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Many investors might recognize blockchain as the technology behind popular cryptocurrencies like Bitcoin and Ethereum. But its application extends across industries and services too.
Blockchain is essentially a string of information or “blocks” recorded on independent computers connected through a shared network. Each data block is frozen in time on an open ledger for all participants to access. This feature makes blockchain technology especially useful in industries where security is paramount, such as banking.
As a retail investor, there are multiple ways to participate in this emerging technology. But first, let’s review the basics of blockchain and why it’s becoming crucial.
What is blockchain technology?
To understand blockchain, you first need to review the purpose of the technology.
At its core, blockchain reduces the risk of fraud, corruption, or the tarnishing of data by a central authority. By democratizing access to information on an open ledger that everyone can see, the technology makes it nearly impossible for a single party to manipulate facts.
By linking verified data and making it accessible to everyone, blockchain also simplifies and automates processes that might have previously been inefficient, such as manually recording information.
For instance, Walmart (WMT) uses blockchain to ensure food safety, tracing products back to the farm. So in the case of an E. coli or salmonella outbreak, the retailer can quickly pinpoint the source, preventing contaminated food from spreading.
Large corporations such as Microsoft (MSFT), PayPal (PYPL), Starbucks (SBUX), Salesforce (CRM), and IBM (IBM) use blockchain for digital security, infrastructure and automation, among other uses.
How to invest in blockchain
Outside of crypto trading and individual stocks, investors can gain exposure to blockchain technology through exchange-traded funds (ETFs). A blockchain ETF holds a basket of publicly traded companies exposed to the technology. These companies can either directly use blockchain or profit from their services that support the industry.
It’s important to note that blockchain ETFs don’t directly hold cryptocurrency assets. Instead, these funds are designed to invest in global companies, of which many are blue-chip technology names.
Top blockchain ETFs
This niche area of the ETF market remains fairly uncrowded, with only a handful of players in the space. And since there are no pure play blockchain companies, most of the holdings in these funds tend to overlap with other broad-based ETFs.
Below we highlight the names with the most assets under management. (Data is as of May 7, 2024.)
Amplify Transformational Data Sharing ETF (BLOK)
BLOK is the most prominent blockchain ETF on the market. This actively managed fund selects global companies to develop and apply blockchain technologies.
- Top holdings: MicroStrategy Inc (MSTR), Coinbase Global (COIN), SBI Holdings and Galaxy Digital Holdings (GLXY.TO)
- Expense ratio: 0.76 percent
- Assets under management: $658 million
Siren Nasdaq NexGen Economy ETF (BLCN)
BLCN owns global companies supporting the development and research of blockchain technology.
- Top holdings: MicroStrategy (MSTR), Coinbase Global (COIN) and NVIDIA (NVDA)
- Expense ratio: 0.68 percent
- Assets under management: $73 million
First Trust Indxx Innovative Transaction & Process ETF (LEGR)
LEGR offers exposure to a global portfolio of companies with varying degrees of involvement in the blockchain.
- Top holdings: JD.com (JD), Micron Technology (MU) and PayPal (PYPL)
- Expense ratio: 0.65 percent
- Assets under management: $106 million
Bitwise Crypto Industry Innovators (BITQ)
BITQ holds an index of 30 crypto companies from around the globe. Some of these names derive more than 75 percent of their revenues from crypto assets.
- Top holdings: Coinbase Global (COIN), MicroStrategy Inc (MSTR), Marathon Digital Holdings (MARA) and CleanSpark (CLASK)
- Expense ratio: 0.85 percent
- Assets under management: $122 million
Global X Blockchain ETF (BKCH)
BKCH invests in global companies participating in blockchain activities like digital asset mining and integration.
- Top holdings: CleanSpark (CLSK), Coinbase Global (COIN), Marathon Digital (MARA), Riot Blockchain (RIOT) and Hut 8 Mining (HUT.TO)
- Expense ratio: 0.50 percent
- Assets under management: $136 million
Cryptocurrency vs. Blockchain ETFs: How these investments differ
For those interested in digital currencies, Bitcoin ETFs offer the key way to invest through a traditional exchange, so you don’t have a lot of options there yet. And you do also have other ways to own cryptos directly or through futures contracts.
If you want to trade digital currencies like Bitcoin, you can access specialized crypto exchanges such as Coinbase or Binance.
Alternatively, some of the best traditional brokers to buy and sell crypto include Charles Schwab and Interactive Brokers, which offer Bitcoin futures contracts, too.
Risks associated with emerging technologies
Similar to other thematic investments such as electric vehicles or artificial intelligence, blockchain ETFs tend to come with additional sources of volatility. These risks can be market-related, such as pricing valuations or sudden changes in investors’ sentiment. Or they can be macro risks, such as additional government regulation.
Consider Bitcoin, which uses blockchain technology to store every transaction ever made. The digital currency has been in existence since 2009, but the popular crypto is not without its share of skepticism from authorities and investors. That uncertainty translates to greater volatility.
For sophisticated and retail investors alike, assessing the value of Bitcoin and other cryptocurrencies such as Ethereum, XRP and Cardano remains a challenge. Most traders appear unsure of what these cryptocurrencies might be worth now or in the future.
Nevertheless, it seems the trend in cryptocurrency trading is not going anywhere. If anything, it appears to have gained steam — and so has the adoption of blockchain.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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