The backbone of cryptocurrencies, blockchain technology, may add value to a diversified exchange traded fund investment portfolio, and investors should also look at how blockchain technology could benefit beyond the crypto market.
In the recent webcast, Investing in Blockchain: The Foundational Tech Behind Bitcoin, Christian Magoon, founder and CEO of Amplify ETFs, and Michael Venuto, co-founder & CIO of Toroso Investments, started by explaining what blockchain technology is. Blockchains are a consensus-based digital ledger that includes immutable, digital data documented in different packages known as blocks. By leveraging a cryptographic signature or hash function, every block is “chained” or related to the next block. Blockchain serves as a ledger that you can share with anyone. It is open for access to people with the relevant permissions. It is impossible to change the data recorded on blocks in the blockchain.
Blockchain technology has many applications across a number of various industries. For example, the top industries that benefit from transparent distributed ledger technologies include Central Bank Digital Currencies (CBDC) and Stablecoins, Digital Identity, Supply Chain, Healthcare and the Life Sciences, Food Safety, Voting, Charitable Donation and Real Estate, among others.
The industry is still in its nascent stages, but the size of the global blockchain market is expected to grow from $3 billion in 2020 to $39.7 billion by 2025 – a CAGR1 of 67.3%. This growth may be driven by venture funding, enterprise investment in blockchain technology, the rise of blockchain solutions for supply chain management, Geographic expansion into emerging markets, and growth of private blockchains.
Cryptocurrencies have been the most prominent expression of blockchain technology. As an asset class, crypto may also be viewed as a technology platform for disintermediation and disruption across many industries: art, music, and collectibles. Billionaire portfolio managers Paul Tudor Jones, Bill Miller, and Stanley Druckenmiller have embraced Bitcoin as an asset class. CEOs like Michael Saylor (MicroStrategy) and Jack Dorsey (Square) have used their balance sheets to buy Bitcoin. Institutions and Endowments have been increasing their allocations to Bitcoin (e.g., Stone Ridge). Additionally, endowments like Yale, Harvard, MIT, Stanford, Dartmouth, and UNC are have targeted investments in crypto (as well as venture capital in blockchain).
Crypto miners are large players in the space as they execute a proof-of-work mechanism within the crypto networks. Businesses are moat-like over the long term, as scale arguably leads to a cost and probability advantage, but the many different approaches to the mining industry will almost certainly lead to much variability and outcomes. However, risks and benefits by country and state vary, including regulation, economic incentives, and types of power availability.
Meanwhile, crypto exchanges refer to the platform enabling trading cryptocurrencies for other assets such as digital or fiat currency. They serve as intermediaries between the buyer and seller while operating on a commission-based model.
To help investors access this growing industry, investors can look to something like the Amplify Transformational Data Sharing ETF (BLOK), one of many funds that invest in blockchain technology, the technology behind cryptocurrencies like bitcoin. Transformational data sharing through innovative blockchain technology can also add value to an investment portfolio independent of cryptocurrencies’ viability and long-term benefits.
BLOK utilizes an actively managed approach to investing in the fast-developing world of blockchain-based technology, allowing the fund’s portfolio managers to respond in real-time to valuations, company fundamentals, and announcements that may impact the blockchain marketplace.
Toroso Investments serves as active sub-advisor and ETF sponsor to an ETF offered by Amplify ETFs. Toroso strives to outperform the EQM-Emerita Blockchain BLOK 50 Global Index with this strategy. The active team’s goal is to identify companies in the early stages of development that may offer exponential returns.
Financial advisors who are interested in learning more about blockchain and cryptocurrencies can watch the webcast here on demand.