Investment Insight | NZ Funds invests in Ethereum
NZ Funds has invested in Ethereum, the second largest cryptocurrency by market capitalisation after Bitcoin. Like gold, Bitcoin has solidified its lane as a store of value in which we continue to have conviction. We are excited to help our clients participate in Ethereum which forms part of our cryptocurrency investment strategy. We believe cryptocurrency is at the centre of the digital transformation the global economy is embarking on.
What is Ethereum?
Ethereum is a platform that aims to make it easier to create applications that are not managed or controlled by one entity, which is called being ‘decentralised’.
Ethereum uses blockchain in a similar way that Bitcoin does to record its history and provide a proof that a transaction has taken place. Ethereum goes a step beyond Bitcoin in that it uses blockchain and code to provide proof of more complex transactions, not just the transfer of monetary value as Bitcoin primarily does.
Ethereum was created in 2013 by Vitalik Buterin with the goal of extending the use of blockchain to record transactions in property, legal documents, conditional payments, and other more complex transactions.
It does this by using smart contracts and complex coding whereby more detailed legal conditions can be incorporated into transactions.
Ethereum is designed in a way that any third-party application developer can ‘clip on’ their application to the Ethereum network. It is an open-source coding platform where everything is public, thereby enabling any developer to create additional use cases for Ethereum.
What makes Ethereum attractive?
Ethereum has much broader and more diverse use cases than Bitcoin does, making the potential applications nearly endless. Some of the current use cases include:
• Banking and financial services contracts (e.g. mortgage payments, bond, insurance).
• Prediction markets (e.g. on outcome of sports games or elections).
• Digital identity management.
• Tracking the supply chain of food for consumption.
• Managing royalties in music.
DeFi
One specific key area of development of use cases for Ethereum is DeFi, which stands for ‘Decentralised Finance’. This is the term used to describe a variety of financial applications in cryptocurrency or blockchain geared toward disruption of financial intermediaries.
DeFi is different from the legacy digital payment methods, such as those run by Visa, Mastercard and PayPal, in that DeFi removes all middlemen from a transaction.
Direct purchases are not the only type of transactions overseen by middlemen. Financial applications such as loans, insurance, crowdfunding, derivatives, betting and more, are also in their control.
Cutting out middlemen from all kinds of transactions is one of the primary advantages of DeFi as, among other things, it lowers the cost of transacting. Think about the exchange rate fees you must spend when exchanging your money to go on your overseas holiday or making your online purchase.
What are the concerns?
The volatility risks inherent in cryptocurrency are prevalent in Ethereum and is acknowledged when we think about the size of the Ethereum position in clients’ portfolios.
Outside of volatility, the key risk of Ethereum is that it can only process a handful of transactions per second (however this is being partially addressed in further development). This compares to Visa processing 1,700 transactions per second.
NZ Funds’ positioning
Ethereum presents a distinct growth opportunity that has huge potential upside which complements Bitcoin’s store of value credentials. Ethereum is very exciting because it has many decentralised finance applications. Currently, NZ Funds’ growth portfolios hold around 3%.
Coinbase - the legitimisation of cryptocurrency continues
Cryptocurrency legitimisation continues with shares of cryptocurrency exchange Coinbase listing on the Nasdaq under the ticker symbol COIN. The company, founded in 2012, provides a variety of financial services focused on Bitcoin, Ethereum and about 50 other cryptocurrencies.
Coinbase fetched an US$85 billion valuation on its opening day—a significant increase over the US$8 billion at which the company was last valued in a 2018. It makes Coinbase valued at almost the same market cap as every company in the New Zealand share market combined.
Ignore cryptocurrency at your peril
The listing of Coinbase further legitimises cryptocurrency as an asset class. NZ Funds’ clients have been invested in cryptocurrency since the third quarter 2020.
The way that we think about managing money for our clients, the building blocks of our portfolios are always going to be shares and bonds. But we do think that you need to take a step back and think where are the opportunities in the investment landscape to generate returns over and above that.
We believe cryptocurrency is an asset class that will continue to be legitimised over time and learning and investing in it early will benefit our clients’ wealth over the long term.
What is Ethereum?
Ethereum is a platform that aims to make it easier to create applications that are not managed or controlled by one entity, which is called being ‘decentralised’.
Ethereum uses blockchain in a similar way that Bitcoin does to record its history and provide a proof that a transaction has taken place. Ethereum goes a step beyond Bitcoin in that it uses blockchain and code to provide proof of more complex transactions, not just the transfer of monetary value as Bitcoin primarily does.
Ethereum was created in 2013 by Vitalik Buterin with the goal of extending the use of blockchain to record transactions in property, legal documents, conditional payments, and other more complex transactions.
It does this by using smart contracts and complex coding whereby more detailed legal conditions can be incorporated into transactions.
Ethereum is designed in a way that any third-party application developer can ‘clip on’ their application to the Ethereum network. It is an open-source coding platform where everything is public, thereby enabling any developer to create additional use cases for Ethereum.
What makes Ethereum attractive?
Ethereum has much broader and more diverse use cases than Bitcoin does, making the potential applications nearly endless. Some of the current use cases include:
• Banking and financial services contracts (e.g. mortgage payments, bond, insurance).
• Prediction markets (e.g. on outcome of sports games or elections).
• Digital identity management.
• Tracking the supply chain of food for consumption.
• Managing royalties in music.
DeFi
One specific key area of development of use cases for Ethereum is DeFi, which stands for ‘Decentralised Finance’. This is the term used to describe a variety of financial applications in cryptocurrency or blockchain geared toward disruption of financial intermediaries.
DeFi is different from the legacy digital payment methods, such as those run by Visa, Mastercard and PayPal, in that DeFi removes all middlemen from a transaction.
Direct purchases are not the only type of transactions overseen by middlemen. Financial applications such as loans, insurance, crowdfunding, derivatives, betting and more, are also in their control.
Cutting out middlemen from all kinds of transactions is one of the primary advantages of DeFi as, among other things, it lowers the cost of transacting. Think about the exchange rate fees you must spend when exchanging your money to go on your overseas holiday or making your online purchase.
What are the concerns?
The volatility risks inherent in cryptocurrency are prevalent in Ethereum and is acknowledged when we think about the size of the Ethereum position in clients’ portfolios.
Outside of volatility, the key risk of Ethereum is that it can only process a handful of transactions per second (however this is being partially addressed in further development). This compares to Visa processing 1,700 transactions per second.
NZ Funds’ positioning
Ethereum presents a distinct growth opportunity that has huge potential upside which complements Bitcoin’s store of value credentials. Ethereum is very exciting because it has many decentralised finance applications. Currently, NZ Funds’ growth portfolios hold around 3%.
Coinbase - the legitimisation of cryptocurrency continues
Cryptocurrency legitimisation continues with shares of cryptocurrency exchange Coinbase listing on the Nasdaq under the ticker symbol COIN. The company, founded in 2012, provides a variety of financial services focused on Bitcoin, Ethereum and about 50 other cryptocurrencies.
Coinbase fetched an US$85 billion valuation on its opening day—a significant increase over the US$8 billion at which the company was last valued in a 2018. It makes Coinbase valued at almost the same market cap as every company in the New Zealand share market combined.
Ignore cryptocurrency at your peril
The listing of Coinbase further legitimises cryptocurrency as an asset class. NZ Funds’ clients have been invested in cryptocurrency since the third quarter 2020.
The way that we think about managing money for our clients, the building blocks of our portfolios are always going to be shares and bonds. But we do think that you need to take a step back and think where are the opportunities in the investment landscape to generate returns over and above that.
We believe cryptocurrency is an asset class that will continue to be legitimised over time and learning and investing in it early will benefit our clients’ wealth over the long term.
Source: Coindesk.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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