Have you ever thought of buying shares in a tech company to enjoy a passive income? This kind of getting revenue is one of the numerous spheres democratized by blockchain. Nowadays, it's not a hard task to buy some blockchain ETFs (exchange-traded funds). These assets are stocks of the companies employing blockchain technology in their activity. Currently, blockchain is used in any imaginable industry or business including banking, supply chains, healthcare, document flow, etc.
What is not easy is choosing the best ETF to invest in. ETF investors get the right to get profit from the growth of underlying assets but have no ownership of these assets. ETFs are good because of (at least) two things: first off, it diversifies the investment as the money gets separated between several stocks, second, this type of funds are available real-time trading which brings more opportunities for getting profit to the table. Another opportunity is buying stocks of the companies that work exclusively with blockchain-based technologies. However, stocks are less accessible as their costs are higher if compared to ETFs. The simplest (or most intuitive) way to invest in blockchain projects is buying tokens associated with certain blockchain platforms hoping that these tokens will gain a higher price in the future. For investors with traditional experience, however, this way can be not so attractive as buying cryptocurrencies is a bit riskier than investing in ETFs. In this article, we will focus on blockchain ETFs.
Now, when the huge corporations are in the game deploying blockchain-based solutions and using cryptocurrencies as an optional means of payment, we have a wide choice of diverse stocks of companies using blockchain technology. Note, that IBM, Microsoft, Toyota, and many other veteran companies are investing in blockchain right now. It's a sign that the technology itself has powerful potential and that's not a silly idea to invest in blockchain companies but we'll have to say it again — choosing the right one to invest in is not an easy task.
On the market, ETFs serve as securities that are used to trace through bonds, assets, and indexes. ETFs are being traded the same way as stocks and represent the shares of the asset that can be bought or sold. The US regulators didn't approve BTC-based ETFs but blockchain-based ETFs are fully legal both in the USA and Canada. The most successful ETFs are heavily invested. Their capitalization is worth hundreds of millions of USD. It's important to understand that not all the ETFs are associated with the companies that use cryptocurrencies as blockchain is a much broader phenomenon.
Additionally, some companies are working with different technologies and blockchain is only a small part of the company's operation. Blockchain ETFs accumulate the underlying value of the blockchain technology while the ETFs associated with certain cryptocurrencies (for instance, Ethereum ETFs or Bitcoin ETFs) are based on the exchange rate of these currencies on the market. Just like stocks, ETFs obey the same laws as to financial agencies. The regulation details differ from country to country. What makes ETFs more convenient than stocks is that each ETF is a basket of assets. It means that diversification is preassigned for ETFs while stocks represent single assets.
The principles of ETF work can be explained via examples. The BLCN ETF is used to monitor the activity of the Reality Shares Nasdaq Blockchain Economy Index. This index contains all the companies that take part in the blockchain research or already implement this technology for business. Each company stock that can fit this index automatically gets a Blockchain Score mark. The score rests upon the scale and the way of the company's facilitation to the blockchain environment development. The quality of the company's product and its influence on the sector matter, too. Such a method guarantees that the company has an actual significance in the industry and is capable of bringing profit.
The index updates twice a year. The BLCN ETF index is managed passively but there are indexes that are managed actively. Let's take a look at the BLOK ETF index to grasp the difference. This index is focused on companies that contribute to the proof-of-concept mechanism development and testing. Moreover, BLOK ETF is associated with the companies that earn money from enterprises involved in data sharing business. Both indexes deal with a great array of global companies occupying a diverse spectrum of economic sectors. All these companies need investments to keep going and develop faster. Most of these companies originate from North America however there are Asian and European businesses, as well.
Which risks are connected to investing in blockchain ETFs? While the blockchain technology gradually becomes recognized worldwide, we can't say that it's triumphantly marching throughout the planet. Some blockchain-based projects turn out to be too weak to survive in the competitive and relatively unexplored and volatile sphere. The future of most blockchain-related companies is not very clear. We can say the same about most of the companies in other sectors, too, but in the case of blockchain, this risk is higher due to such factors as sudden restrictive regulations that can heavily impact the sphere. Hacker attacks and similar events are not a rare thing in the industry and this factor also makes the blockchain ETF investments riskier.
There is one more problem. Many huge companies are involved in blockchain to some extent but make much of their products without any relation to the blockchain. These companies fit the mentioned indexes but can have low performance in the blockchain segment as this segment is not their priority. It's understood that the fees taken by the fund houses can seriously cut the income. This should be taken into consideration.
In conclusion, we will highlight the three biggest ETFs of 2020. Amplify Transformational Data Sharing ETF (ARCA:BLOK) consists of assets worth nearly $80 million. It targets the companies participating in the blockchain applications and investing in blockchain research. Reality Shares NASDAQ NexGen Economy ETF (NASDAQ:BLCN) is worth $55 million. It deals with companies contributing to blockchain research, applications, and the development of blockchain-based solutions. First Trust Indxx Innovative Transaction & Process ETF (NASDAQ:LEGR) accumulates a value of over $36 million. It is a passive index fund working with companies developing blockchain technology including IBM and Microsoft. All three ETFs were launched in January 2018.