DAA Manager Insights: Blockchain Nordic
Since the ever-growing monetization of digital encounters is likely to extend through the next decades, privacy is becoming a rare commodity. ICONOMI’s wide spectrum of DAAs not only represent diversity and depth within each digital asset, but also a full range of options for different DAA manager styles. Today we are giving you a glimpse into the views of Blockchain Nordic from Denmark, manager of the private and hidden BNX DAA.
Are Danish/Scandinavian people risk-takers? How do they see crypto? Do negative media articles influence them?
Generally speaking, Scandinavians are thought of as careful investors who like to stay on the safe side. However, increased investment in innovation and start-ups in recent years are a clear indication that the mindset is shifting to a less risk-averse one.
The media has not been the most bullish or accurate when reporting on cryptocurrencies and has generally had a negative viewpoint about cryptocurrencies and their speculative nature.
However, it is important to note that Scandinavians have high disposable income and, in general, are a highly educated community that will happily dip into the market when it is explained in the right words, though not without ensuring that they are not taking any unnecessary risks. This means there is a great market for professionally managed products such as BNX.
What is the solution for making complicated things easily understandable, such as when explaining and connecting blockchain and investments? What will your approach be?
We like to think we have found an easy way to explain blockchain technology by focusing on blockchain technology as a database that can be openly shared among users and that creates an unchangeable, timestamped, linked record of their transactions that is verified by computers all around the world. Denmark is a small country, but we have some very large corporations, one of which is Maersk, which along with IBM invested in supply chain blockchain technology, giving a lot of credibility to the technology and its real-life use cases.
The biggest concern people have regarding blockchain investments is security. They keep hearing about this hack and that hack in the media and, not understanding fully, believe that these hacks are a fault in the technology rather than the result of human error. We like to divulge that security is one of the strongest points in blockchain. Imagine cutting a credit card into a billion pieces and distributing these pieces all around the world. Would it be easy to gather all these pieces and put the credit card back together? Essentially, this explains how decentralization protects these networks.
Real-life use cases and an understanding of blockchain security tend to be enough for people to get a picture of what is going on, to truly believe that the technology is here to stay, and to believe that being an early investor can yield returns never seen before!
Your DAA is based on extensive research and backtesting. Does this have value in today’s crypto market? Can you shed some light on how you constructed your DAA?
From the very beginning, we have approached investments in the digital asset space in a very professional and traditional manner. When we decided we had to create an instrument for everyone to enter this revolution, we knew we had to first set investment criteria and a purpose for the index, all while keeping risk and volatility exposure in mind. We started asking ourselves what the most important projects for blockchain technology usage and adoption are. Basically, we take our fundamental approach to analyzing projects from there.
We initially started with a broad view, looking for projects that are disruptive and add value, but we quickly realized: why invest in a single project on a specific blockchain? We could be the best in the world at picking projects, but no one knows what the future holds and how regulation will shape the industry. Of course, in hindsight, it is easy to say which projects one should have invested in during the past year, but we do not have that information going forward.
So, we took a step back and started looking at what would present the least amount of unsystematic risk, and that’s when we came across development platforms. Let’s take the example of the most well-known development platform, Ethereum. There are over five hundred Ethereum-based tokens, and investing in all of them would lead to over-diversification. Also, picking the tokens that will thrive is a game that involves uncontrollable factors. However, by investing in Ethereum itself, we benefit from all the tokens created on the network. To use the Ethereum blockchain, projects need ether, and due to the limited nature of supply, the higher the demand, the higher the price. Thus, the investment appreciates in value.
So now we know that by investing in Ethereum, we benefit from all the projects using it. The next question is: which of these platforms will be king? Or, why are there so many different platforms? Ethereum was the first to introduce smart contracts, which fueled a real use case and simple usage of blockchain. However, we have new players in the market, new development platforms that propose different solutions and have their own value propositions. The nature of blockchain and current limitations are such that no single blockchain can overcome all the limitations. So, investing in all the relevant development platforms potentially exposes us to benefiting from the general usage of the technology, as we believe not all organizations will want their own token but will still benefit from utilizing blockchain. Having an equally weighted approach when investing in these projects exposes us to benefiting equally, no matter which platform ends up at the top of the hill!
We next wanted to diversify the nature of our projects without being exposed to autocorrelation. We didn’t want to invest in the projects that run on these blockchains, so currencies were an easy choice: Bitcoin, essentially the root of blockchain, and Monero, the privacy coin par excellence.
Now we had two equally weighted portfolios, one comprised of development platforms and one of currencies. We wanted to create a single index for both, so we turned to empirical finance, where we found great insight when backtesting the different allocations. Using classic regression analysis, Markowitz portfolio performance theory, and capital asset pricing models, we were able to test our risk-adjusted returns. Since the market is clearly correlated with Bitcoin and Ethereum, using them as benchmarks was appropriate. We found the best allocation to be one that is comprised of 80% of the development portfolio and 20% of currencies. While this is the current allocation, it is not a permanent one, and we constantly study the markets to find the best allocation. Our aim is to ensure the highest returns with the least possible unsystematic risk.
Some believe value investing is an effective strategy, but we do not believe this to be the case, as there are too many uncontrollable variables and it is more a game of luck than of verifiable forecasting. By using econometric methods, we use price data and can control for robustness, allowing us to forecast, with a statistically significant level of certainty, what the long-term risk-adjusted returns will be.
Funds have generally always relied on quantitative and statistical analysis on top of fundamental analysis when approaching investments, and we are seeing this more and more in the digital asset space. Institutional investors are heading our way, and they will certainly exploit market inefficiencies.
Blockchain mass adoption will happen sooner or later. What kind of new, blockchain-related services are we looking at?
We’ll separate this answer into two parts: financial adoption and technological adoption.
We believe financial adoption will solidify with regulation, which will lead to equity tokens, or securities. Ownership through smart contracts is one of those things where in the future, we will question how people ever blindly trusted institutions!
Technological adoption is actually happening already, and we are unknowingly subject to it! Before mass adoption, we will need very stable networks in place. The European Commission’s announcement was truly bullish on the technology, and there are strong use cases in cross-government administration and in the healthcare industry, as well as in the already mentioned supply chain industry.
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