About The Amplify Transformational Data Sharing ETF: BLOK
Irrational exuberance was a term coined by Alan Greenspan to describe “the psychological basis of a speculative bubble” where “news of price increases spurs investor enthusiasm, which spreads by psychological contagion.” He coined that term in the bathtub, and first used it publicly about three years before the dot-bomb crash. Bearing that in mind, take a close look at an ad that a financial newsletter had the audacity to send to over a million readers, many of whom are probably new to investing.
Expecting high yields? Lower risk? Highly strategic investments that are safe? This is the most irresponsible ad we’ve seen yet with so much ignorance on display that it could double as a satire piece from The Onion. It should scare the bejesus out of anyone who believes that capital preservation is as important as capital appreciation, but there aren’t many of those types out there right now. When everyone and their brother is asking you about how to make money in crypto, it’s time to sound the alarm.
Still, there’s a great deal of promise to be had in blockchain technology in niche areas like decentralized finance (DeFi) once we’ve solved problems such as the “crypto trilemma.” Blockchain networks creators need to have three qualities – decentralization, security, and scalability – but right now they can only have two. All those multi-million-dollar heists help prove the point. Until this trilemma can be solved, blockchain technology won’t realize its full potential.
Assuming the problem eventually gets solved, and we’re well past Gartner’s Peak of Inflated Expectations, investing in blockchain technology will totally make sense. Today, we’re going to talk about a “safe” way to get exposure to blockchain by investing in the biggest blockchain exchange traded fund (ETF) to date.
The Biggest Blockchain ETF
Back in May 2018, we wrote a piece about 4 Blockchain ETFs for Investing in Blockchain. Below, you can see the top-ten holdings for each ETF back then.
The only stock all four ETFs could agree upon should be a top 10 holding was Intel. The next most common name was Microsoft, which appeared in three of the four ETFs. Then there were six other stocks that appeared in more than one ETF which can be seen highlighted in yellow.
A cursory look at these blockchain ETFs today shows one has amassed a sizable amount of assets.
The Amplify Transformational Data Sharing ETF – BLOK
The Amplify Transformational Data Sharing ETF (BLOK) has now surpassed $1 billion in assets under management (AUM) which is about a third the size of ARK’s Fintech Innovation ETF. Institutional investors appear to be climbing on board, so what are they buying? Here’s what BLOK says on the tin:
BLOK is an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies.
That description casts a broad net. According to Blockdata, 81 of the Top 100 Public Companies are using blockchain technology. As with any ETF we analyze, the first thing to do is understand exactly what we’re getting exposure to by looking at the top 12 assets that make up 50% of this ETF.
|SILVERGATE CAPITAL (SI)||5.83%|
|NVIDIA CORPORATION (NVDA)||5.24%|
|GALAXY DIGITAL HOLDINGS (GLXY.TO)||4.91%|
|HUT 8 MINING (HUT)||4.19%|
|HIVE BLOCKCHAIN TECHNOLOGIES (HIVE)||3.84%|
|RIOT BLOCKCHAIN (RIOT)||3.74%|
|MARATHON DIGITAL (MARA)||3.54%|
|CME GROUP (CME)||3.39%|
|SBI HOLDINGS (8473.T)||3.27%|
There are a few outliers here. It’s hard to argue that NVIDIA is a play on blockchain. The same holds true for CME Group, an $82 billion company that operates the world’s largest financial derivatives exchange, and SBI Holdings, a Japanese firm that dabbles in all sorts of different things. As for MicroStrategy, we’ve talked about this mess of a company whose CEO is obsessed with bitcoin instead of the software company he’s been tasked to lead. Still, MicroStrategy remains a popular bitcoin stock that topped our list of 7 bitcoin stocks we wrote about in our May 2021 piece A Complete Guide to Investing in Blockchain Stocks. In that same piece, we talked about two bitcoin mining stocks – Marathon Digital and Riot Blockchain – neither of which we found compelling. Another bitcoin mining firm we covered was Hut 8 Mining, a stock that was far too risky for our liking.
Of the top-12 stocks in BLOK, half are bitcoin mining stocks. If you belong to the cult of crypto, you may want to cover your ears for what we’re about to say. If the price of bitcoin crashes for whatever reason, bitcoin mining stocks are going to be all but screwed. Is that really a risk you want to be taking? As we said in our recent piece on bitcoin miner Argo Blockchain, the upside that you might receive from leverage isn’t worth the company-specific risk you’re taking on when you invest in bitcoin miners. If you want exposure to bitcoin, just buy bitcoin.
That leaves us with two stocks left – Coinbase and Silvergate Capital – both of which we’ve covered before. We’d buy Coinbase at $128 a share and Silvergate Capital is a crypto bank with too much complexity and too many unknowns.
We’re not overly impressed with the list of constituents so far, and it only goes downhill from here. Let’s look at the next 20 names in the list that comprise an additional 38% of the ETF’s AUM.
|VOYAGER DIGITAL (VOYG.TO)||2.81%|
|GMO INTERNET (9449.T)||2.78%|
|DIGITAL GARAGE (4819.T)||2.56%|
|ARGO BLOCKCHAIN (ARBK)||2.45%|
|Z HOLDINGS (4689.T)||2.21%|
|CORE SCIENTIFIC CONVERTIBLE NOTE 10% 04/19/2025||1.65%|
|ADVANCED MICRO DEVICES (AMD)||1.56%|
|BITCOIN ETF (EBIT.TO)||1.32%|
|PURPOSE BITCOIN ETF (BTCC.TO)||1.30%|
|3IQ COINSHARES BITCOIN ETF (ETHQ.TO)||1.30%|
Twitter is a play on blockchain? Seems hard to argue. The same holds true for Accenture, Oracle, and IBM. Advanced Micro Devices may make the chips that power bitcoin mining rigs, but that’s just a fraction of revenues for this $186 billion chipmaker. PayPal and Square are consumer payments plays. Z Holdings is a Tokyo-based holding company, while Digital Garage is a Japanese firm that can’t articulate what it is they do to save their lives. Also from Japan, GMO Internet provides various Internet services worldwide. Overstock is an American internet retailer selling primarily furniture, and Mogo is a small Canadian fintech firm. Then there’s Robinhood, a firm that democratizes wealth by selling retail investors risky assets like crypto and options.
More bitcoin miners including one we covered recently, Argo Blockchain. Canaan is a Chinese bitcoin mining firm that’s pivoting out of China since bitcoin mining is banned there now. Voyager Digital is a Canadian crypto asset brokerage firm which facilitates trading in crypto assets (we use the term assets loosely). Core Scientific is a blockchain infrastructure and hosting company that’s looking to go public via a special purpose acquisition company (SPAC) called Power & Digital Infrastructure Acquisition Corp (XPDI) which we may look to cover in the future.
Finally, the ETF holds three other ETFs. Why should investors have to pay an expense ratio for BLOK, then additional expense ratios for the ETFs it holds?
For early-stage disruptive technologies like blockchain, it’s often hard to find many pure-play stocks. Consequently, ETF providers often need to stretch the definition of whatever thesis it is they’re trying to target. That seems to be happening here. Overall, we don’t find this portfolio of assets to be a very compelling way for investors to get exposure to blockchain.
Investing in an exchange traded fund only makes sense if the stocks contained within the portfolio give you exposure to the thesis in question. Investors looking for blockchain exposure may be better off putting together their own basket of stocks and forgoing the 0.71% expense ratio being charged by Amplify. Blockchain-based assets and crypto assets are prone to exceptional volatility, so risk-averse investors may look to avoid this space entirely until it matures a bit more.
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