While the Sam Bankman-Fried and FTX cryptocurrency exchange implosion has given the blockchain world a black eye heading into 2023, there is little doubt the technology will find increasing applications all across global commercial and financial markets.
Prominent economist Paul Krugman declared late in 2022 that bitcoin, somewhat inaccurately seen by many as a proxy for the metaverse, was headed into an “endless winter.”
Nevertheless, for undaunted investors who find the blockchain sector appealing, the buying season may be now: Market values in the industry are sharply lower than a year or two ago, and there is more to the blockchain technologies than cryptocurrencies. The year 2023 could offer attractive entry points into a technology continuously gaining wider acceptance.
Why? In a nutshell, blockchain technology is useful: a shared, immutable online digitized ledger that allows rapid recordkeeping, processing of transactions, and tracking of assets within a business network.
Within the blockchain recordingkeeping system, an asset can be tangible such as property, rare vehicles or artwork, or intangibles such as intellectual property rights or brands. Blockchain technology’s claim to fame is security and verifiability.
“Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved,” recently trumpeted no less an authority than IBM.
Blockchain is useful in many commercial endeavors, including international trade, tracking of food from farm to table, in anti-counterfeiting measures, and in the promising sector of tokenized assets.
INVESTING IN BLOCKCHAIN
For retail and high-net-worth individuals, investing in blockchain is both easier and trickier than might be imagined.
Easier, in that there are some exchange-traded funds oriented to the blockchain industry. So, investors can point and click with the mouse on Amplify Transformational Data Sharing ETF (BLOK), Reality Shares Nasdaq NextGen Economy ETF (BLCN) or Global X Blockchain ETF (BKCH) and be invested in a mix of companies exposed to blockchain technology.
The description of the Global X Blockchain ETF’s investment theme roughly holds true for all three ETFs: “The Global X Blockchain ETF (BKCH) seeks to invest in companies positioned to benefit from the increased adoption of blockchain technology, including companies in digital asset mining, blockchain and digital asset transactions, blockchain applications, blockchain and digital asset hardware, and blockchain and digital asset integration.”
Seems like a plan, and the investor enjoys instant diversification within the sector with the ETF approach, and reasonable fees.
But said investor may wish to be forewarned. The Global X Blockchain ETF began trading in July of 2021 at near $87 a share, and then reached a peak topping $154 a share in November of 2021.
Since then, the ETF’s share price has plummeted, trading down to under $13 a share at year-end 2022.
Timing, they say, is everything in baseball, comedy and on Wall Street. Investors in 2023 are able to take a stake in the blockchain world at less than 10 cents on the dollar compared with traders in late 2021.
There are no guarantees on Wall Street, but many blockchain-related stocks appear to be bottoming, in that they are no longer posting sagging prices with each passing month. In 2023, investors will at least have the comfort of not buying at the top.
IBM
Yes, the grandaddy of tech stocks, the maker of the now antique-collectible IBM mainframe computers (not to mention Selectric typewriters) is making a splash in the blockchain world.
Decades ago, IBM began migrating out of computer hardware and largely into business software and services, which in recent years brought Big Blue into setting up blockchain solutions for commercial enterprises.
For those seeking a discrete investment with exposure to blockchain technology, but perhaps one with the institutional heft to avoid precipitous downward percentage losses, IBM may be the ticket. IBM shares in early 2023 are actually modestly higher than a year earlier, and even up a bit from the pandemic days, when many blockchain outfits were in their heyday.
While startup blockchain companies tussle for recognition and burn through capital, IBM has the brand recognition to attract such large clients as grocer Albertson’s, Home Depot, automaker Renault and even retail colossus Walmart.
IBM touts its blockchain system as one of the largest in the world outside cryptocurrency exchanges. The IBM blockchain system already helps speed and secure vaccine distribution and other life science and medical goods, verify food supply chains, expedites trade finance, and provides verification of identities.
But even for IBM, not all is easy sailing when introducing new technologies. For example, in an earlier generation, fax machines took a while to catch on — the technology was solid and worked, but there had to be enough users to validate buying a fax machine, a classic chicken-and-egg problem.
Blockchain technology systems are encountering similar headwinds, judging from IBM’s trials. In early 2021 there was a report from CoinDesk, a news outlet specializing in bitcoin and digital currencies, that IBM would scale back its blockchain business due to losses, but a company spokesperson dismissed the report.
Nevertheless, in late 2022 shipping-line giant A.P. Moller-Maersk and IBM announced they would scrap a blockchain-based program, dubbed TradeLens, to track shipments and enable international commerce.
TradeLens, like the fax machines, could only truly be implemented with the participation of hundreds of companies, financiers and national authorities. Not all necessary partners wanted to get on board, so, for now, TradeLens is in dry-dock.
The TradeLens story signals that blockchain as a transactions’ technology will likely be accepted more slowly than proponents would like. However, that may actually favor larger enterprises such as IBM, which can profit from corollary business while slowly expanding blockchain operations.
In other interesting news, investors in IBM will be paid to wait: Unlike most blockchain plays, IBM offers a nice 4.7 percent dividend yield.
BLOCKING COUNTERFEITS
French viticulturists, particularly those who produce high-end Bordeaux and Burgundy, have told regional newspapers that 20 percent of upscale French wines sold globally are likely counterfeit, and more so if sold in Asia.
But one does not have to be in Asia to be accused of selling a fake. Chicago-based celebrity chef Charlie Trotter was sued for allegedly selling collectors a magnum of ersatz Domaine de la Romanée-Conti for £30,000 British pounds ($36,556). The buyers claim they learned the bottle was fake when they tried to have it insured; something about an artificially aged label might have given away the game. Trotter denied charges.
Back in France, the former president of an official trade organization, The Comité National des Conseillers du Commerce Extérieur de la France, said, “For every real bottle of French wine in China, there is at least one counterfeit bottle of French wine.”
Blockchain offers a solution, not only for wines, but most other high-end and luxury products. For wine in particular, genuine bottles usually pass a strict geographic certification procedure or an audit before being sold commercially and are allowed certain labels. When this audit information is immutably recorded on a blockchain digital ledger available to collectors and buyers, the risk of counterfeiting can be minimized. In brief, buyers can check the bottle’s provenance, online, even through their smartphones.
Bottles can have attached or embedded a near field communication tag (also known as an NFC tag, a type of radio frequency identification tag) that is proof of authenticity, and can be read with the proper smartphone app. The attached NFC tags are available at 10 mm wide, easily fitting into products, and contain unique ID codes and information about the product.
Some counterfeiting experts say the NFC tags can also be faked and require yet more measures to be effective.
In any event, blockchain at least considerably raises the bar for counterfeiters, and blockchain anti-anti-counterfeiting measures are likely a growth industry for decades ahead. As ever more commerce is conducted online, and as the world develops more high-income regions, especially in Asia, the urge to counterfeit high-profit luxury goods will only increase.
One of the world’s largest designer-manufacturers of NFC tags is the Dutch-Swiss STMicroelectronics NV. STMicroelectronics manufactures a wide range of semiconductor chips and other miniature tech gadgetry, in addition to the NFC tags. Like many tech outfits, STMicroelectronics is down from pandemic-era highs, and in early 2023 trades at a conservative 9.7 times earnings. The maker of NFC tags is one way for investors to gain exposure to the blockchain sector at a reasonable price, in an already profitable enterprise.
PROPERTY TOKENS
Anyone who has bought or sold property knows of the wickets of paperwork and phalanxes of professionals attached to even straightforward transactions. The paperwork blizzard seems unreasonable: Investors can trade millions of dollars of stock with a click of the mouse, or buy a $400,000 luxury car in an hour on the lot, or waltz from an auction with a $50 million painting. In contrast, commerce becomes glacial when a $200,000 property is traded.
Presently, the drive to tokenize real estate is most usually promoted as a variation of the real estate investment trust — fractionalized ownership of a property or properties, and easily tradable.
“A few years ago it was inconceivable to own fragments of a property and trade them on a daily basis without high transaction costs. However, tokenization makes this possible,” advised accounting and services giant E&Y in a recent report.
By means of tokenization, property can be sliced up and sold in shares. The individual tokens represent the underlying property with all its rights and obligations. The notary visit, burdensome transaction costs or other hurdles could become technically obsolete through the use of tokenization.
E&Y contends that through embedded “smart contracts,” numerous normally obligatory steps to buying a property, such as compliance, document verification, trading, opening an escrow account and dividend payments, can be carried out automatically via the blockchain.
Despite advantages, to date buying tokenized property remains something of a novelty. A ski resort in Colorado had a 20 percent stake tokenized in February of 2022, and then in March a 250-unit apartment complex in Dallas, named Spot @ Myra Park, was also tokenized, both through one of leaders in the token sector, tZERO. But no announcements since. In a big world, actual tokenized property transactions are very rare.
Nevertheless, for investors, the day may come soon enough that, in addition to various REITs, public and private, or limited partnerships, they can also readily buy a token in a property. For now, the tokenization costs associated with a property are somewhat high, running from $30,000 upward.
For the buyer of a house or small apartment complex, weary of paperwork and eager for streamlining, unfortunately, the prospects of doing so quickly through a tokenized asset transaction are probably well in the future. Costs of tokenization will have to decline, and the small cottage industry of groundbreakers doing the tokenizing will have to enlarge and mature. And many regulatory bodies, at the county, state and federal levels, will have to onboard.
DREAMS OF PIONEERS
There is little doubt blockchain is useful technology that will commercialize in the years ahead. Moreover, the sector is selling at 10 cents on the dollar compared with peak prices in late 2021 and 2022, as seen by sector-ETF trading values.
For the intrepid investor, that spells opportunity. Although the jury is still out on cryptocurrencies, certainly blockchain technology has proven itself in certain types of trade transactions, and in anti-counterfeiting operations.
Some large companies active in the sector, such as IBM or STMicroelectronics, are established enterprises and profitable, offering potential rewards while waiting for the bigger paydays.
Acceptance of blockchain technology in the great swath of the commercial world may take longer than proponents wish. In addition, people in commerce are innovative and developing more efficient operations constantly, aside from blockchain systems.
Every new technology, from automobiles to the internet, has a long breaking-in period, during which more clarity is obtained to future values. Often those values exceed the dreams of pioneers — but where and when is not so easily determined.
Benjamin Cole (7continents7@gmail.com) is a freelance writer based in Thailand.