What Is a Blockchain ETF?
Blockchain exchange-traded funds (ETF) are ETFs that hold stocks of companies that profit from blockchain technology or have business operations tied to blockchain technology. While regulators have rejected numerous bitcoin ETFs, they have approved a few blockchain-based ETFs. Note that in October 2021, the first cryptocurrency ETF started trading—the ProShares Bitcoin Strategy ETF (BITO). The universe of blockchain ETFs also remains small, with seven such funds currently trading. These funds nonetheless provide investors with access to companies utilizing blockchain technology.
- Blockchain ETFs hold stocks of companies that have blockchain technology-related operations or profit from the blockchain.
- There are seven current blockchain ETFs.
- However, there is only one cryptocurrency ETF (ProShares Bitcoin Strategy ETF), which started trading in October 2021.
How a Blockchain ETF Works
Blockchain ETFs offer an efficient investment vehicle to invest in a select basket of blockchain-specific stocks. Such blockchain ETFs track the performance of an underlying index which acts as a benchmark.
For example, there's the Siren Nasdaq NexGen Economy ETF (BLCN) and Amplify Transformational Data Sharing ETF (BLOK). The indexes these ETFs track include companies from the banking and financial sector, technology, IT services, hardware, internet, telecom services, and even biotechnology which may be using some form of data sharing or blockchain-based systems.
For instance, the BLCN ETF is holding companies like Cisco Systems Inc. (CSCO), Intel Corp. (INTC), Overstock.com Inc. (OSTK), Microsoft Corp. (MSFT), and Barclays PLC (BCS). The BLOK ETF's holdings include Taiwan Semiconductor Co. (TSM), Nvidia Corp. (NVDA), IBM Corp. (IBM), Overstock.com Inc., and GMO Internet Inc.
As blockchain technology remains open and global, companies from across the world are included in these ETFs. Regionally, both ETFs have the bulk of exposure to North America-based blockchain companies, while the rest is shared by Asian and European companies in varying proportions.
Beyond cryptocurrencies, the blockchain is finding use in various other sectors, such as services, supply chain management, digital apps development, digital entertainment industry, biotechnology, and even agriculture.
Blockchain ETF Example
The BLCN ETF is a passively managed ETF that attempts to track the performance of a specially designed index called the Reality Shares Nasdaq Blockchain Economy Index. This index is comprised of companies involved in research, development, support, or utilization of blockchain technology and associated businesses.
The index methodology assigns a “Blockchain Score” to each potential company stock that may be an eligible candidate for inclusion in this index. This score is based on several factors about how the business of the company is contributing to the blockchain ecosystem, its blockchain product maturity and associated economic impact, investments and expenditures on research and development activities, company results, and innovations.
This factor-based methodology ensures that the potential of a blockchain company and its business is gauged with higher accuracy for realistic economic profits, renovated business prospects, and operational competence. The 50 to 100 companies with the top Blockchain Scores qualify for entry into this index, and the same stocks get replicated in the BLCN ETF. The index is rebalanced every six months.
On the other hand, the BLOK ETF is an actively managed ETF that aims to invest in global companies deriving significant income from transformational data sharing-related business or are engaged in the research and development, proof-of-concept testing, and/or implementation of similar technology.
Blockchain ETF Risks
Being a theme-based investment, blockchain ETFs carry the inherent risk of non-performance, non-adaptability, or failure of the blockchain ecosystem. While there is an increasing level of acceptance for blockchain systems, the concept is still in a nascent stage and remains dependent on the evolution of the overall ecosystem, the reliability and stability of the blockchain network, its configuration, and its successful adoption.
Another inherent risk is that one may end up betting a significant portion of money on technology-based startups which are prone to failure. While the diversification through ETFs mitigates such stock-specific risk to a good extent, the risk of certain holdings not performing well remains.
Additionally, there is a mixed bag in the top holding companies of such ETFs, which have a big overlap with existing technology and internet companies.
For example, although MicroStrategy and Nvidia are among the top holdings for both BLCN and BLOK, they are essentially technology companies deriving a larger share of their revenues from non-blockchain-based products and services.
Similarly, Cisco and Intel are primarily hardware components companies that derive most of their revenues from networking equipment and computer processors, while having a limited share from hardware that is used in blockchain-based systems.
Blockchain segments may be contributing only a small part of overall revenues to such stocks, making the overall returns vulnerable to the non-performance of their majority non-blockchain segments.
One also needs to be aware of the expense ratio charged by fund houses, and the trading charges levied by such ETF units.
While purchasing such ETFs, one needs to account for the fact that they are betting on a mixed bag of stocks that are expected to benefit in the long run from the overall emergence of blockchain.
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