some way."
Participation via ETF
Blockchain ETFs own stocks of companies that are active in the field of blockchain technology or that benefit from it in some way. Some examples are IBM, Amazon and Germany-based SAP. Many investors may be wary of risking a blockchain investment as the technology is linked to the volatile cryptocurrency market. Blockchain is not the same as cryptocurrencies, however, and blockchain ETFs only invest in stocks of regulated companies, many of which are large blue-chip technology companies.
Reality Shares' (https://realityshares.com/app/BLCN) ETF BLCN, which is listed in the USA and comprises 67 stocks, pursues a mixed strategy and invests in both growth and value stocks. The fund is focused on the technology sector in developed markets worldwide. It tracks the Reality Shares NASDAQ Blockchain Economy Index, which measures the returns of companies involved in the development, research, support or use of blockchain technology. The ETF's three main holdings in mid-June included Overstock (OSTK), an e-commerce company that sells discounted branded items, as well as Square (SQ), a provider of mobile payment solutions, and SBI Holdings (8473), an in Japan-based financial services company and venture capital fund manager. BLCN uses the Blockchain Score company scoring method, which is designed to identify the companies that can benefit most from blockchain technology.
The active managed ETF BLOK from Amplify (https://amplifyetfs.com/ blok), which is also listed in the USA and comprises a little over 50 stocks, invests worldwide in stocks that are involved in the development and use of blockchain technologies. In terms of industry, the allocation in mid-June was dominated by IT services with around 24%. Geographically, around 45% of the stocks in the ETF were based in North America, 42% in Asia and only 11% in Europe. The top 10 accounted for around 36%. The largest share at stock level was held by GMO Internet shares at just under 5% on the reporting date.
First Trust's ETF LEGR (www.ftportfolios.com/retail/etf/etfsummary.aspx?Ticker=LEGR) pursues a mixed strategy. The fund has a broad focus (around 100 stocks) on the technology sector in developed markets and tracks the Indxx Blockchain Index. The ETF's three largest holdings in mid-June included NVIDIA (NVDA), a semiconductor company, PayPal Holdings (PYPL), a provider of online payment solutions, and the Chinese internet company JD.com (JD). The fourth ETF is BCHE (BCHN: Ticker of the ETF in London) from Invesco, which is also traded on SIX Swiss Exchange and is based on the Elwood Blockchain Global Equity Index (https://elwoodam.com/equity-index). With 43 titles he is more focused than the other three. The index aims to capture the investment potential generated by income related to the adoption of blockchain technologies or cryptocurrency. It has proven in the past that it can keep up with the world stock index even when the cryptocurrency industry is in a cyclical downturn. The index provider believes that indirect exposure to bitcoin in the index may result in outperformance in falling markets, assuming that uncertainty about inflation drives the price of bitcoin higher.
"Finding the pearls in this still highly fragmented new market is difficult, even for experts."
In terms of performance, only LEGR has been below the global share index since March 2019. For new investments, investors should rely on BLOK and / or BCHE (BCHN) because of their stronger focus. The latter could benefit in the future from the greater involvement of crypto-affine blockchain companies.
Participation via tracker certificates
For investors who want to map the megatrend via participation products listed in this country, the range is not exactly abundant. You can currently choose between BLOCHU and BLOCKU, two finite tracker certificates from UBS, and ZSOEBV, an endless tracker certificate from Bank Vontobel on the Solactive Blockchain Technology Performance Index (www.solactive.com/indices/?index=DE000SLA5D70 ). When comparing exchange rates, BLOCHU was converted into EUR, the trading currency of BLOCKU and ZSOEBV. For more conservative investors, the endless, broadly diversified tracker certificate ZSOEBV is the best choice. For the more risk-conscious, the very strongly focused BLOCHU, made up of only 13 stocks, is worth considering.
But investors can also assemble their own blockchain portfolio. This is relatively easy due to the information available from the ETFs and the tracker certificates. A 60:30:10 composition is recommended so that the risk remains within tolerable limits. 60% should be covered with the help of large-cap stocks with a blockchain connection. 30% with medium-sized companies and the remaining 10% with small companies, mainly from the crypto industry. In terms of number, a minimum of twelve (4: 4: 4) to a maximum of 30 titles (10:10:10) is recommended. As a food for thought, the following mixture is promising. Big caps with 15% each (Amazon, Nvidia, Paypal and Advanced Micro Devices), mid caps with initially 7.5% (Square, Docusign, Grayscale Bitcoin Trust, Overstock) and small caps (Bitcoin Group, Riot Blockchain, Hive Blockchain and Hut & Mining).
Had, had bicycle chain ... started this basket with the proposed weighting at the end of 2019, the Corona crisis would have been a storm in a water glass. In the retrospective calculation from the beginning of 2019 to mid-June, the basket achieved an excellent annualized return in CHF of 59% up to June 19 and outperformed the selected benchmark, the Swiss Performance Index, by far. A start in the coming days should still be worthwhile, especially since the blockchain megatrend is only just beginning and the addition of crypto miners and indirectly crypto currencies will probably give the whole thing an additional kick in the coming months.
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