First Trust: Investing in the blockchain revolution
Warren Buffett has a knack for placing things in perspective. He observed how industrial titan John D. Rockefeller, the richest man of his generation, could only dream of what many of us take for granted today.
“His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbours now do1.”
Ever wondered how all this progress crept up on us?
Well, the industrial revolution began to increase the world’s income (judged here by GDP/capita); but it was the introduction of the personal computer in the late 1900’s and the introduction of the internet in the 1990’s that really changed the trajectory.
We feel this radical income growth was brought about by three distinct waves of change, introducing new infrastructure for innovation and not just technology. The industrial revolution introduced manufacturing, the personal computer digitalised knowledge, and the internet scaled access to information.
It’s only natural to ask, therefore, what’s the next big infrastructure leap?
We think it could be Blockchain Technology. And here’s why:
Transformative technology has delivered digitisation (photos are no longer primarily on film or paper), dematerialisation (every smartphone has a camera app), demonetisation (it costs virtually nothing to replicate or transfer photos) and democratisation (everyone can now become a photographer). These changes – initially deceptively small – have compounded at an exponential rate.
But here’s the crux: what works so well for photos doesn’t seem all that great for our money, healthcare records or passports. That’s because, for all its innovation, the internet has yet to offer a standardised way to identify an authentic copy.
Blockchain technology closes this gap, as the technology is nearly impossible to tamper with, and in a world of constant cybersecurity threat this added security is increasingly valuable.
We do however concede that Blockchain may have had an image problem. Most people equate Blockchain with Cryptocurrency – its first major application. Just like e-mail was the first major application of the internet – not the entire internet’s potential – Blockchain’s impact stretches far beyond virtual currencies.
For example, Blockchain is decentralized, making it a global phenomenon and allowing developers all over the world to work and explore. Also, the combination of open-source software, cloud computing and new technology with new capital formation dynamics are connecting and forming a new infrastructure for innovation in multiple industries.
“I am a big believer in the ability of Blockchain technology to effect fundamental change in the infrastructure of the financial service industry.” – Bob Greifield (Nasdaq CEO 2015).
In finance, earlier this year, HSBC completed the first commercially viable trade-finance transaction using Blockchain. Today, trade deals typically take several weeks to complete, owing to a cumbersome paper trail involving suppliers, ports, shippers and financial institutions. Blockchain technology has the ability to reduce the transaction time to a matter of hours, radically altering the trade finance industry.2
Increasing transaction speed and efficiency could have far reaching implications. According to the World Bank, global remittances totalled $613 billion in 2017, of which $466 billion went to developing countries. The cost of transferring capital is often exorbitantly high – an average of 7%, according to the World Bank..3 Imagine your local bank charging you this for every pay-cheque…. given an option, you wouldn’t stand for it.
Interestingly, the hype around Cryptocurrencies seems to have distracted the investors from a crucial observation: Rather than investing in (or speculating on) cryptocurrencies, investors can look to invest in companies that enable Blockchains to exist – a ‘pick-axes to the miners’ approach. In a modern-day version of the Gold Rush: the average gold miner didn’t make much money; the average pickaxe seller did.
But how can you invest in Blockchain, when there is no “Blockchain business”?
Thematic investing can help. Thematic investing cares not if a company is considered a technology stock or a farming stock; so long as the company is engaged with or directly affected by the desired theme. Blockchain is a theme crossing these sectorial barriers, which taps directly into ways businesses are changing alongside this innovative technology.
With many years of experience, First Trust is one of the largest players in thematic ETFs, as well as the 6th largest ETF sponsor in the US.4 Since the firm’s inception, First Trust has successfully launched a series of thematic products, in areas including cyber security, the internet, IPOs and now blockchain.
The First Trust Innovative Transactions and Process Ucits ETF (“BLOK”) is a physical ETF tracking the performance of the Indxx Blockchain index – an index of exchange-listed companies either actively using Blockchain or developing products poised to benefit from the technology. This index is equally weighted between Blockchain users and enablers.
After all, anyone who’ll be using Blockchain will need to have both the required hardware, and the technical know-how. Enablers – our modern-day pickaxe vendors – stand to benefit regardless. These mostly consist of leading chipmakers and tech consultants. In fact, the three tech consultants below have hovered up almost 2/3rds of all the revenue spent on Blockchain thus far, and they’re familiar names.
Examples of Blockchain in Action
Users are diverse: banks and securities exchanges, trade companies and shippers, supply-chain juggernauts and even beef production.
Walmart, launched The Food Trust blockchain to manage its global food supply chain. In part, this is an effort to prevent contamination outbreaks.6
Walmart and nine other companies have partnered with IBM in order to release a blockchain for tracking food globally through its supply chain, The Wall Street Journal (WSJ) reports June 25. The Food Trust blockchain, which includes Nestlé SA, Dole Food Co., Driscoll’s Inc., Golden State Foods, Kroger Co., McCormick and Co., McLane Co., Tyson Foods Inc. and Unilever NV, have been collaborating with IBM on the initiative since 2016, and began conducting trials of the product in August of last year.6
In shipping, Tradelens is attempting to digitise the global supply chain through an open and neutral industry platform underpinned by Blockchain technology.7
Also, a ranch in northern Wyoming, has joined the stealth start up Beef Chain, to implement a shared, distributed blockchain with the end goal to connect the world’s cattle supply chain.8
The Core of Thematic Investing
At its core, thematic investing is about identifying powerful macro-level trends that will potentially yield the growth stories of the future while providing two types of service: generating exposure to an investment thesis and simpler way of expressing it, effectively trading/investing in a number of securities in one trade. With this single transaction, the client gains exposure to a group of companies tied together by a theme rather than their country of domicile, sector classification or exchange listing.
In these early days of Blockchain, the technology’s impact on the top and bottom line of many companies can seem small, BUT if history is any guide, the change – when it happens – could develop extremely fast. Our world today would be unrecognisable to Rockefeller, and Warren Buffett’s awe is that it only took a single lifetime. At the current pace of change, the next radical changes may take even less.
Click here to Join our upcoming webinar, presented by First Trust senior product specialist Gregg Guerin, and listen to further insights on the potential opportunities of the blockchain revolution.
3. https://remittanceprices.worldbank.org/sites/default/files/rpw_report_december2017.pdf and https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD
4. First Trust, Bloomberg June 2018.