Blockchain: No More Lines at the DMV
BLOK closed July with a positive NAV return of 3.52% and YTD performance of positive 22.83% (see standardized performance). Then August hit, and market volatility erupted. This, of course, has had a negative effect on the price action of Bitcoin, ETF flows, and many of the stocks in the portfolio that tend to be high beta. However, while the correction in price is a challenge to watch, it does not change the momentum of the infrastructure buildout in Blockchain or, according to our research, the long-term trend around Bitcoin adoption.
Our focus for the Fund remains on capturing the benefits that will come from those companies building out the Blockchain rails. In certain cases, we have identified groups like the Bitcoin miners that secure the Bitcoin network. In other cases, we are allocating to growth companies providing investors trading and/or transactional platforms. Currently, the Fund is diversified across nine companies in the miners category representing 24% of the portfolio, and 15 companies in the platform category representing 24.45% of the portfolio. While we continue to see acceleration and evidence of adoption, we were particularly excited to see the news out of the California DMV. According to sources, this initiative aligns with Governor Newsome’s 2025 vision of integrating blockchain into government operations to reduce title transfer time from two weeks to a few minutes (see article by Riley Asak, California DMV and Cryptocurrency: Blockchain-Powered Vehicle Ownership1).
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month-end please visit BLOKETF.com.
For decades we have heralded that the ETF wrapper will democratize assets and investment opportunities. It should therefore be no surprise to those who know us that we see easy access to Bitcoin through ETFs as great news. However, what should not be lost is the fact that while Bitcoin is expected to remain the dominant protocol and/or asset in the category, it will not be the singular winner. Innovation simply does not work that way. To this point, we note that the 42 million citizens in California will be relying on a partnership with Oxhead Alpha and Ava Labs, and be using the Avalanche blockchain, not Bitcoin. In highlighting this fact, we are not trying to reduce the value proposition of Bitcoin network but rather build awareness around how cryptography2 works and how it will transform people’s lives through data sharing. To be clear, Blockchain as the wrapper is the technical term that describes the use of cryptography as programming puts information “on-chain.” We often accept the fact that an airplane can fly without truly knowing why. Similarly, over the last 20-30 years, we have grown to trust “the internet” as a network that transfers information instantly and securely. The Blockchain is no different, except with most Blockchains, it is a tri-party computer secure code that displaces trust through automation so that we know it is true. The saying “trust but verify” has never been more truthful than in today’s sketchy world!
Bitcoin, as a commodity, is designed to be a long-term store of value and basis for digital property. However, this evolution makes for a disruptive technology that will ultimately revolutionize industries. To this point, we do not know whether this means the network will eventually have a value of $283 trillion (Michael Saylor’s Keynote Speech - Nashville Bitcoin 2024: The Digital Economy3), but cryptology (“crypto” for short) certainly has the power, momentum, and technological benefits needed to disrupt industries globally. Again, boiling it down, cryptology described as Blockchain is simply about tokenizing information through a computer language for the purpose of providing “smart contracts” and automating outcomes. This is the foundational thesis behind transformational data sharing and how its adoption will change industries and thus have an impact worth far more than just the value of Bitcoin.
As another example of how industries will change from the adoption of Blockchain, we would highlight a recent interview that we did with the CEO of GrainChain. By improving the transparency and reliability of real time data using Blockchain, GrainChain has improved financing terms for farmers in Central America and Texas. As “Smart Contracts” work using the IBM Hyperledger Blockchain network, banks and lenders rely on the data to get paid faster based upon both the proper accounting of costs and revenues. Note that accountability is available across 24 different commodities (see Blockchain Interview Series with GrainChain’s Luis Macias4).
Transactions and Repositioning:
Our investment process can be defined by the asymmetry of the opportunity and our discipline to move in small increments. As we become more confident in Management’s ability to execute on a strategic long-term plan or our short-term outlook for risk, we will add to or subtract from a position. We will never catch a falling knife because we feel we are smarter than the markets just based upon price. Frankly, we try to size the portfolio positions so that when we are wrong, we don’t destroy capital. We believe this type of systematic approach positions our investors well for future disruption and volatility so that when we get it right, we can see an outsized upside.
During the month of July, we added to...
1https://coinpaper.com/5066/california-dmv-and-cryptocurrency-blockchain
2https://www.fortinet.com/resources/cyberglossary/what-is-cryptography
3 https://youtu.be/O9KnBcWMkpw
4 https://www.youtube.com/watch?v=4chTpbM_azY&t=6s