How Do Blockchain ETFs Work?

Hello, this is Bitpunk. Today, let's take a look at blockchain ETFs.

The enthusiasm for blockchain, the core technology behind cryptocurrencies, is opening up new paths for investment through ETFs (Exchange Traded Funds). US authorities have so far rejected ETFs based on Bitcoin, but they have approved blockchain-based ETFs. The Canadian government also approved the first blockchain ETF, called the Blockchain Technologies ETF (HBLK), in early 2018.

The Potential of Blockchain

Blockchain-based currency systems like Bitcoin are being watched by regulators around the world, but the basic concept of blockchain holds great promise and potential. Beyond cryptocurrencies, blockchain is seeing growing use in a wide range of fields, such as services, supply chain management, digital app development, the digital entertainment industry, biotechnology, and agriculture. As a result, many companies are adopting blockchain technology to develop new systems.

According to a report by the BLCN ETF, blockchain could cut banks' infrastructure costs by about $20 billion by 2022, and around 10% of global GDP is expected to be stored on blockchain platforms.

Illustration @Davidstankiewicz

Investing in Blockchain

You can invest in blockchain through a variety of means. The first and most common is to directly buy a blockchain-based cryptocurrency such as Ethereum. However, this can be complicated for the average investor, and it carries an inherent risk of loss if a particular blockchain system fails.

A somewhat safer approach is to invest in the stocks of listed companies that are adopting blockchain technology. For example, if IBM develops a blockchain-based system and earns revenue from it, shareholders can expect to benefit from increased returns on their IBM shares.

Blockchain ETFs

This is where blockchain ETFs have an advantage. As an example, let's look at the underlying index and methodology behind an ETF. The BLCN ETF tracks its performance through an index called the RSNBEI (Reality Shares Nasdaq Blockchain Economy Index). This index is made up of companies involved in researching, developing, supporting, or using blockchain technology and related businesses. The index methodology assigns a "blockchain score" to companies that are candidates for inclusion in the index. This allows blockchain companies and their business potential to be measured more accurately in terms of real economic strength, innovative business prospects, and operational capabilities. Then, the 50 to 100 companies with the highest blockchain scores are included in the BLCN ETF.

Risks of Blockchain ETFs

Because these ETFs are thematic investments, they carry their own inherent risk of failure. Acceptance of blockchain systems is gradually increasing, but the concept is still in its early stages, and changes across the entire ecosystem, as well as the stability and commercial viability of blockchain networks, remain key issues.

https://www.investopedia.com/tech/how-blockchain-etfs-work/