Blockchain is a relatively new financial technology (fintech) industry that has grown to be worth more than $1trn since the launch of the original cryptocurrency, Bitcoin, in 2009. “Crypto” refers to a type of mathematics called cryptography, which allows people to send and receive this digital-only cash in a very secure way.
The world’s largest banks and asset managers such JPMorgan and BlackRock are now building products using blockchain, essentially a digital ledger, to speed up activities such as issuing bonds, or to settle financial transactions more quickly and efficiently.
Our exchange-traded fund (ETF) buys shares in the top firms that derive a large proportion of their revenue from blockchain technology, bitcoin mining (the digital process whereby bitcoins are made), bitcoin custody or trading.
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Mining for profits
Riot Platforms (Nasdaq: RIOT) is the second-largest publicly traded US bitcoin miner. It grew sales from $7.8m in 2018 to $259m in 2022. Data-centre hosting now comprises 12% of revenue, with engineering services contributing 22%.
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Bitcoin mining takes place in large data centres, often with thousands of computers running simultaneously, just like the warehouses that power Google or Microsoft’s cloud-computing services. The reward for bitcoin mining is very high, and there are many companies competing for limited space, which is why renting out parts of a data centre (which is known as “hosting”) to smaller bitcoin-mining businesses has become so lucrative in recent years.
Prudent balance-sheet management means the company is debt free. Riot also has a market-leading profit-margin position. Its cost of production per bitcoin was $11,225 in 2022, and slid to $10,354 earlier this year.
Former Twitter boss Jack Dorsey’s other company is payments firm Block (Nasdaq: SQ), formerly known as Square. The name change represents the company’s shift towards greater support of bitcoin infrastructure, including developing the Lightning Network to speed up settlements. Block is well placed to profit from Intel’s 2023 exit of the bitcoin-mining sector and has invested heavily in research and development (R&D) to produce power-efficient five-nanometre semiconductors. Block comprises four divisions: CashApp, a mobile payment service; music-streaming service Tidal; payments processor Square; and bitcoin R&D firm Spiral.
Block’s biggest profit generator is CashApp, which has 51 million users and produced $2.95bn in gross profit in 2022, its highest to date. In the first quarter of 2023, CashApp reported $2.16bn in sales from users buying and selling bitcoin. Analysts forecast earnings-per-share growth of 175% and $1.05bn in net profit for Block in 2023, which would give the company an attractive price-to-earnings growth ratio of 0.5.
Microstrategy’s big potential
CEO Michael Saylor made his fortune with MicroStrategy (Nasdaq: MSTR), his $2.8bn enterprise-analytics software and cloud-services company. His long-term legacy, though, is likely to focus more on the group being the largest single bitcoin-holding firm in the world, having added 140,000 bitcoins (worth $3.77bn) to its balance sheet since August 2020.
MicroStrategy follows the equivalent of a dollar cost-averaging investment strategy, converting a portion of its free cash flow for purchases as well as issuing debt to buy bitcoin. The software side of the business remains in rude health. The stock jumped recently following a multiyear deal to integrate its AI-based analytics into Microsoft 365 and Azure, the second-largest cloud platform behind Amazon Web Services.
