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Cryptocurrencies Are Just the Tip of the Iceberg for Blockchain

  • By Liam Brennan

Blockchain was introduced more than 10 years ago, but Invesco believes the potential for this technology to change the global economy is still overlooked (and undervalued) by investors. In this article, Invesco discusses blockchain and why lettuce farmers have become early adopters


The internet impacts just about every part of our lives, from the way we communicate to the way we shop to the way we conduct business. Yet, the first application was simply to share data between a few computers. Numerous applications have followed since the early emails and the rest, as they say, is history. Just imagine if you, as an investor, knew back then what you know now.

In our opinion, the potential for blockchain to change the global economy is greatly underappreciated in today’s market, much like the internet was in the beginning, when most people couldn’t see past its usefulness for email.

You could draw a strong comparison between the internet and blockchain. The blockchain technology was first used as the ledger for Bitcoin, but its true potential extends far beyond that. We are beginning to see it used by financial services companies in particular, but we can expect greater application of blockchain technology across a wide range of industries. In our opinion, the potential for blockchain to change the global economy is greatly underappreciated in today’s market, much like the internet was in the beginning, when most people couldn’t see past its usefulness for email.

What is Blockchain?

In the simplest terms, a blockchain is a ledger – a complete record – used to capture and store every transaction related to an asset. The record of transactions is permanent, transparent, traceable and unalterable. In the context of blockchain, “asset” could be anything from a cryptocurrency that exists only in the digital world, or it could be a physical asset, medical records, legal contracts or potentially any other type of information that requires the involvement of multiple parties.

Example of a blockchain transaction

All blockchains have some basic components. They will have addresses (each being unique to an individual, just like an email address) and the various transactions executed and recorded on the blockchain ledger. While those are the commonalities, blockchains may differ in two significant ways:

Why use Blockchain?

Companies may use blockchain to reduce costs, improve efficiencies, increase the transparency and auditability of their records, and reduce the potential for fraud. Another attraction is that it enables multiple parties to contribute to and trust a record of ownership without needing to trust each other.

Companies may use blockchain to reduce costs, improve efficiencies, increase the transparency and auditability of their records, and reduce the potential for fraud.

Some of these benefits are going to be more attractive than others depending on the industry, the size of the company and complexity of the transactions involved. You can then throw in the difficulties involved with unrelated companies located in different countries and time zones.

Case studies

1. Walmart’s use of blockchain technology

The problem:
What do they do when there is an outbreak of a potentially life-threatening bacteria? For instance, in 2018, when there was e-coli found in lettuce in a certain part of the country. Walmart has a huge supply network of farms across the country, and without a way to trace the origins of its produce, they may be forced to pull all lettuce from the shelves.

Blockchain solution:
All of Walmart’s lettuce and spinach suppliers are now required to record the movement of produce onto a blockchain database. By tracking it from the farm (and even the specific section of the farm) to the store location, the blockchain provides secure, permanent and unalterable traceability, helping Walmart effectively manage any contamination as soon as it’s detected.
This blockchain was developed by IBM. Following a two year pilot programme, Walmart is rolling it out to more than 100 farms across the country and says it is now using blockchain to track other items from chicken to yogurt.

2. The use of blockchain technology in the real estate industry

The problem:
With any real estate transaction, there is a lot of papershuffling involved. Documents going back and forth between multiple parties by email, fax and courier is costly, inefficient and, particularly when you consider the need to transfer money at various stages, open to fraud.

Blockchain solution:
“Smart contracts” are being used increasingly, with the blockchain ledger providing an unalterable, permanent and transparent record between the multiple parties involved throughout the transaction. Each party could also be required to validate each transaction, which reduces the potential for fraud.

How does an investor gain exposure to Blockchain?
Even though blockchain has been around for a decade, it is still an emerging technology, and most of the current opportunities are within existing companies that are not yet realised. We believe the potential for blockchain to generate real earnings for these companies is underappreciated by the market, either because investors are unable to identify it or know how to assign value, or they assume synergies may only be relevant if the blockchain ecosystem continues to grow.

The variety of companies involved in blockchain technology may surprise you. There aren’t any “pure play” blockchain companies of significant size and liquidity for a meaningful investment, but you will find some small niche companies. However, much of the hidden exposure is within large household names. The universe of companies that are currently or can potentially generate real earnings from blockchain is diversified in terms of sector and geography. While the earnings potential related to blockchain is largely underneath the surface for many of these companies, their present-day real earnings are clearly visible.


for illustrative purposes only

Accessing the hidden potential We have launched the Invesco Elwood Global Blockchain UCITS ETF to offer investors access to global companies in developed and emerging markets that participate or have the potential to participate in the blockchain ecosystem. The ETF aims to deliver the performance of the Elwood Blockchain Global Equity Index by physically investing as closely as possibly in the index constituents. The index is designed to evolve with the potential growth of blockchain technology. The majority of the index is currently allocated to companies where the value attributable specifically to blockchain technology is either in the ‘developing’ or ‘potential’ phase. These are companies with assets that are well-positioned to capitalize on the emerging opportunities for blockchain. Over time, however, we would expect the balance to shift naturally to companies with more significant direct exposure to blockchain-related earnings as the technology becomes more ubiquitous.


INVESTMENT RISKS
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As this fund invests in companies from one or a small number of sectors, investors should be prepared to accept a higher degree of risk than for an ETF with a broader investment mandate.

IMPORTANT INFORMATION
This article contains information that is for discussion purposes only, and is intended only for professional investors in the UK. Marketing materials may only be distributed in other jurisdictions in compliance with private placement rules and local regulations.

Information correct as at 1 March 2019, unless otherwise stated.

This article should not be considered financial advice. Persons interested in acquiring the fund should inform themselves as to (i) the legal requirements in the countries of their nationality, residence, ordinary residence or domicile; (ii) any foreign exchange controls and (iii) any relevant tax consequences.

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This article is marketing material and is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.

For details on fees and other charges, please consult the prospectus, the KIID and the supplement of each product.

The fund is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade mark or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG.

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© 2019 Invesco. All rights reserved | EMEA1809/2019

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