Even as the cryptocurrency bitcoin has gained traction within the investment community, bitcoin exchange-traded funds (ETFs) are still a pipe dream. Meanwhile, blockchain ETFs have already made their debut in mainstream markets. In the news and mainstream media reports, the terms bitcoin and blockchain are sometimes used interchangeably. As a result, it's possible to confuse blockchain ETFs and bitcoin ETFs, although they are different financial instruments.
- While bitcoin exchange-traded funds (ETFs) are not yet a reality, blockchain ETFs have already made their debut in mainstream markets.
- In recent years, virtual currencies have been embroiled in multiple regulatory battles and have been scrutinized heavily, particularly for their role in facilitating criminal activities, such as money laundering.
- On the other hand, blockchain technology is neither banned nor under scrutiny by regulatory agencies.
- Blockchain ETFs primarily track the stock market prices of companies that have invested in blockchain technology in their fund.
- More recently, optimism about the possibility of a bitcoin ETF in the near future has increased, namely because the incoming chair of the SEC is Gary Gensler, who has deep expertise in cryptocurrencies.
To understand the difference between bitcoin ETFs and blockchain ETFs, it's important to know the difference between the instruments they track. Bitcoin is a cryptocurrency, while a blockchain is the underlying technology of a cryptocurrency. That distinction becomes important when considered within the context of investment instruments.
Even though bitcoin futures are already offered on the country’s two leading exchanges, cryptocurrency’s regulatory status is still unclear in some jurisdictions. In recent years, virtual currencies have been embroiled in multiple regulatory battles and have been scrutinized heavily, particularly for their role in facilitating criminal activities, such as money laundering.
On the other hand, blockchain technology has won the approval of J.P. Morgan CEO Jamie Dimon and has been adopted by a wide swath of the financial services industry. Blockchain technology is neither banned nor under scrutiny by regulatory agencies.
There are currently five blockchain ETFs trading in regulated markets. They are the Siren Nasdaq NexGen Economy ETF (BLCN), Capital Link NextGen Protocol ETF, Amplify Transformational Data Sharing ETF, First Trust Indxx Innovative Transaction & Process ETF, and VanEck Vectors Digital Transformation ETF. All of these ETFs were launched between 2018 and 2021. In April 2021, they have a combined $1.7 billion worth of assets under management (AUM), and their expense ratios range from 0.65% to 0.95%.
According to a report by The Wall Street Journal, investors put $180 million into blockchain ETFs within the first two weeks of their launch. The trading volumes for these ETFs were also higher when compared to other similar instruments that have launched since October 2017.
How Are Blockchain ETFs Different From Bitcoin ETFs?
Blockchain ETFs primarily track the stock market prices of companies that have invested in blockchain technology in their fund. Because blockchain is a technology, it is not tied to a specific company or product.
"Bitcoin needs blockchain but blockchain doesn’t need bitcoin,” said Christian Magoon, CEO of Amplify ETFs, the largest ETF focused on blockchain.
The blockchain universe of investments is large and not restricted to a particular sector. For example, IBM formed a partnership with the shipping line Maersk to implement blockchain in the freight industry. Similarly, e-commerce company Overstock has made investments in blockchain through its Medici Ventures and tZERO digital coin exchange. Naturally, these companies are favorites with blockchain ETFs. For example, Amplify ETFs’ Amplify Transformational Data Sharing ETF (BLOK) and Siren Shares Nasdaq NexGen Economy (BLCN) have included both companies in their ETFs.
Most bitcoin ETF applications that have been submitted to the Securities and Exchange Commission (SEC) have proposed tracking the price of bitcoin through futures contracts that are traded on the Chicago Board Options Exchange and through the CME Group. In this model, ETFs track the price of bitcoin through ownership of futures contracts.
However, the SEC has cited “liquidity and valuation” problems with the ETF proposals, and has rejected these proposals. Bitcoin futures contracts currently have low trading volumes and liquidity. As a result, the futures follow spot exchange prices, which are volatile, as opposed to leading the spot exchange prices.
In their current form, blockchain ETFs are relatively less volatile when compared to the volatility of (hypothetical) bitcoin ETFs. This is because they are not exposed to the volatility of bitcoin’s wild price swings.
That said, blockchain is still considered a nascent technology and does not currently constitute a large market. As such, the stock prices of companies being tracked by the ETF are more susceptible to factors that do not concern or affect blockchain technology. When they are launched, bitcoin ETFs will be directly affected by the policies of regulatory agencies regarding bitcoin and cryptocurrencies.
Will Bitcoin ETFs Be Available In the Near Future?
As the popularity of bitcoin continues to surge, so have the calls for the introduction of bitcoin ETFs. In general, digital currencies have become increasingly mainstream among institutional investors. And there many things that are appealing about a cryptocurrency ETF: Investors would be able to buy and sell bitcoin more easily and cheaply, smoothly integrate it into their portfolios, and eliminate the inconvenience of securing and storing bitcoin. However, the road leading to bitcoin ETFs is a rocky one. As mentioned before, in the past the SEC has rejected several proposals for bitcoin ETFs.
At the World Government Summit in 2018, Adena Friedman, CEO of Nasdaq, said it might be “too soon” for bitcoin ETFs in the United States. According to her, the underlying markets that determine bitcoin price are unregulated and may not necessarily be fair to all participants. “And that means that there may be price distortion,” she said.
This price distortion may result in an unreliable basket of prices for the ETF. at the time, Friedman did not provide a timeline for the launch of bitcoin ETFs in the U.S. market and said it was “prudent for regulatory markets to take a 'watch' mode and learn as much as we can about it.”
More recently, optimism about the possibility of a bitcoin ETF in the near future has increased, namely because the incoming chair of the SEC is Gary Gensler, who has deep expertise in cryptocurrencies.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.