Does It Make Sense to Invest In a ‘Blockchain Fund’? Know Here...

Sep 13, 2021

Listen to Does It Make Sense to Invest In a ‘Blockchain Fund’? Know Here...

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Fintech has come a long way... it has transformed and improved the entire financial sector with innovation across payments and transfers, capital markets investments, financing and banking, and personal financial management. India had been heavily dependent on lengthy, elaborate, and physical processes, but advancements in financial technology have significantly simplified financial management.

After the 2016 demonetisation, India witnessed a swift penetration of digitization. In addition to that, an influential demographic of millennials and strategic collaborations between fintech firms and banks have contributed to the growth of fintech services in India.

Fintech has been a key player in augmenting economic growth; the COVID-19 pandemic has been at a turning point for the greater adoption of digital lending, online investments, banking, micro-services, robo/AI services, and more.

Consequently, there is another aspect of financial technology, which is one of the latest trends in the financial markets called 'Blockchain Technology'

You see, many companies have leveraged innovative technologies to overcome geographic boundaries and connect individuals with financial services, and blockchain technology is one of them.

What is Blockchain Technology?

Blockchain has emerged as a 'sunrise' technology in financial services. Blockchain works like a massive digital spreadsheet or ledger in which every transaction is recorded. It is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

Given that each block in the chain contains a number of transactions, every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant's ledger. It confirms, validates, and archives information; and it can be accessed virtually in real-time by all participants.

Also known as Distributed Ledger Technology (DLT), Blockchain technology is a decentralised database managed by multiple participants. The biggest advantage is, the Blockchain system of recording information in a way makes it difficult or impossible to hack, change, or cheat the system.

Blockchain technology was crucial in the development of Bitcoin and other crypto currencies, the decentralized ledgers record the transactions of the participants. The most high-profile use of blockchain in fintech has been cryptocurrencies.

Does It Make Sense to Invest In a ‘Blockchain Fund’? Know Here...
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The price of Bitcoin has highly increased and gained traction from many retail investors, millennials are seeking to invest in cryptocurrencies in India. However, most investors are unaware of the crypto markets and the blockchain technology that supports each of these cryptocurrencies. It is essential to understand that Bitcoin is different from blockchain.

Blockchain is the technology that underpins the cryptocurrency Bitcoin, but Bitcoin is not the only version of a blockchain distributed ledger system in the market. There are several other cryptocurrencies with their own blockchain and distributed ledger architectures. The potential for its adaptation to other uses has opened a number of possibilities for investors, both related and distinct from cryptocurrency.

The increasing acceptance of cryptocurrency amongst investors is one of the major factors driving the market growth. Several companies, banks, and financial institutions globally are now using blockchain technology for payment processing and issuing of their digital currencies. Blockchain has the potential to revamp currently existing processes to unlock new sources of efficiency and value.

Blockchain in India is making inroads at a swifter pace than before and gaining a lot of curiosity on ways it can make companies more efficient and their transactions safer. Blockchain is being looked at by businesses to streamline their operations. The pandemic has led a huge shift from physical to digital platforms, making blockchain more relevant to ensure safe and transparent financial transactions.

The accelerated popularity of blockchain technology has encouraged blockchain companies to consistently reinvent the wheel and see how this technology can be applied optimally. The original design of blockchain focused on the cryptocurrency 'Bitcoin'.

However, due to its specific characteristics, many companies now find blockchain technology efficient for applications in many areas, not limited to cryptocurrencies, but including finance, logistics, insurance, healthcare, etc.

Blockchain is a revolutionary technology in the financial services industry; it has directly affected several sectors by reducing the cost involved in financial management. Do note that, blockchain is not free from risks. It can be prone to risks related to technology, implementation, investments, legal processes, operational, security, finance, and other aspects directly or indirectly related to blockchain.

Should investors consider an investment in 'Blockchain Fund'?

Recently, Invesco Mutual Fund filed papers with SEBI to launch a new fund offer (NFO). This will be an open-ended fund of fund scheme, it will invest in Invesco Elwood International Blockchain UCITS ETF, an abroad exchange traded fund listed on global stock market.

The fund house aims to introduce a mutual fund scheme that will offer Indian investors the exposure to global companies that are involved in blockchain technology. Investors can expect to make gains from the growth of companies evolving with the blockchain technology.

The underlying scheme, i.e. Invesco Elwood International Blockchain UCITS ETF, will provide exposure across companies globally in developed and emerging markets that participate and have the potential to involve in the blockchain ecosystem.

For investors, there are two broad areas that focus on blockchain technology, one is the pure cryptocurrency investments; and the second is investment in a mutual fund scheme that indirectly invests in companies targeting the growth potential of blockchain technology.

The opportunity to invest in blockchain technology gives investors the chance to leverage the potential offered by this revolutionary technology. Before investing in schemes banking on the future growth prospects of blockchain technology, you must assess your risk tolerance, investment objective and horizon.

The blockchain technology has a low exposure in India and many investors are unaware of the nitty-gritties. Do not make an investment influenced by a market trend; take the time to gain a thorough understanding of the fund and its underlying scheme.

Since, this will be the first fund of fund scheme investing indirectly in blockchain technology for domestic investors; it is suggested that only high-risk investors may consider investing in it if it is approved by SEBI and after sufficient information is available.

Investments in a Fund-of-Funds (FoF) scheme that's focused on blockchain technology also involves how the fund managers track the underlying scheme. Being an international FoF, it will be prone to risks such as, geo-political, social, and changes in monetary and government policies, etc.

Investors with moderate to low risk appetite may skip to consider any investment in 'Blockchain Fund' unless it has built a strong performance track record you can evaluate.

Please note, investors can only invest in such funds after the approval from SEBI.

To conclude...

Although the technology is still in the nascent phase in India, its potential across the board is huge. The future of blockchain technology seems to be bright. Blockchain technology is globally disrupting a lot of industries like finance, entertainment, healthcare, education, etc. With increase in digitization and priority to the record and security of financial transactions, blockchain technology has potential for growth in the near future.

Frequently Asked Questions (FAQs)

1. What is Blockchain technology?

Blockchain technology works like a massive digital ledger in which every financial transaction is recorded. Think of it the same way as you would record an accounting ledger book or a cash book with all financial transactions.

2. What is Blockchain Fund?

A blockchain fund is used to invest in companies involved with the transformation of business applications through blockchain innovation. Blockchain ETFs are exchange traded funds that invest in a basket of companies that use blockchain technology for operations.

3. How can I invest in Blockchain technology?

You may directly purchase cryptocurrencies, such as Bitcoin, or invest in an exchange-traded fund (ETF) that specifically invests in shares of companies with exposure to blockchain.

4. Are cryptocurrencies different from blockchain?

Blockchains are designed to use cryptocurrencies as the "ink" for writing records on the blockchain ecosystem. Cryptocurrencies are therefore different from blockchain, but, yet, an integral part of blockchain technology.

5. What is Distributed Ledger Technology (DLT)?

Distributed ledger technology is a broad category that encompasses blockchain technology. Instead of accounting for data through one centralized computer, distributed ledger technology uses many participants in a network to maintain a digital record.

 

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

 

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