Blockchain ETF: What It Is, Example, and Risks

What Is a Blockchain ETF?

Blockchain exchange-traded funds (ETFs) hold stocks of companies that profit from or have business operations tied to blockchain technology. Best known for its use in maintaining decentralized records of cryptocurrency transactions, blockchain technology has potential applications across many industries, with use cases as diverse as protecting healthcare data and managing video streaming services, among many others.

As the number of ETFs available on the market has grown, investors can target an increasing variety of market areas and asset types. Blockchain-based ETFs—a type of exchange-traded product (ETP)—are one way to invest in a diversified set of companies that may have cryptocurrency on their balance sheet or engage with blockchain technology in other parts of their business.

Twenty-five blockchain ETFs provide U.S. investors with access to companies utilizing the technology as of January 2024.

How a Blockchain ETF Works

Blockchain ETFs offer an efficient vehicle to invest in a select basket of blockchain-specific stocks. From an investor's perspective, these funds work just like any other ETF—you gain access to a group of stocks in the blockchain industry in a single instrument that trades on an exchange just like an individual stock.

Passive Management

The majority of U.S.-traded blockchain ETFs are passively managed, tracking the performance of an underlying index. For example, the Siren Nasdaq NexGen Economy ETF (BLCN) aims to track the performance of a specially designed index called the Nasdaq Blockchain Economy Index. This index includes 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. This score is based on several factors, such as how a company contributes to the blockchain ecosystem, its blockchain product maturity and associated economic impact, investments and expenditures on research and development activities, company results, and innovations.

The 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.

Active Management

Several blockchain ETFs opt for an active management strategy rather than relying on a custom-designed index like BLCN. With total assets over $1.1 billion as of January 2024, making it among the largest U.S.-traded blockchain ETFs, the Amplify Transformational Data Sharing ETF (BLOK) is one example of an actively managed fund.

BLOK ETF issuer Amplify believes its active strategy allows its fund managers to "make timely decisions and identify companies that are best positioned to profit from the developing blockchain technology space." The fund commits to investing at least 80% of its assets in stocks of companies deriving significant income from transformational data sharing-related business or engaged in the research and development, proof-of-concept testing, or implementation of similar technology.

Holdings

Whether they use active or passive strategies, blockchain ETFs often invest in companies from the banking and financial sector, technology, IT services, hardware, internet, telecom services, and even biotechnology firms that may be using some form of data sharing or blockchain-based systems.

For example, BLCN holds stocks like MicroStrategy (MSTR), Coinbase (COIN), Block (SQ), and Beyond (BYON). BLOK includes MicroStrategy and Coinbase among its top holdings, along with Japan-based financial services group SBI Holdings (8473.T), Accenture (ACN), and Riot Platforms (RIOT).

As blockchain technology remains open and global, these ETFs include companies from around the globe. Regionally, both BLCN and BLOK have the bulk of exposure to North American-based blockchain companies, while the rest is shared by Asian and European companies in varying proportions.

Use of Blockchain Beyond Cryptocurrency

Beyond cryptocurrencies, blockchain technology is finding use in various other sectors. For one thing, the technology has extended its reach into other areas of the banking and financial markets. Financial institutions are using blockchain for international payments, equity swaps, cross-border trade, regulatory compliance, and protecting customer information.

But the potential uses of blockchain technology are not limited just to the financial world. The technology has potential in integrating health care data, tracking goods along the supply chain, and helping media companies protect their intellectual property. Even government systems involving voting and identity management could benefit from the blockchain's enhanced security and transparency.

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 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 blockchain ETFs may end up investing in earlier-stage technology-based companies, which are prone to failure. While the diversification through ETFs mitigates such stock-specific risk to a reasonable extent, the risk of specific holdings not performing well remains.

Additionally, the holdings of blockchain ETFs often overlap with existing technology and internet companies. Companies included in the portfolio may derive a larger share of their revenues from non-blockchain-based products and services.

For instance, some blockchain ETF holdings might generate most of their revenues from networking equipment and computer processors, with a limited share of hardware 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 funds and the trading charges levied by such ETF units. For example, BLCN and BLOK have expense ratios of 0.68% and 0.75%, respectively—significantly higher than a fund like the SPDR S&P 500 ETF (SPY), which charges 0.09%.

The Bottom Line

Blockchain ETFs invest in a portfolio of companies with business activities related to the blockchain. This distributed database technology underpins cryptocurrency transactions and has many other applications. Some blockchain ETFs seek to track the performance of specialized indexes, while others are actively managed in an attempt to capitalize on the latest technological developments.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC and XRP.