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Digital assets, the true investment opportunity from an investor's perspective

06/06/2019

Over the past few decades, technology has been an increasingly attractive investment opportunity for investors. While still in its early days, it is fair to say that blockchain technology is one of the most exciting innovations we are currently witnessing. It is a new paradigm that has the potential to disrupt most industries, from financial services to supply chains. On the one hand, it can reduce costs, streamline “traditional” distribution channels and remove the need for “trusted” intermediaries; on the other hand, it enables automation, decentralisation and transparency through its smart contracts(1) and public ledger capabilities.

Blockchain is being prioritised

Blockchain technology is not a fad and is most likely here to stay. Though innovation is mostly endorsed by start-ups in the space, a growing number of large corporations are evaluating the business opportunity and potential synergies at stake. According to a Deloitte survey2 conducted in 2018 amongst 1,000 executives from nine industries and seven countries, 74 percent of respondents reported that their organisations see a “compelling business case” for the use of blockchain. For most organisations surveyed, blockchain is becoming a priority investment, 95 percent of companies surveyed are investing or intend to invest in this nascent technology

The polarised views of the market

Whilst most would agree that blockchain technology has merit and multiple applications, the jury is still out on the role of Digital Assets or tokens. As always with innovation, it is not straightforward to fully appreciate the opportunity and implications for the future. When it comes to blockchain, this is even more true, as a very limited number of people have a sufficiently in-depth understanding of it; in most cases, people simply don’t understand its purpose.

The articles in the media generally outline two opposite “extreme” beliefs:

  • Those who believe that blockchain technology is going to change the entire world. Beyond the financial industry applications that most potential investors are aware of, it is believed Digital Assets can impact social order, the balance of power, wealth, opportunity as well as things like censorship, transparency and many more of the ways we interact with each other.
  • Those who believe that there is no such revolution on the horizon and that the financial system will continue to function as it always has. The role of Digital Assets is limited in society. Social order will not be changed but blockchain may have applications within some industries to increase efficiencies.

We position ourselves somewhere in the middle and believe that, while there is a strong use case for many industries, corporations should spend time reviewing current processes and determine whether blockchain technology can improve their operations. We also believe the role of Digital Assets will continue to grow in the financial markets.

Investing in a new asset class

We have seen a substantial amount of research done by applying traditional valuation analysis to Digital Assets. While analysts tend to draw conclusions based on such analysis, the reality is that applying these models to Digital Assets is most likely impractical or at the very least questionable – we can put together analysis to prove that either blockchain “evangelists” are correct or that blockchain pessimists are correct, depending on the time period and performance metrics we choose to consider. The key point for an investor is that we aren’t really gaining any meaningful insight from this, as the market is in its early stages and is dynamically evolving.

Making an investment decision based on your prediction of what will happen in the next year is extremely risky. For an investor with a diversified portfolio and sufficient funding to meet their investment objectives, the case for investing in Digital Assets with a short-term investment horizon is unclear.

Investors that are able to take a longer-term view are better placed to benefit from the opportunity. The progress made each year is astonishing, and there is much to be optimistic about, the details of which go beyond this article but a high-level overview is as follows:

  • Regulation is coming. It might be slow, but every year the framework for a balanced outcome that promotes innovation is developing, and this is a good sign for a longer-term investor.
  • Education and awareness of the asset class is increasing. From an investor’s standpoint, we have gone from something geeks and criminals play around with to something that financial institutions are participating in.
  • Infrastructure for mainstream adoption and investment is being built – with many of the largest financial institutions involved.
  • True diversification – for most investors this will be their only investment outside of traditional financial markets.
  • Appreciating and adapting to the evolution of society towards the values that are important to millennials and how this will shift macro trends.

Many investors regretted missing the opportunity of investing at the price levels of 2017, with many having no knowledge of the asset class at the time. Those prices are now being revisited with Bitcoin back at the price levels of August 2017 (c.$4,000) at time of writing3. However, this time the asset class has more than a year of extra progress in terms of infrastructure, development and regulatory framework.

The case for investing in Digital Assets continues to look compelling, and it is becoming very difficult for investors to ignore it.

 

ASIM AHMAD
Head of Portfolio Management of Eterna Capital.

Asim was previously a member of BlackRock’s Institutional Client Business team working in a solution-orientated role with global and UK based investment consultants. Prior to joining BlackRock, Asim was an investment consultant at JLT, where he advised institutional investors on their investment arrangements, including investment selection, setting investment strategy and due diligence with a focus on Hedge Funds and Alternatives. Asim holds a BSc in Mathematics and is a CFA Charterholder.

 

NASSIM OLIVE
Founding Partner - Chief Economist & COO of Eterna Capital.

Nassim was previously a member of BlackRock’s Institutional Client Business, responsible for covering Global and UK based insurance companies. As part of his role, he was in charge of developing business relationships and providing solutions to clients. Nassim is passionate about markets, economics and politics. He joined BlackRock after completing his MSc in Finance with Distinction at Imperial College London in 2014. Nassim is a CFA Charterholder.

(1) Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman
(2) Source: Deloitte, 2018 Global blockchain survey, Breaking Blockchain Open – sample size = 1,053 global companies (3) https://www.coinbase.com/price/bitcoin