Investors who are skeptical about cryptocurrencies but want to take an indirect position in the crypto markets can consider making sector-specific investments in sectors which are correlated to the development of blockchain technology.
Sectors providing intermediary or complementary goods and services
Sectors providing intermediary or complementary goods and services to cryptocurrencies will naturally see their revenues increase as the crypto industry grows. Consider the semiconductor industry. In Q1 of 2018, Samsung reported a 58% year-on-year growth in its operating profits for and attributed the increase to strong demand for cryptocurrency mining chips. Software as a service (SaaS) subsector is another market which is likely to grow as blockchain services become increasingly relevant in our everyday lives. Bank of America estimates that if 2% of cloud computing service run on blockchain, it could grow to a $7 billion market. Corporate computing providers such as Microsoft and Amazon are already offering blockchain related services.
Similarly, sectors which stand to benefit from adopting blockchain reduce operating costs by adopting blockchain solutions are also likely to see an increase in their bottom line. Banks for instance will benefit from adopting blockchain solutions by reducing counterparty and settlement risk, decreasing capital requirements and enabling instant value transfer. A study from Juniper Research found that using blockchain for cross-border would save banks more than $27 billion annually by 2030. However, it is also important to note that the market share of banks in some of these services may be eroded to emerging fintech and blockchain companies. Supply chains are also expected to benefit hugely from using blockchain; IBM estimates that the implementation of blockchain solutions for the global supply chain will result in 5% increase in global GDP and 15% increase in trade volume.
New subsectors within the crypto market
Mining and staking are cornerstones of the security cryptocurrency networks. As such, stakeholders in the cryptocurrency industry have incentives to invest in these subsectors as the crypto market matures. Staking in particular is a new and budding industry which is forecast to exceed a billion dollars by this year. As for mining, the growing regulatory clarity will reduce regulatory risks and the introduction of hedging instruments such as LedgerX’s options will provide miners with means to mitigate price risk. As the rate of innovation in mining hardware will inevitable slow down over time, considering that energy costs make up between 60% to 80% of mining revenue, miner may even ultimately be forced to develop ways generate energy at competitive costs to stay competitive.
Markets which will be indirectly and positively affected
Emerging markets with low financial accessibility and a lack of financial stability will be able to leapfrog their financial infrastructure with the technology offered by cryptocurrencies, which could lead to an increase in economic activities and labor participation rates. For instance, Digital Citizen Fund, a non-profit organization whose mission is to boost digital literacy rate among women in Afghanistan, pay their participants in bitcoin, circumventing the culturally embedded gender inequality and the underdeveloped financial infrastructure. Although there has not been any notable studies measuring the economic impact of Bitcoin in countries with undeveloped financial infrastructure, residents in such country have a huge incentive to use Bitcoin.
Mining can also potentially drive economic development in rural parts of the world. Since energy costs make up for a significant percentage of operating costs, miners are naturally setting up operations in remote regions such as Mongolia and Iceland where energy is the cheapest and miners can potentially save on cooling costs. Electricity prices in these areas can be as low as 20% of those in other parts of the country. Countries constricted by sanctions such as Iran are also turning to mining by providing miners with subsidized energy. Although it may be farfetched to say that mining can lead to significant economic growths in such countries, it is undeniable that miners have huge incentives to set up operations in places where energy is cheap.