What is a Blockchain ETF?
Blockchain exchange-traded funds (ETFs) are ETFs that hold stocks of companies that benefit from blockchain technology or conduct business operations involving blockchain technology. While regulators have rejected many bitcoin ETFs, they have approved some blockchain-based ETFs. Note that the first cryptocurrency ETF began trading in October 2021 – the ProShares Bitcoin Strategy ETF (BITO). The universe of blockchain ETFs is even smaller, with seven such funds currently trading. Yet these funds also give investors access to companies that use blockchain technology.
- Blockchain ETFs hold stocks of companies that have operations related to blockchain technology or benefit from blockchain.
- There are seven existing blockchain ETFs.
- However, there is only one cryptocurrency ETF (ProShares Bitcoin Strategy ETF), which began trading in October 2021.
How Blockchain ETFs Work
Blockchain ETFs provide an efficient investment vehicle for investing in a select basket of blockchain-specific stocks. Such blockchain ETFs track the performance of an underlying index that acts as a benchmark.
For example, Siren is the Nasdaq NexGen Economy ETF (BLCN) and the Amplify Transformational Data Sharing ETF (BLOK). These ETFs track indexes that include companies in the banking and financial sectors, technology, IT services, hardware, Internet, telecommunications services and even biotechnology that use some form of data sharing or blockchain-based systems. can do
For example, the BLCN ETF has 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 Company (TSM), Nvidia Corp. (NVDA), IBM Corp. (IBM), Overstock.com Inc. and GMO Internet Inc.
As blockchain technology remains open and global, these ETFs include companies from around the world. Regionally, both ETFs account for the bulk of North America-based blockchain companies, while the remainder is shared in varying proportions by Asian and European companies.
Beyond cryptocurrencies, blockchain is being used in many other areas such as services, supply chain management, digital application development, the 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 includes companies that are involved in research, development, support or use of blockchain technology and related businesses.
The index method assigns a “Blockchain Score” to each potential company stock that may be eligible candidates to be included in this index. The score is based on a number of factors including how the company’s business 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 innovation.
This factor-based methodology ensures that the potential of a blockchain company and its business is assessed with a high degree of accuracy for real economic benefits, reimagined business prospects and operational efficiencies. 50 to 100 companies with the top blockchain scores qualify for entry into this index, and the same stocks are replicated in the BLCN ETF. The index is rebalanced every six months.
BLOK ETF, on the other hand, is an actively managed ETF that aims to invest in global companies that are generating significant income from business related to transformational data sharing, or engaged in research and development, proof-of-concept testing are, and/or implement similar technology.
Blockchain ETF Risks
Being themed-based investments, blockchain ETFs carry an inherent risk of non-performing, non-compatibility, or failure of the blockchain ecosystem. While there is an increasing level of acceptance for blockchain systems, the concept is still at an early stage and is dependent on the development of the overall ecosystem, the reliability and stability of the blockchain network, its configuration, and its successful adoption.
Another inherent risk is that one could bet a significant chunk of money on technology-based startups, which are prone to failure. While diversification through ETFs substantially reduces such stock-specific risk, there remains the risk of some holdings not performing well.
Additionally, such ETFs have a mixed bag among the top holding companies, which have a large 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 substantial portion of their revenue from non-blockchain-based products and services.
Similarly, Cisco and Intel are primarily hardware component companies that derive most of their revenue from networking equipment and computer processors, while having a limited share from the hardware used in blockchain-based systems.
Blockchain segments may deliver only a small portion of the total revenue in such stocks, making the overall return vulnerable to the non-performance of the majority of their non-blockchain segments.
One should also be aware of the expense ratio levied by the fund houses and the trading charges levied by such ETF units.
When buying such ETFs, one needs to take into account 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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