What Is a Blockchain ETF?
A blockchain exchange-traded fund (ETF) is a fund that invests exclusively in a basket of blockchain-based companies. The companies held by a blockchain ETF have business operations in blockchain technologyor invest or profit from the blockchain.
Blockchain ETFs—a type of exchange-traded product (ETP)—are distinct from cryptocurrency ETFs, which invest in a basket of digital currencies such as bitcoin. However, a blockchain ETF can provide exposure to some of the technologies that are exploring digital ledger technology.
Key Takeaways
- Blockchain ETFs are exchange-traded funds that invest in a basket of companies which use blockchain technology for operations.
- Some of these funds are actively managed, whereas others are passive and track an index
- Blockchain isn’t just used with cryptocurrencies. It has the potential to be the way all information is recorded and stored.
- Like any breakthrough technology, there is no guarantee blockchain will live up to its potential and become widely used across multiple industries.
Understanding Blockchain ETFs
A blockchain is a shared ledger that stores all information regarding a transaction (date, time, dollar amount, etc.). This ledger is decentralized, meaning it is not kept in one location but distributed across a network that can be viewed by the public. The information in the ledger is also incorruptible.
Proponents believe that blockchain technology can enable people to communicate crucial data in a safe, tamper-proof manner. Just about anything can be recorded and stored on a blockchain network.
Blockchain ETFs give investors a chance to make money from this technology, which has the potential to revolutionize business and be used by everyone. These funds invest in various companies making money from blockchain in some form. Some of them are actively managed while others are passively managed and simply track a specific index.
Blockchain ETFs offer dual benefits—pooled investments in baskets of stocks like that of a mutual fund, and real-time tradingwith tick-by-tick price changes like that of a stock.
9
The number of blockchain ETFs traded on the U.S. markets, according to ETF.com.
Applications of Blockchain Technology
Blockchain is best known for maintaining a secure and decentralized record of all cryptocurrency transactions. This technology isn’t just limited to digital currencies, though. Blockchain can potentially be used in any situation where data recordkeeping is required.
Blockchain technology can be used to deliver information in a quick, secure, and transparent fashion, even between mutually distrustful parties. Those characteristics have led some proponents to predict that blockchain could end up being as groundbreaking as the internet was.
It's called blockchain because information is stored in blocks that form a chain.
How Blockchain Works
A blockchain can in some way be compared to spreadsheets. It is essentially a database where information is entered and stored. Where a blockchain differs from a spreadsheet is in how the data is structured and accessed.
The blockchain process essentially takes the following steps:
- An authorized participant enters information about a transaction into a block, which then must be authenticated by the technology.
- The block is sent to every participant in the network.
- An authorized “node” validates each block, assigning a hexadecimal number called a hash, and adds the block to the existing chain of validated transactions.
- This update is communicated and available for all to see on the network.
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Different Services/Industries That Blockchain Is Used in
Thousands of cryptocurrency systems run on a blockchain. But that’s not the technology’s only use. Companies in many other industries have explored pilots using blockchains and similar ledger technology to store data for other types of transactions. Proponents believe that it can speed transaction times, demand less oversight and resources, and is harder to hack and manipulate.
Those benefits have prompted several big-name companies to invest in blockchain. Industries that have seen a use for blockchain include:
- Food. When food gets transported, it risks getting contaminated. Blockchain could enable companies to track each step of the journey food takes and determine what the produce might have come in contact with.Among other things, this makes it much easier to identify the causes of outbreaks and sicknesses and stop them from happening again.
- Banking and finance. In theory, blockchain could lead customerbanking and investing transactions to be completed in minutes or seconds, including on holidays, evenings, and so on. Banks could become more efficient and risks would be reduced.
- Healthcare. Blockchain has been touted as the way forward for medical records. In theory, it would enable healthcare providers to record and store medical information safely. The only way to gain access would be through a private key, made available to a handful of specified individuals.
It is also believed that blockchain would make voting impossible to tamper with. If true, that could reduce election fraud and boost voter turnout.
Blockchain ETFs vs. Bitcoin ETFs
The terms bitcoin andblockchainare sometimes used interchangeably, despite being two different things:Bitcoin is a cryptocurrency, while blockchain is the underlying database technology.
Blockchain is not tied to any one specific company or product. it is a technology that can be used across various industries. Blockchain ETFs invest in various companies listed on the stock market, many of which also have other operations outside of blockchain, rather than a specific coin. This makes them more diversified and less volatile.
Another notable difference is regulation and availability. Bitcoin and other virtual currencies have been heavily scrutinized by government authorities. For many years, the Securities and Exchange Commission (SEC) resisted applications by companies seeking to launch a cryptocurrency ETF, citing fears of market manipulation. The first bitcoin futures ETF in the United States was approved in October 2021, and the first bitcoin spot ETF in January 2024.
Cryptocurrency ETFs come with additional risks due to the inherent volatility of digital currency. In addition, they may have higher expense ratios due to the cost of custodying digital assets.
Blockchain ETF
Invests in companies that develop or make money form blockchain technology
Neither banned nor under scrutiny
Not tied to a particular company, meaning greater diversity, less risk, and less potential upside
Bitcoin ETF
Governments are skepitcal and investing regulations are tight
Exposure to a currency known for volatile price swings and making or losing investors lots of money
May have high expense ratios due to the cost of custodying and trading cryptocurrency.
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.
Many blockchain ETFs have witnessed positive returns.However, investors are still concerned with the long-term prospects of blockchain ETFs. As is the case with any breakthrough technology, there is no guarantee blockchain will live up to its potential and become widely used across multiple industries.
Blockchain ETFs also come with the inherent risk of investing in technology-based startups, at least while the blockchain concept is still evolving, and hitting regulatory roadblocks across the globe.
Example of Blockchain ETFs
Two popular blockchain ETFs include the Siren Nasdaq NexGen Economy (BLCN) ETF and the Amplify Transformational Data Sharing (BLOK) ETF.
BLCN
The Siren Nasdaq NexGen Economy seeks to replicate the returns of the Siren Nasdaq Blockchain Economy Index, an index made up of global companies committed to blockchain development.The fund is described as passive but does have some discretion in selecting companies.
As of January 2024, BLCN, which was one of the first ETFs to focus on blockchain technology, had $71.8 million in assets under management and a five-year annualized return of 4.38%. Its top holdings are Galaxy Digital Holdings, Coinbase Global, Inc., and Microstrategy Inc., with an expense ratio of 0.68%.
BLOK
The Amplify Transformational Data Sharing ETF is an actively managed fund investing in companies developing or using what it calls “transformational data sharing technologies.” It has no underlying index and carries an expense ratio of 0.75%.
The fund, as of January 2024, has assets under management of $850 million and a five-year annualized return of 17.55%. BLOK invests 47% of its assets in technology services and 19% in financial services. Its top holdings, as of October 2023, are Coinbase Global, Inc., Microstrategy, Inc., and Marathon Digital Holdings, Inc.
How Do I Invest in Blockchain?
There are several ways to invest in blockchain. Methods include buying a few stocks that are involved in its development, buying shares in a blockchain ETF, or investing in cryptocurrencies, either directly or via a trust.
Why Invest in a Blockchain ETF?
If you believe blockchain will live up to its potential and want to spread your bets, a blockchain ETF makes sense. Investing in a basket of stocks limits upside, but also the chance of heavy losses.
What Is the Best Blockchain ETF?
There isn’t a best blockchain ETF, just as there isn’t a best mutual fund or stock. What’s best for one person may not work for another, and performance can vary from one period to the next. Look at what each ETF hopes to achieve, whether it is active or passive, the track record of its asset manager, the type of companies it invests in, and the expense ratio.
The Bottom Line
Blockchain ETFs give investors a way to potentially make money from blockchain technology. These ETFs spread their bets on a number of companies at the forefront of blockchain, a technology that some people believe could be as groundbreaking as the internet.
Blockchain is best known for maintaining a secure and decentralized record of all cryptocurrency transactions. But it isn’t just limited to that. Many industries need to record, safely store, and track data, and blockchain has been touted as an effective way to do this.
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