Another Baillie Gifford fund is sizing up opportunities in the cryptocurrency space.
The Baillie Gifford US Growth trust is backing Blockstream, a private blockchain tech company based in Canada.
While the trust’s holding in the private company is small, representing 0.3% of net asset value, co-manager Kirsty Gibson (pictured) believes it has the potential to broaden the use of bitcoin across financial institutions.
Last year, Scottish Mortgage became the first Baillie Gifford vehicle to test the cryptocurrency waters by participating in a $300m fundraise for crypto wallet provider Blockchain.com. Reports suggest the Miami-based start-up could go public as soon as this year, which would see the value of the trust’s stake, currently estimated at 1.5% of NAV, soar.
It also holds a stake in Blockstream, as does late-stage growth Baillie Gifford trust Schiehallion.
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Blockstream addressing blockchain speed issues
Gibson prefers the “infrastructure players” like Blockstream because “we are not precisely sure how this industry is going to play out”.
The appeal behind Blockstream is that it is trying to help “bitcoin realise its potential as financial infrastructure”, she said.
Numerous financial functions revolve around updating ledgers or records of who pays what. One of the benefits of bitcoin’s blockchain ledger is it’s decentralised, meaning it is not owned by any one individual or institution. Changes to the ledger are authenticated by ‘miners,’ which verify transactions.
While this makes it “impossible to cheat”, the updating process is also very slow, meaning it has not been readily useable for most financial institutions.
Blockstream is attempting to overcome this speed issue, having created a ‘liquid network’, a separate “sidechain” for bitcoin transactions, which allows for more frequent trading between institutions.
“Ultimately, what Blockstream is looking to do is bring genuine utility to bitcoin in a way that up until now has been more difficult to do,” Gibson said.
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Into the metaverse
Blockstream is one of several experimental holdings in the portfolio where the hypothesis for the team’s investment case has not played out but “where the asymmetric return possibilities look vast”.
Snap, the company behind the gen Z beloved app Snapchat, is another example. What interests Gibson about the business is how it is “reimagining the role of the camera”.
She said: “The CEO Evan Spiegel believes that the future of technology is not on the screen in front of us. It’s going to be in the world around us and it’s through your camera that the next generation of computing will be overlaid upon that world.”
As Snapchat is at the forefront of augmented reality technology it can power the “mirror world”, the place “where the physical and the digital worlds combine”.
“You would hold up your camera to a location and perhaps you’d learn something about the history of that location perhaps you’d be able to interact with it, maybe you’d be able to invite friends to participate in a game with that location or maybe make purchases.”
Another private holding, Discord, has “the potential to unlock an opportunity to become the social infrastructure of the metaverse,” according to Gibson.
Originally built as an online-chatting platform for video gamers, it has rapidly broadened out its user base to educational groups and even investment communities, such as crypto enthusiasts.
In this way it is like the “Starbucks of the online world”, Gibson said. “As a platform, and like its user base, Discord feels quite fluid and changeable and ripe with potential.
“While it’s fair to say the path to how its business evolves is not precisely clear, we believe that they have the potential to unlock an opportunity to become the social infrastructure of the metaverse and we decided to take a holding.”
‘There will be businesses that we get wrong’
Baillie Gifford US Growth trust has grown rapidly since launching a little over three years ago, with assets currently at £678.8m.
However, it has seen a massive reversal of fortunes this year as its large tech holdings have sold off sharply amid fears of rising interest rates. Shares in the trust have fallen by 33% since the start of the year, leaving them sitting on a 6.2% discount to NAV.
Shopify has been the worst hit of its top 10 holdings, having seen two thirds of its value wiped year-to-date, followed by furniture and e-commerce company Wayfair, which has lost 54%.
Tesla has also hurt the trust’s performance, falling 17% over the period. Baillie Gifford’s substantial investment in Elon Musk’s electric vehicle company raised eyebrows years ago, but it has since made the Edinburgh manager billions of dollars in profit.
Gibson said this is often the way with “innovative” companies. “We recognise that new ideas are often met with derision. The ex-CEO of Microsoft, Steve Ballmer, is famous for saying, ‘Who’s going to buy a $500 iPhone?’ We prefer to think about the thoughts of mid-century industrial designers, Charles and Ray Eames, who said that toys are often preludes to serious ideas, and consequently we strive to remain open.”
She added: “There will be businesses that we will get wrong, but we also know that those that we are right in owning will more than make up for those that do not succeed.”
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