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HBGD: Own the Picks, Pans and Shovels of the Digital Gold Rush

To date, volumes have already been written on whether bitcoin and other cryptocurrencies are the “new” gold. Ultimately, this is probably the most credible investment argument for their use. In particular, bitcoin, with its limited supply and broad global dissemination, could potentially become a credible alternative to gold, and in fact appears to have taken on this mantle in the past few months.

Clearly there is a lot of interest in owning and “mining” bitcoin and some spectators have likened the current popular frenzy surrounding cryptocurrency as a “digital gold rush”. Here are some reasons to consider the diversified approach of owning equities that could benefit from the rise in cryptocurrency usage through ownership of the Horizons Big Data & Hardware Index ETF (HBGD).

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What to Own During a Gold Rush?

There’s an interesting anecdote about the California and Yukon Gold rushes during the 19th century and the best way to profit during this time. Hint: it wasn’t the “Miner ‘49ers” that were the ones hitting the payload.

Historically, the gold rushes in the Western geography of Canada and the United States, which included California, Yukon and Alaska, were probably the most important socioeconomic drivers of the expansion of the West coast, with cities like Seattle, Vancouver and San Francisco owing much of their initial mass settlement to providing goods and supplies to the associated episodic gold rushes.

Most miners failed and faced destitution, but the wealth from providing infrastructure and supplies was immense. It’s interesting to note, for example, that during the California gold rush, the adjusted price in 2017 numbers is astounding in terms of the cost of goods paid by miners, according to Smithsonian Magazine. Pans the miners used cost 20 cents before 1849 gold rush, but soon rose to $8, or $246 in 2017 dollars. Boots that cost $6 rose to $185 in 2017 dollars. A shovel went for $36, or more than $1,000 in 2017 dollars. Food was just as affected. The price of eggs rose from $1 per egg to $3, or $92.56 equivalent and rice was $8 per pound, or $246.83 in 2017 dollars.

Fantastic wealth was attained by some prospectors that largely became large-scale mining operators, but ultimately the big wealth was generated by those offering the infrastructure and supply chain goods for these gold rushes.


Source: Horizons ETFs, as at March 31, 2021.

Cryptocurrency and Blockchain Companies

This is the area where the largest growth has been generated in the past 12 months, as these companies get direct earnings leverage and investor interest that is highly correlated to the rising price of the cryptocurrencies. The performance of the companies held in this bucket has been astounding.

Here is the list of these companies held by HBGD. You can see substantial growth in some of these stocks, all of which were less than $100 million market-caps a year ago.  It is really the momentum from these names that has helped drive the performance of HBGD to over 300% total return for the one-year period ending March 31, 2021.

Cryptocurrency and Blockchain Technology Companies in HBGD

Source: Bloomberg, as at March 31, 2021.

Even within this bucket there is a decent amount of diversification, with companies like Riot Blockchain, HUT8 Mining and HIVE Technologies representing full-scale digital mining operations. There are also companies like Galaxy, Voyageur and Marathon that represent more traditional brokerage and asset management companies that focus on transacting and investing in diversified blockchain and cryptocurrency businesses. In either case, many of these names provide direct exposure to cryptocurrency and could see their valuation increase alongside the valuation growth for their associated underlying cryptocurrencies.

Semi-Conductors

Semi-conductors, specifically GPUs, are critical to blockchain usage and cryptocurrency mining. The use of GPUs is a super-trend that we assert transcends blockchain as they are a key component in computers, mobile devices and even automobile manufacturing. Many investors might not be aware that it is a tightly controlled market with a finite amount of supply relative to demand.

Semi-Conductor Companies Held in HBGD

The key semi-conductor stocks in HBGD as at March 31st, 2021, include NVIDIA, Intel, SKY Hynix and AMD. If you look at their control of global supply chain on processors, it’s quite telling. Lead times on getting GPUs and process components to market have never been this long given the high demand versus constrained supply, which has become even more difficult due to the supply-chain issues exacerbated by the COVID-19 pandemic. Part of this is due to supply constraints at Taiwan Semi-Conductor (TSMC), but this chart shows how reliant the major U.S. technology giants are on the large semi-conductor processor manufacturers. This shows the revenue bottleneck (yellow circle) that results from the one bottleneck at TSMC. For example, it prevents NVIDIA from following through on $480 million in order commitments. Take this further to where all of the new crypto-miners, both residential and industrial, need to own GPUs to mine, and it doesn’t take much to understand the massive demand constraints and rising prices in the sector.

Source: Bloomberg Intelligence as at March 29, 2021.

Cloud Computing and Storage
This is another mega-trend that we believe transcends the blockchain and cryptocurrencies. The cloud computing market is estimated to be about $832.1 billion by 2025, according to Analytics Insight,  largely driven by huge growth in cloud storage needs for enterprise use. Because blockchain systems exist entirely online, the amount of cloud storage space and speed needed to effectively mine cryptocurrency and validate transaction is staggering. This particular industry bucket is more or less potentially immune to the blockchain and cryptocurrency sectors’ downside volatility since the use of many of the server providers are widely used by much larger industries such as online retail and media. Key stocks as at March 31st, 2021, in this industry category include Emory, Western Digital, Digital Realty and Equinix.

The Benefits of Diversification
This is a crucial feature of HBGD’s index’s approach. Cryptocurrencies can be highly volatile and at one point between late 2019 and mid-2020, HBGD didn’t have any exposure to cryptocurrency or blockchain-focused stocks, due to their swift drop in market capitalization and subsequently being dropped from the Index. This resulted in significantly lower drawdowns than a pure-play blockchain strategy. Again, this is a crucial aspect to highlight as investors, new to the sector and looking for exposure, might not want to take on the full gamut of risk.

HBGD Performance

perf-table.png

Source: Morningstar Direct, as at March 31, 2021. Since HBGD inception date: June 20, 2018.
The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, Index returns do not take into account management, operating or trading expenses or income taxes payable that may be incurred in replicating the index. The rates of return shown are not indicative of future returns. The ETF is not guaranteed, its value changes frequently, and past performance may not be repeated. The index is not directly investible.

Key Features of HBGD

  1. Own key infrastructure and service companies of the blockchain and cryptocurrencies (Picks, pans and shovels!)
  2. Lower historical risk profile that owning cryptocurrency outright – semi-conductors and cloud storage are part of larger secular big data trends
  3. Eligible for ownership at most broker/dealers (no compliance restrictions) unlike cryptocurrencies
  4. Potential strong performance momentum from sizable exposure to cryptocurrency and blockchain companies
  5. Index rebalances quarterly to add/remove names and to change with rapidly changing industry trends

Commissions, management fees and expenses all may be associated with an investment in the Horizons Big Data & Hardware Index ETF (the “ETF”) managed by Horizons ETFs Management (Canada) Inc. The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

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