HomeCryptoBLOK ETFs: Exposure Beyond the Risk of Crypto Balances (NYSEARCA:BLOK)
BLOK ETFs: Exposure Beyond the Risk of Crypto Balances (NYSEARCA:BLOK)
January 13, 2023
The Amplify Transformational Data Sharing ETF (NYSEARCA: BLOCKED) invests in companies involved in blockchain technologies and related applications. While the concept of peer-to-peer distributed ledgers as a method of recording transactions was originally linked to cryptocurrencies, the attraction is the growing number of use cases across industries beyond the volatility of Bitcoin (BTC-USD) and other digital resources.
However, the fund’s performance was a near-disaster, caught up in last year’s broader market selloff and that particular crypto exposure from major underlying holdings. BLOK is down more than 75% from its all-time high in 2021, during a period defined by its speculative frenzy.
What we find is that BLOK’s strategy has quietly moved away from being a pure “cryptocurrency” game, adopting a broader definition of a blockchain company to include more global technology leaders. We see BLOK entering 2023 as a more diversified fund that is still positioned to capture high-level trends in the blockchain, albeit with a more balanced risk profile. The bottom has rebounded from its lows and we see several reasons why the recent momentum can continue.
What is the BLOK ETF?
A key point of BLOK is that the fund is actively managed, meaning it doesn’t track a particular index, with holdings at the discretion of the portfolio management team. According to fund sponsor Amplify ETFs, the goal is to invest at least 80% of its net assets in shares of companies “actively involved in the development and use of blockchain technologies.” From the fund’s prospectus, the selected companies largely fall into one of three categories:
Actively engage in research and development, testing and/or implementation of transformative data sharing technology.
Taking advantage of the demand for transformative data sharing applications such as transaction data, cryptocurrency and supply chain data.
Partner with and/or directly invest in companies that are actively engaged in the development and/or use of transformative data sharing technologies.
The conclusion for us is that these criteria have a certain margin of interpretation which allows the strategy to go in various directions. That’s the setup today with the top 10 holdings in BLOK including global consultancy Accenture plc (ACN), International Business Machines Corp (IBM) and CME Group Inc (CME). These big-cap industry leaders have a peripheral connection to “the blockchain,” but they’re hardly the first names that come to mind when thinking about cryptocurrencies. According to our calculations, approximately 55% of the current 48 holdings are non-pure-play crypto stocks.
The justification with ACN is likely the company’s drive to offer blockchain consulting services, although this is likely a small part of its current business. With IBM, it makes sense that its data center solutions represent the critical infrastructure side of digital assets using cloud networks. This is also the case with the Japan-based GMO Internet Group (OTCPK:GMOYF) which focuses on a variety of Internet infrastructure services.
The theme continues with other smaller holdings in stocks like Oracle Corp (ORCL), Sysco Corp (SYY), Intel Inc (INTC), and Advanced Micro Devices (AMD). Visa Inc (V) and Mastercard Inc (MA) are the traditional leaders in payments, but have recognized the importance of new technologies. Walmart Inc (WMT) also finds its place with its potential use of blockchain for its e-commerce supply chains.
To be clear, there are still plenty of pure-play crypto names included MicroStrategy Inc (MSTR), where the company’s $2.2 billion market cap is made up almost entirely of its balance sheet Bitcoin holdings. BLOK owns Coinbase Global Inc (COIN), recognized as a major cryptocurrency exchange and a survivor compared to other high-profile bankruptcies in the industry.
Moving forward, Galaxy Digital Holdings Ltd (OTCPK:BRPHF) and Silvergate Capital (SI), along with several smaller positions in Bitcoin miners such as Riot Platforms Inc (RIOT), Marathon Digital Holdings Inc (MARA), Bitfarms Ltd (BITF) are all directly linked to the value of digital assets.
The reason we’re focusing on this dynamic is that BLOK looks very different today than when it was essentially “all-in” on cryptocurrencies. The feeling is that this group has taken a back seat to its more high-profile position at the height of the cryptocurrency boom. Over the past year, it’s clear that cryptocurrency names have significantly underperformed companies with less direct involvement in blockchain technologies.
For context, here’s a screenshot of what the BLOK portfolio looked like at the end of Q1 2021, where nine of the top 10 holdings were direct digital asset names. Again, it appears that the strategy has attempted to hedge against the more speculative side of the blockchain theme in the relative safety of the leaders of the large-cap segment.
What is the future of BLOK?
Putting it all together, we think BLOK could work for investors who want exposure to crypto and blockchain technologies with a cautiously bullish approach. This is in contrast to some alternative blockchain and crypto ETFs which can be more aggressive and have higher risk in terms of portfolio placement.
We can mention Global X Blockchain ETF (BKCH), VanEck Vector Digital Transformation ETF (DAPP) and Bitwise Crypto Industry Innovators ETF (BITQ) where many of the same stocks are covered, but cryptocurrency games have bigger roles in the portfolio.
For us, we are bullish on stocks and see value in underdog tech stocks that can benefit from a shifting macro environment where inflationary pressures ease, opening the door for the central bank to ease aggressively aggressive rate-hiking policies. By this measure, more diversified global stocks within BLOK in names like IBM, CME, PYPL, V, and MA should benefit from that market tailwind, while high-beta crypto stocks add to upside potential .
On this point, the biggest risk in BLOK still comes down to the future of digital assets and Bitcoin, considering the cumulatively material direct exposure to the underlying portfolio holdings. Various governments have been discussing a scenario where BTC collapses under its recent cycle low or regulatory changes such as a “cryptocurrency ban”. Any measures to limit the adoption or proliferation of digital assets and blockchain technologies would undermine the long-term bull case.
From a technical point of view, it is encouraging to see BLOK rally in recent weeks, well away from the lows. A breakout above $17.00 would lead to a new wave of momentum, which is our base case going forward.