Blockchain Adoption Will Accelerate Tokenization
As of October 31, 2024, BLOK’s NAV returns were up 6.99% and YTD performance was 34.31% (see standardized performance). In the last report, we provided a great deal of information around how trillions worth of value creation is occurring on a regular basis as a result of blockchain technology. We did this because, while it is easy to see Bitcoin as the most valuable blockchain because of its price action and value proposition, it is evident to us that on a longer-term basis, tokenization of real-world assets (RWA) using other blockchains may ultimately have even greater societal and business implications. Moreover, while 2024 has proven to be a rewarding year for our investors, we foresee business momentum building upon itself as a result of the election. Bottom line, in 2025 we foresee greater regulatory clarity from the government, increased capital access, and an increase in large firms embracing blockchain as a competitive advantage.
Looking beyond the possibility of the government owning Bitcoin as treasury and/or the proxy vote around Microsoft adopting a similar mandate on December 10th, we foresee firms having significantly less reason to not accelerate their spending on blockchain technology as a solution to lower costs, increase efficiency, and improve security.1 In many ways, with Society for Worldwide Interbank Financial Telecommunications (SWIFT), Depository Trust and Clearing Corporation (DTCC), so many more trillion-dollar financial firms embracing blockchain technology, any financial service firms not willing to adopt it will run the risk of being disintermediated in 2026 and beyond.2 Next month we will be writing about our 2025 predictions, but one of our obvious predictions is that CFOs and CTOs will be reviewing their allocations to a blockchain. Hint: if you believe that highly regulated banks and large traditional finance or TradFi firms are now seeing value in the automation and security of blockchain, just think about the potential benefits of adoption in the healthcare and real estate sectors. Stay tuned!
We are all about sharing insights and opinions from others who we believe will educate our investors. To this point, we found the BCG whitepaper particularly constructive, as it makes the case for $600 billion to $1 trillion in mutual fund assets getting tokenized by 2030.3 It is noteworthy that the authors also highlight that the tokenization value proposition basically follows the ETF playbook in disruption by adding greater potential liquidity and operating efficiencies. As such, the authors project that tokenization will gain 1% of the $58 trillion in AUM, similar to the path that ETFs followed, and save the mutual fund industry about $100 to $400 billion. There is no mention that investors will benefit from this change with lower costs, but it would be reasonable to assume that with greater scale, lower prices will follow. While investor protections around transparency and security would have to be addressed in disclosures, investors may end up seeing the benefit without needing to do much except read the disclosures. The difference in the two paths would be a function of acceptance around private funds (see above).
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.
Sorry for getting deep in the weeds, but this is important to many of our readers in the financial service industry. BCG makes the case above that there are "three main approaches to fund tokenization, each with its distinct advantage and challenge. The first is the creation of digital twins4, often through Security Token Offerings (STO), similar to a master-feeder structure.5 This approach is fast to implement but involves the added expense of managing dual operations. The second approach is developing a native pool of investors. Lastly, there is an option of converting existing funds. This method offers scalability but demands care to avoid disruption." We would note that much of this might be achieved through distributed ledger technology (DLT), but on private blockchains which have established internal custodial relationships and/or through platforms like Chainlink, which provide bridges between TradFi and Decentralized Finance (DeFi).
Transactions and Repositing:
October was an especially active month. Pursuant to the process, the Fund trimmed Galaxy Digital (Galaxy CN) and MicroStrategy (MSTR) per diversification rules. Scaling back some winners and following certain rules around sector exposure has been a constructive risk management discipline we have maintained since the fund was launched in 2018. In addition, two positions we decided to reduce exposure in were Alibaba (BABA) after it rallied hard with other stocks in China, and Roblox (RBLX). The Fund sold 100% of LY Corp and Bitfarms (BITF) to support our interest in buying new positions in Applied Digital (APLD) and Terawulf (WULF). The Bitcoin mining data center sector remains a highly dynamic area of the portfolio. There are many factors that we are constantly reviewing around our weightings in this group. For details, please feel free to reach out. We increased our exposure in the sector and are now leaning in aggressively in the area.
We also added to BlackRock (BLK), DELL Technology (DELL), and MercadoLibre (MELI). BlackRock continues to position itself well for the tokenization of real-world assets (RWA) beginning with private equity funds. It is the manager of about $1 trillion in alternatives and closed on the acquisition of Global Infrastructure Partners on October 1. Reading through the BCG whitepaper, one has to imagine that BlackRock has a strategic plan to integrate the two opportunities. We also believe that KKR has ambitions to capitalize on the tokenization opportunity when combined with infrastructure and private equity. It has some tokenized funds, and recently closed on a $50 billion partnership. Members of the team have been open about their vision that $100 trillion will need to be spent on global infrastructure. Lastly, close readers of these reports should not be surprised to read that we nearly doubled the Fund's position in Opera LTD (OPRA) and increased the exposure incrementally in Coinbase (COIN).
1 https://www.sec.gov/Archives/edgar/data/789019/000119312524242884/d878959ddefa14a.htm
2 Inside The Competition For Big Money (https://www.oliverwymanforum.com/future-of-money/2023/nov/inside-the-competition-for-big-money.html)
3 https://web-assets.bcg.com/81/71/6ff0849641a58706581b5a77113f/tokenized-funds-the-third-revolution-in-asset-management-decoded.pdf
4 A digital twin is a digital replica of a physical object, person, system, or process, contextualized in a digital version of its environment. Digital twins may help many kinds of organizations simulate real situations and their outcomes, ultimately allowing them to make better decisions. (McKinsey.com, What Is Digital Twin Technology)
5 An investment structure commonly used by hedge funds that involves investors investing in feeder funds that, in turn, invest in a larger master fund. (Investopedia.com, Master-Feeder Structure)