Sustainability

NGS Super secular trends: blockchain, decentralised finance and cryptocurrency

15 Aug 2023 5 min read

Each year, our Investments team sets the strategic asset allocation for our portfolio. As part of this exercise, we produce an in-depth research piece on upcoming “secular trends”.

What are secular trends and why do they matter?

Secular trends are evolving trends in the market that take place over a longer time horizon, rather than being seasonal or cyclical. It’s important for us to understand secular trends when we’re reviewing and setting our long-term strategic asset allocation, as they help us identify investment opportunities and risks.

Key trends ahead

Our secular trend analysis this year looked at:

  1. carbon neutrality
  2. electronic and autonomous vehicles
  3. 3D printing
  4. the metaverse
  5. demographic changes
  6. quantum computing
  7. geopolitics
  8. blockchain, decentralised finance and cryptocurrency
  9. the hydrogen economy.

This article focuses on blockchain, decentralised finance and cryptocurrency.

Blockchain, decentralised finance and cryptocurrency

Let’s start with McKinsey’s definition of blockchain:1

Blockchain is a technology that enables the secure sharing of information. Data ... is stored in a database. Transactions are recorded in an account book called a ledger. A blockchain is a type of distributed database or ledger ... which means the power to update a blockchain is distributed between the nodes, or participants, of a public or private computer network.

Blockchain allows for the permanent, immutable, and transparent recording of data and transactions. This, in turn, makes it possible to exchange anything that has value, whether that is a physical item or something less tangible.

In 2018, the global market for blockchain technology was valued at US$1.2 billion. Since 2020, it has increased 480%, and is predicted to reach US$39.7 billion by 2025.2 ARK Invest (2023) identifies public blockchain as the key enabler for three major revolutions3:

  • currency revolution, move from fiat currency to cryptocurrency, the best-known being Bitcoin and
  • financial revolution, move from traditional financial institutions to decentralised finance (DeFi), which uses blockchain to remove third parties and centralised institutions (such as banks) from financial transactions.
  • Internet revolution, move from Web2 (corporate-owned platforms) to Web3, which is an interoperable, user-owned web that run on the blockchain.

Blockchain has the potential to upend traditional banking, providing faster, more reliable, and secure payment technology that is also cheaper. Large businesses like Microsoft and JP Morgan have already begun to implement blockchain technology, but cryptocurrency is still in its early phases, with global users reaching 425 million in December 2022.4

Are there risks?

Cryptocurrency investments have been highly volatile to date, with Bitcoin suffering 6 major crashes (falling over 50% each time).5

The legal status of cryptocurrencies is also something to watch. In some countries it is illegal; in others it is not illegal, but is restricted.6

Some impediments to the growth of blockchain technology are the volatility of the fees for transactions,7 security for crypto, and environmental concerns around the energy required for ‘crypto mining’ (verifying and adding new cryptocurrency to the blockchain). Bitcoin production is estimated to generate up to 22.9 million metric tons of carbon dioxide emissions a year, equivalent to emissions by countries like Jordan and Sri Lanka, or about 1% of global electricity consumption.8

What does this mean for NGS Super’s portfolio?

There are 3 potential ways to invest:

  1. Investment into the blockchain technology and supporting infrastructure.
  2. Investment in cryptocurrency companies or traditional financial institutions with a leading effort in digital transition, such as crypto exchange companies and tech companies that allow crypto transactions (such as PayPal).
  3. Direct investment into cryptocurrency and related ETFs, which is currently under increasing regulatory scrutiny in the US after 2022 and requires more clarity to form a solid investment thesis in the future.

Currently NGS Super has a small exposure through some global listed companies. There is ongoing discussion about how to access the trend taking a conservative stance.

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