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Digital transformation companies represent a distinct and separate investment opportunity, when compared against digital assets like bitcoin, Ethereum, and against other equities in your portfolio. We break out key takeaways to understand some of these differences and how to position digital transformation companies within a client portfolio.
Digital asset companies are doing business within the digital asset ecosystem, but are NOT the same as underlying digital assets. An investment in Coinbase is not the same as an investment in bitcoin, although a significant portion of Coinbase’s business relies upon users trading bitcoin on the Coinbase platform. There are a wide range of business lines that digital transformation companies can participate in — from exchanges, to mining, to asset management. Generally speaking, bitcoin and other digital assets may play a crucial role in a company’s business operations, but companies should not be conflated with digital assets.
Source: Morningstar as of 11/4/2021 – 31/7/2021 based on weekly returns.
Digital transformation companies reflect 1) varying degrees of correlation to bitcoin and Ethereum 2) low correlation to broad market and tech benchmarks and 3) low overlap with broad market and tech benchmarks. Based on VanEck research, less than 1% of the total weights of the Nasdaq 100 Index, S&P 500 Index and MSCI ACWI Index are comprised of stocks comprising the MVIS Global Digital Assets Equity Index.
Low correlations and low overlap with broad market and tech-heavy indexes indicate that an allocation to digital transformation companies makes sense from a modern portfolio theory perspective. Digital transformation companies are providing portfolio diversification and the potential for alpha. Keep in mind, these companies are early-stage movers, operating within a long-term structural growth environment.
A publicly-traded digital transformation company is a centralized organization. These companies typically have a CEO, a board of directors, shareholders, and other characteristics which are shared by the majority of publicly traded companies. Publicly-traded companies are centralized organizations working towards a common goal of generating profits and cash flows for investors and shareholders. In the vast majority of cases, digital assets aim to be decentralized software protocols, without a CEO or voting rights for shareholders.
Cash flows are also a key difference. Digital asset companies generate cash flows related to their various business lines. One of the pillars of modern finance and equity valuation, discounted cash flow analysis, is based on the idea that a company can be valued by estimating the sum of all future cash flows and then tying those cash flows to a present value. So while vast majority of publicly traded digital transformation companies have some type of cash flow, bitcoin, and the vast majority of cryptocurrencies, do NOT generate cash flows. For a user to make a profit on a bitcoin trade, the user has to sell bitcoin at a higher price than what it was bought for, which is not the same as a business-related cash flow.
Fred Theil, CEO of Marathon Digital, explains,
“If you own gold or you own Bitcoin, you only get the benefit of the markup and value over time as the asset itself grows. Whereas if you invest in the miners who essentially generate the Bitcoin and earn the rewards, you get the benefit of their full profit stream…So, you get to own a piece of the value stream and the full value stack versus just owning the appreciation of the Bitcoin itself.”
The VanEck Vectors Digital Transformation UCITS ETF (DAPP) seeks to track the MVIS Global Digital Assets Equity Index (MVDAPPTR), which provides exposure to the companies involved in the digital transformation of the global economy. DAPP’s underlying index only invests in digital transformation companies, and does not invest in actual digital assets like cryptocurrencies, or cryptocurrency investment vehicles. The index is designed to provide pure-play exposure to the companies that are actively participating in the digital transformation, which may benefit from the structural long-term growth of digital assets.
VanEck Asset Management B.V., the management company of VanEck Vectors Digital Assets Equity UCITS ETF (the "ETF"), a sub-fund of VanEck Vectors UCITS ETFs plc, a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland and tracks an equity index. The value of the ETF’s assets may fluctuate heavily as a result of the investment strategy. If the underlying index falls in value, the ETF will also lose value.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the local information agents.
MVIS® Global Digital Assets Equity Index is the exclusive property of MVIS (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Digital Assets Equity UCITS ETF is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.
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This information originates from VanEck (Europe) GmbH which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.
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