What Is a Blockchain ETF?
A blockchain ETF is similar to standard sector- or theme-based stock investments through exchange traded funds (ETFs), working by exclusively investing in a basket of blockchain-based companies. The companies owned in a blockchain ETF have business operations in blockchain technology or are those that invest or profit from blockchain.
- Blockchain ETFs are exchange traded funds that invest in a basket of companies that use blockchain technology for operations.
- The main thesis of blockchain ETFs is that blockchain technology enables companies that use it to cut costs and simplify their operations through decentralization.
- Blockchain ETFs come with the inherent risk of investing money in tech startups that could fail and hit regulatory roadblocks across the globe.
Understanding Blockchain ETFs
Blockchain is a fairly new technology that generates a ledger, which stores all information regarding a transaction (date, time, dollar amount, etc.). This ledger is decentralized, meaning it is not kept in one location but rather distributed across a network that can be viewed by the public. The information in the ledger is also incorruptible.
Blockchain ETFs offer dual benefits—pooled investments in baskets of stocks like that of a mutual fund, and real-time trading with tick-by-tick price changes like that of a stock.
To constitute being a blockchain ETF, the ETF must invest in companies that focus on the development of blockchain with the purpose of altering business operations or invest in cryptocurrencies through the use of derivatives.
Blockchain ETFs vs. Bitcoin ETFs
Blockchain ETFs have a broader mandate as compared to Bitcoin ETFs, which are yet to be approved by the Securities and Exchange Commission (SEC). This is primarily because blockchain, the technology, can be used in multiple industries beyond finance. For example, it is being used in the supply chain industry to track the origin of a product and its movement across complicated supply chains encompassing multiple geographies and regulatory regimes.
As blockchain's applications across industries grow, analysts have latched onto it as a significant competitive differentiating factor. The technology's enthusiasts claim that it reduces overall transaction costs and decentralizes the ecosystem of an industry. However, this thesis is yet to be proven in several industries.
Criticism of Blockchain ETFs
Blockchain ETFs are a relatively recent phenomenon. As such, it is difficult to determine trends or derive conclusive results from their performance. However, many blockchain ETFs have witnessed positive returns the last couple years.
That being said, investors are still concerned with the long term prospects of blockchain ETFs, as some claim there is a novelty to blockchain as a technology, which may not last. It is yet to be determined if this is a lasting technology with long-term applications that would justify increased investments. As with all investment portfolios, it is best to seek diversification and not concentrate on only one type of investment.
Blockchain ETFs also come with the inherent risk of investing in technology-based startups while the blockchain concept is still evolving, and, therefore, regularly hitting regulatory roadblocks across the globe.
Example of Blockchain ETFs
Blockchain ETFs can be actively managed or passively managed, will cover companies with international exposure, and will track the performance of blockchain-based indexes specially designed to serve as benchmarks for the ETFs.
Two popular blockchain ETFs include the Siren Nasdaq NexGen Economy (BLCN) ETF and the Amplify Transformational Data Sharing (BLOK) ETF.
The Siren Nasdaq NexGen Economy seeks to replicate the returns of the Siren Nasdaq Blockchain Economy Index. As of Feb. 28, 2021, the fund had $283 million in net assets and an annualized performance of 20.89% since inception.
As of Feb. 28, 2021, the fund invests 32.8% in information technology companies, with its top holdings being Canaan Inc (CAN), Galaxy Digital Holding, and Baidu (BIDU). The fund has a gross expense ratio of 0.68%.
The Amplify Transformational Data Sharing ETF has net assets of $1.1 billion as of Feb. 28, 2021, an annualized performance of 26% since inception, and a gross expense ratio of 0.71%. The fund invests 41% of its assets in the software and services sector and 17% in financial services. Its top holdings, as of Feb. 28, 2021, are Microstrategy (MSTR), Hut 8 Mining Corp, and Galaxy Digital Holdings.