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Investment Opportunity: Blockchain ETFs

Source: iStock/monsitj

The bitcoin community has been waiting for a Bitcoin exchange-traded fund (ETF) since the bitcoin billionaires Winklevoss brothers submitted their first proposal for their COIN ETF in mid-2013. Until today, no Bitcoin ETF has been approved by financial regulators.

Having said that, there are numerous financial services companies interested in launching susch ETFs. In January, however, Dalia Blass, who heads the US Securities and Exchange Commission's (SEC) Division of Investment Management, stated in a letter to two investment industry groups: “We believe, however, that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors.” Hence, as it stands, we are still going to need to wait for the first bitcoin ETF to become a reality.

The good news for those who want to invest in this revolutionary technology, however, is that there are now publicly-traded blockchain ETFs that both institutional and retail investors can invest in.

Blockchain ETFs Are Here

In January, Amplify ETFs and Reality Shares both launched blockchain ETFs that provide investors with the opportunity to add blockchain exposure to their investment portfolios.

Amplify ETFs launched the Amplify Transformational Data Sharing ETF (BLOK) that invests “in the equity securities of companies actively involved in the development and utilization of transformational data sharing technologies.” The ETF’s largest holdings include Taiwan Semiconductor MFG, Digital Garage, Overstock, SBI Holdings, Square, Nvidia, and IBM, and the fund is actively managed.

The ETF has a gross annual expense ratio of 0.90%, net assets of USD 177 million and currently trades at around USD 20.

Reality Shares launched the Reality Shares Nasdaq NexGen Economy ETF (BLCN), which is “designed to measure the returns of companies that are committing material resources to developing- researching- supporting- innovating or utilizing blockchain technology for their proprietary use or for use by others.” The ETFs largest holdings include Intel, Overstock, IBM, Cisco, Hitachi, Microsoft, Hive BlckChn Tech, and SAP, and is based on a Nasdaq blockchain-related companies index, which is rebalanced twice a year.

The ETF has a gross expense ratio of 0.68%, net assets of USD 112 million and currently trades at USD 23.

It is important to note that both ETFs do not invest in small companies that have recently ventured into the blockchain or cryptocurrency space to opportunistically benefit from the boom in this space. Companies such as Long Blockchain, which was formerly known as Long Island Iced Tea Co., are of no interest to Amplify and Reality Shares’ fund managers.

Moreover, in January, the SEC has announced that it will scrutinize listed companies that are changing their names to incorporate the word blockchain as well as those who claim to be working on blockchain solutions simply to drive up the value of their share prices.

Demand is High For The Blockchain

In the first week, since the launch of the two blockchain ETFs, investors have poured USD 240 million of funds into the two next-generation technology funds in the hope to reap the benefits of the blockchain technology’s bright future.

"It is rare for new ETFs to pull in such a large amount of cash but there has been pent-up demand for a thematic approach to gain exposure to Blockchain." Todd Rosenbluth, director of ETF and mutual fund research at CFRA, wrote in an email to CNBC.

This strong surge in demand for the two new funds indicates that the market believes in the future of blockchain technology applications for businesses.

The Effects on the Cryptocurrency Market

Exchange-traded funds are traded on exchanges in the same way as stocks. Hence, they have gained substantial popularity among both institutional and retail investors as they are generally liquid and easy to buy and sell. That is why the approval of a publicly-traded Bitcoin ETF would be such a big deal for bitcoin as an asset class.

While bitcoin futures contracts, found on the CBOE and the CME, an American financial market company, already provide investors with the opportunity to specialize on the price of bitcoin using a regulated investment vehicle, futures are more of a short-term investment product.

ETFs, on the other hand, can be held short-term, medium-term or long-term, which is why they are much more popular among retail investors than futures. Hence, the introduction of a Bitcoin ETF could potentially push the price of bitcoin to never before seen highs as retail investors could put bitcoin into their investment portfolios without having to purchase and securely store the underlying digital currency. Furthermore, a Bitcoin ETF would provide institutional investors such as mutual funds and pension funds with the opportunity to add bitcoin exposure to their portfolios through a fully regulated investment vehicle that would fit into their investment guidelines, provided they can invest in ETFs.

Blockchain ETFs - in their current format - will not have much effect on the cryptocurrency market as they are effectively technology ETFs that invest predominantly in blue chip tech companies that have some involvement in blockchain technology, while holding hardly any blockchain “pure play” stocks as there are only very few of those in the market.

Nonetheless, blockchain ETFs are a great way to gain exposure to the growth of blockchain technology without having to invest in risky token sales of new blockchain projects.

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