Digital currencies, including bitcoin, have become synonymous with volatility. Elevated volatility among cryptocurrencies and the lack of a trusted global regulatory framework are among the reasons some market observers back blockchain investments as a way of tapping the digital currency space over the currencies themselves. Still, there are those that advise caution with blockchain as well. Blockchain is intended to be a centralized ledger of digital currency transactions.
Cryptocurrency "prices rallied significantly in 2017, bringing the total market capitalization to nearly $500 billion," said BlackRock, Inc. (BLK) in a note out Tuesday. "But we don't see them becoming part of mainstream investment portfolios soon. Crypto markets are highly volatile, fragmented, largely unregulated, and come with unique liquidity and operational risks." (See also: The Black Swan Risk In Cryptocurrency Markets.)
BlackRock is the parent company of iShares, the world's largest issuer of exchange-traded funds (ETFs). The company has previously said that it is not interested in launching a bitcoin ETF. As BlackRock notes, bitcoin and rivals like ethereum and ripple are significantly more volatile than U.S. stocks, and that includes the performance of U.S. stocks during the 2008-2009 Global Financial Crisis.
"Cautious on bitcoin and bullish on the underlying blockchain technology – this is an emerging consensus among policymakers and business leaders," said the asset manager. "Blockchain, a distributed ledger technology, enables secure peer-to-peer transactions. This means no intermediaries, but also no trusted centralized authority."
Today, there are four blockchain ETFs trading in the U.S., all of which have come to market this year. The first two – the Amplify Transformational Data Sharing ETF (BLOK) and the Reality Shares Nasdaq NexGen Economy ETF (BLCN) – debuted on the same day in mid-January. BLOK and BLCN have about $287 million in combined assets under management. Overall, the four blockchain ETFs, none of which can actually have the term blockchain in their names, have just over $300 million in combined assets under management. (For more, see: What Is the Difference Between Blockchain ETFs and Bitcoin ETFs?)
Obviously, the marriage of blockchain and ETFs is still in the honeymoon stages, but BLK and BLCN prove that there is appetite for the concept. However, risks linger, and investors should consider those issues. "Yet challenges abound. Take the financial industry," said BlackRock. "A blockchain-based, single shared financial database could eliminate inefficiencies and risks associated with human processes, but adoption at scale would require a massive shift in software development and a well-constructed maintenance model. Regulators and central bankers would also need to play a big role, we believe." (For additional reading, check out: Top Blockchain Startups to Watch in 2018.)