Move over bitcoin and ethereum. There’s a new investment opportunity in this space, and it’s not a new-fangled cryptocurrency. Rather, it’s blockchain, the decentralized ledger technology that made cryptocurrency trading possible in the first place.
“We’re in the early growth phase, in which industries are implementing blockchain to their advantage,” says Kushal Agarwal, portfolio manager with Oakville, Ont.-based Harvest Portfolios Group Inc.
He has tracked the sector for several years and calls blockchain the highway on which many applications drive.
Its potential to deliver efficiencies and transform industries is immense, Mr. Agarwal says. Blockchain facilitates and speeds up business-to-business transactions, while making it almost impossible to lose track of items in supply chains because of its constantly updating, tamper-proof framework.
“Most people wouldn’t realize that Home Depot and Walmart’s shipping is already tracked in Canada on blockchain,” Mr. Agarwal says.
According to one recent report, blockchain is currently a US$4.9-billion market, expected to reach US$67.4-billion by 2026.
Companies involved in this space may be poised to see rapid growth. In the story of the digital revolution – from mainframe computers, to PCs, to the internet, to cloud computing and social media – blockchain is the next chapter, Mr. Agarwal says.
Dedicated blockchain firms offer high upside
Lisa Polonoski, an investment advisor with Haywood Securities Inc. in Vancouver, says investors are tuning in to blockchain’s potential.
“I get a lot of inquiries from clients about blockchain, even from my more mature investors,” she says. “They’re curious about how and if they should get exposure to this technology in their portfolios.”
To date, large technology, financial and business consulting firms have been the early leaders. However, the companies dedicated solely to blockchain might offer the most upside.
Although the market is still very speculative, “you’re not seeing the same volatility in the actual companies that you would see potentially in the cryptocurrencies,” says Michael Salisbury, portfolio manager with Strong Private Wealth at Raymond James Ltd. in Burlington, Ont.
One difficulty for advisors and other investors is keeping abreast of emerging companies.
“The challenge is finding a way to get exposure in a risk-adjusted way,” Ms. Polonoski says.
To meet investor interest, several asset managers have launched exchange-traded funds (ETFs) offering investors access to diversified blockchain portfolios with low management costs.
Harvest’s Blockchain Technologies ETF HBLK-T is one example. At first, the majority of the ETF’s portfolio consisted of major companies like International Business Machines Corp. IBM-N, Infosys Ltd. INFY-N and Accenture PLC ACN-N, which helped companies like Walmart Inc. WMT-N implement blockchain. Many large companies – Microsoft Corp. MSFT-Q, Oracle Corp. ORCL-N, Visa Inc. V-N and others – remain in the ETF, but their share of the portfolio’s assets under management (AUM) is falling.
“We started with 45 per cent in these large-cap names and now we’re at 15 per cent,” Mr. Agarwal says. “The rest are companies solely dedicated to blockchain technologies.”
Looking for trends to capture
Among those smaller allocations are those providing software and technology services specific to blockchain, like Quisitive Tech Solutions Inc. QUIS-X, a strategic blockchain partner with Microsoft. Other holdings, like EPAM Systems Inc. EPAM-N, provide enterprise blockchain solutions for large firms.
The ETF also includes cryptocurrency miners and other companies that will benefit from the rise of the Web 3.0 and the metaverse.
This emerging frontier meshes the virtual and real worlds. It’s a new economy unto itself, with elements like non-fungible tokens – again underpinned by blockchain – as a means to commodify digital assets such as virtual real estate, which have soared in value.
“Everything can be tokenized,” Mr. Agarwal says. “And every transaction in the metaverse is tokenized, with blockchain recording every one of them, and its ownership.”
The Harvest ETF aims to capture these trends, a strategy already attracting more than $57-million in AUM. The strategy has borne fruit thus far, with the ETF posting about a 42 per cent return in 2021.
Still, with blockchain very much in its early growth phase, investors face the challenge of striking a balance between risk and reward, Ms. Polonoski says.
“You could examine small-cap companies, but also seek large companies already investing in and adopting blockchain capabilities into their processes today,” she says.
Mr. Agarwal says that a reasonable allocation for blockchain would be about 5 to 10 per cent of a portfolio. The strategy would then be to reduce exposure to less volatile large firms while increasing the allocation to more volatile, smaller blockchain companies as the technology becomes more entrenched.
“What you want as time progresses are firms implementing and supporting blockchain, not just the ones using and benefiting from it, because every company will be using it five years from now,” he says.
Advertising feature produced by Globe Content Studio with Harvest Portfolios Group. The Globe’s editorial department was not involved.