Investment case for companies shaping the future of finance.
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Bloomberg Professional Services
Investment case for
companies shaping
the future of finance.
Indices
Mike Pruzinsky, Bloomberg Indices
Jessica Lin, Bloomberg Indices
March 2022
Contents 02 Role of financial systems 03 What is blockchain technology? 04 Introducing decentralized finance 05 What are smart contracts? 05 The Bloomberg Grayscale Future of Finance Index 07 Spotlight companies 07 Methodology comparison 08 Index characteristics 08 Index holdings 09 Key takeaways
Investment case for companies shaping the future of finance. Over the past fifty years, technological innovation has been critical to driving the financial industry’s development of new products and services. However, much of the financial system today still relies on antiquated infrastructure that is slow and inefficient for today’s modern needs. As new technology becomes more widely adopted, it’s possible to envision a transformative ecosystem of financial processes and transactions bringing disruption to existing ways of doing business. The digital economy and blockchain technology offer the potential to make entire processes and transactions more accessible, transparent, and efficient. New digital assets and transparent ledgers will introduce autonomous control and democratize financial access across market participants.
Bloomberg Equity Indices
Role of financial systems
The global financial system is a network of financial institutions including banks, insurance
companies, and exchanges working to allocate capital. Financial institutions are among the
oldest, most important industries in the world and serve two primary purposes. First, banks
must operate the payments systems so that a modern economy can easily function through
the exchange of goods and services. Most means of payment including credit cards, checks,
and online banking are tied to banks. Second, banks serve as financial intermediaries by
making loans and connecting capital between borrowers and lenders.
Despite advancements in financial technology, many financial institutions rely on antiquated
technology stacks. For example, the ACH payment method developed in the 1970s still
governs many transactions run today. At its core, this legacy structure has led to five key
problems: centralized control, limited access, inefficiency, lack of interoperability, and
opacity.1 It also given rise to the financial technology (Fintech) industry to help create
a new breed of solutions.
Growing interest in financial technology news. Terminal customers can view the latest financial technology
news here or on Bloomberg.com.
1
Source: https://media.wiley.com/product_data/excerpt/18/11198360/1119836018-29.pdf
2Bloomberg Equity Indices
What is blockchain technology?
At a high level, blockchain is a decentralized database or digital ledger that is immutable.
Each transaction is recorded as a “block” and links to the prior transaction to form a chain,
with each storing a one-way hash of the previous block. The transactions are broadcast
on a peer-to-peer (P2P) network and are validated across a network of computers (nodes).
Transaction records are transparent to all nodes on the network and updates to the ledger
are reflected in real-time. This allows transactions to be processed without a traditional central
entity. Digitization of the ledger could be more efficient and have less potential for error by
removing settlement and clearing. Blockchain technology is tamper-resistant and immutable in
nature, meaning the transaction cannot be modified once created, supporting the security and
traceability of transaction records.
Blockchain process
Potential
Advantages
of Blockchain
Transaction starts The transaction Transaction broadcast
record is stored to a P2P network of
as a block computers (nodes) • Decentralized
• Immutable
• Transparent
• Secure
• Efficient
Transaction Verified transaction Nodes validate
complete stored as a new block and verify the
and added to the chain transaction
Blockchain, primarily Ethereum, supports smart contract, which helps the creation of a new way
to conduct transactions without a central financial intermediary.
3Bloomberg Equity Indices
Introducing decentralized finance
Decentralized Finance (DeFi) is an effort through technology to replicate a variety of
capabilities and applications of the current financial system in an open, global, and
autonomous way. DeFi takes advantage of blockchain technology by driving efficiencies
through automation using a distributed transaction ledger. Each transaction becomes a
recorded block on the chain and can be thought of as an entry in an immutable, validated
register. This decentralized mechanism allows for friction and intermediaries to be removed
by connecting peers to peers. In contrast to the existing financial network, algorithmic
governance allows for smart contracts to function as intermediaries so that buyers, sellers,
lenders, and borrows may interact without the need for central control.
While DeFi is an emergent technology, as of last year DeFi applications recorded over
$230 bn in total value locked (TVL) representing growth over 13 times since the start
of the prior year end.2
While DeFi has some technical obstacles, which have prevented wider adoption, many will
begin to dissolve in 2022, according to Bloomberg Intelligence.3
• Platforms are offering access to DeFi services to make it easier for the mainstream
population to adopt the usage of digital assets.
• Alternative blockchains and solutions on top of Ethereum are being built to tackle excessive
costs on the Ethereum blockchain.
• Speculative activities are being reduced by optimizing for capital usage of existing deposits.
2
Source: https://defillama.com
3
Source: Bloomberg Intelligence
4Bloomberg Equity Indices
What are smart contracts?
As mentioned, financial institutions continue to base transactions on legacy technology with
traditional contractual agreements. Smart contracts address this area of untapped potential
by operating on a “code as law’ basis so that any user can see exactly how an application
is expected to behave.4 As specific conditions are met, the smart contract automatically
executes based on the written code. This leads to efficiency gains through the removal
of the 3rd party and reduces the need for excessive paperwork.
“A smart contract is an automatable and enforceable agreement. Automatable by computer,
although some parts may require human input and control. Enforceable either by legal
enforcement of rights and obligations or via tamper-proof execution of computer code.”5
It is this intersection of blockchain technology and smart contract adoption that offer
a vision of endless possibilities.
The Bloomberg Grayscale Future of Finance Index
To effectively capture the evolution of finance and the digital economy, Bloomberg
introduces the Bloomberg Grayscale Future of Finance Index. The index aims to provide
direct and concentrated exposure to companies shaping the three key pillars and seven
sub-pillars of this space, as defined by Bloomberg Intelligence.
To learn more about the company selection process and read Bloomberg Intelligence’s
Global Future of Finance Theme Basket primer please click here.
Companies at the forefront of the digital economy shaping the financial ecosystem from
an inefficient, opaque, and centralized one to one that is seamless, open-sourced, and
decentralized can be classified into three key pillars and seven sub classifications.
Future of Finance
Financial Foundations Digital Asset Infrastructure Technology Solutions
Exchanges Energy & Resource Blockchain
Asset Payment Hardware
and Miners Management Technology
Managers Platforms Providers
Brokerages Providers Providers
4
Source: https://coinmarketcap.com/alexandria/article/a-dive-into-smart-contracts-and-defi
5
Source: Clack, Christopher D., Vikram A. Bakshi, and Lee Braine (2017: 2), “Smart Contract Templates:
foundations, design landscape and research directions,” Barclays Bank PLC
5Bloomberg Equity Indices
The seven sub-classifications of the companies involved in the future of finance are defined
below. Companies with primary business activities in these areas are eligible for inclusion in
the Index. As further innovation continues to mount, companies contributing to these will be
evaluated for inclusions as part of ongoing governance process.
Asset Managers Asset Managers are defined as institutional buyers, sellers, or lenders of digital assets
with intent to realize profit on capital gain. Asset managers may also include institutions
with significant investments or a significant portfolio of businesses that engage with the
digital economy. erg Grayscale Future of Finance Index
Exchanges & Exchanges & Brokerages are defined as platforms that enable customers to engage and
Brokerages interact within the financial system. These companies act as the major on and off ramps
for users of all types to the digital economy.
Payment Platforms Payment Platforms are service providers that authorize and settle transactions within the
digital economy between entities including investors, brokers, exchanges and merchants.
Blockchain Blockchain Technology Providers are defined as companies that facilitate and manage
Technology Providers blockchain-based applications. These are companies that offer systems, solutions,
and/or software that support the broader digital ecnomy.
Miners Miners are defined as companies that run and manage the computing necessary for
securing certain digital asset-based blockchains, verifying transactions, and adding
to supply.
Hardware Providers Hardware providers are defined as companies that make servers, processors, and other
hardware and components used for mining digital assets and supporting the greater
digital economy.
Energy & Resource Energy & Resource Management Providers are defined as companies that optimize
Management the energy and power required for digital asset mining companies.
Providers
6Bloomberg Equity Indices
Spotlight companies
• Block Inc: Growing the utility of the blockchain
• Coinbase: Making DeFi easier to access and customer friendly.
• PayPal: Bridging the gap between traditional finance
Learn more about how these companies are involved with trend’s happening within the
industry by reading the latest Bloomberg Intelligence company primers linked above.
Methodology comparison
The following table compares the Bloomberg Grayscale Future of Finance Index
(“BGFOF Index”) to peer indices in the market:
Index Name Bloomberg Grayscale Solactive Blockchain Nasdaq Blockchain Indxx Blockchain
Future of Finance Index 7 Economy Index8 Index9
Index6
Tickers BGFOF Index SOLBKCH Index RSBLCN Index ILEGR Index
Selection Focus Selects companies Selects companies that Selects companies Selects companies
that have exposure to have or are expected in the blockchain that have devoted
the digital asset and to have business economy as material resources
blockchain ecosystem operations in the determined by the or made material
using Bloomberg provision of blockchain Reality Shares Index commitments to the
Intelligence (BI) Theme technologies Committee use of blockchain
Basket using a data-driven technologies using
with analyst research approach of natural research performed
and data-driven language processing by Indxx
build process
Weighting Modified Market Cap Free Float Market Cap Modified Blockchain Equally Weight
Weighted Weighted Score Weighted Companies Within
Each Category
Reconstitution Quarterly in March, Semi-annually in May Quarterly in March, Semi-annually in
Frequency & June, September, and and November June, September, and March and September
Timing December December
6
Source: https://assets.bbhub.io/professional/sites/10/Bloomberg-Grayscale-Future-of-Finance-Index-Methodology.pdf
7
Source: https://solactive.com/downloads/Guideline-Solactive-SOLBKCH.pdf
8
Source: https://indexes.nasdaqomx.com/docs/methodology_RSBLCN_effective_6302021.pdf
9
Source: https://www.indxx.com/assets/media/Indxx_Blockchain_Index_Methodology.pdf
7Bloomberg Equity Indices
Index performance
Index holdings
Name Ticker Weight Exposure Category
Silvergate Capital Corp SI UN Equity 9.57% Asset Management
Coinbase Global Inc COIN UW Equity 8.33% Exchange
Block Inc SQ UN Equity 8.11% Payments
Robinhood Markets Inc HOOD UW Equity 6.68% Exchange
PayPal Holdings Inc PYPL UW Equity 6.38% Payments
Plus500 Ltd PLUS LN Equity 5.76% Exchange
Argo Blockchain PLC ARB LN Equity 4.43% Mining
Canaan Inc CAN UQ Equity 4.41% Mining
Bitfarms Ltd/Canada BITF UQ Equity 4.23% Mining
Hive Blockchain Technologies Ltd HIVE UR Equity 4.18% Mining
Hut 8 Mining Corp HUT CT Equity 4.15% Mining
Marathon Digital Holdings Inc MARA UR Equity 3.98% Mining
Cleanspark Inc CLSK UR Equity 3.97% Mining
Riot Blockchain Inc RIOT UR Equity 3.94% Mining
Galaxy Digital Holdings Ltd GLXY CT Equity 3.86% Exchange
Monex Group Inc 8698 JT Equity 3.76% Exchange
Northern Data AG NB2 GY Equity 3.65% Mining
Voyager Digital Ltd VOYG CT Equity 3.38% Exchange
Bakkt Holdings Inc BKKT UN Equity 2.71% Payments
Bit Digital Inc BTBT UR Equity 1.97% Mining
Mogo Inc MOGO CT Equity 1.49% Exchange
BIT Mining Ltd BTCM UN Equity 1.06% Mining
8Bloomberg Equity Indices
Key takeaways
• Decentralized Finance is solving key problems in traditional centralized finance such as
inefficiency, limited access, opacity, centralized control, and lack of interoperability through
smart contracts, tokenization, forking, yield farming, staking, and having an open-source,
decentralized platform
• Trading for NFTs and the Total Value Locked in DeFi applications has substantially
increased suggesting that more users are looking to adopt DeFi solutions to solve
traditional problems in financial services
• The Bloomberg Grayscale Future of Finance Index effectively captures the performance of
companies shaping the development of the digital economy by engaging in its 3 key pillars
1. Financial Foundations
2. Digital Asset Infrastructure
3. Technology Solutions
• The Index has outperformed peers while having significantly lower volatility and maintaining
strong correlation compared to a basket of DeFi protocols and apps
• The Index is spread across Financials and Technology with most of the exposure in
United States (58%) and Canada (17%)
• The Index has the most segment exposure in Mining (40%) and Exchange (33%)
• Overall, the Index consists of 22 securities with robust Theme, Revenue, and Regulatory
scores to the DeFi and digital asset ecosystem, as determined by Bloomberg Intelligence.
To ensure representativeness, index constituents are actively monitored by Bloomberg
Intelligence to capture the ever-changing nature of the digital economy
Please click here to learn more about how to access the index via the Grayscale Future
of Finance ETF GFOF.
9About Bloomberg Indices Whether you’re looking for leading benchmarks or inventing the next wave of investment products, Bloomberg can help. Bloomberg has a proven track record in creating industry-standard and bespoke benchmarks across asset classes, which help market participants address their evolving needs, including benchmarking, asset allocation and product creation. As an integral part of Bloomberg, Bloomberg’s index team has access to an unparalleled breadth of trusted data, reliable technology and best- in-class research teams, all working together in order to bring new strategies and opportunities to life.
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