Month: July 2018

Blockchain ETFs Vs Blockchain Investments

This article will discuss the best blockchain etfs, best cryptocurrency etfs, best cryptocurrency funds and best blockchain investments in 2018. Please skip down to the conclusion at the bottom of the article if you just want the answers.

This article needed a strongly worded title such as Blockchain ETFs are bull$#*# as the whole point of investing in Blockchain is to do exactly that, invest in the blockchain. I will discuss later cryptocurrency and blockchain as an asset class, but I think the point of investing in niche or category investments is to cover the category for diversification reasons.

“I think many of these ETFs are labelled Blockchain ETFs as a sales pitch to attract money rather than being pure plays on Blockchain technology”.

Now, if you are worried about investing in the blockchain and you are a conservative investor, but still want to dip your little toe in the water, I guess these ETFs could appeal, but they seem a little pointless to me and won’t provide the alternative asset class that people are looking for when looking to invest in Blockchain type investments.

Cryptocurrency ETFs

There are currently no cryptocurrency ETFs on the market. Many fund managers have tried to list an ETF with the SEC, but failed. The SEC is rightfully worried about volatility and cybersecurity. They are worried retail investors will lose money via hacks or flash crashes, so they are being very cautious and have rejected all filings so far, including a filing from the Winklevoss twins, the originial investors in Facebook, who have been trying to file ETFs for years now.

The first indirect investments in Bitcoin arrived via GBTC, the Bitcoin Investment Trust, run by Grayscale Investments, LLC, although it is not a direct play on Bitcoin prices, as it is a trust which is valued daily and is usually sold at a discount or premium to the Bitcoin price. But, as you can see from the chart below from 1st June 2017 – 24th July 2018, the trust is up over 800% and closely corresponds to the Bitcoin price.

This compares favourably to the S&P500, a basket of the 500 largest companies in the USA, which is up only 23% over the same time frame, although Bitcoin is wildly volatile and investors often have to stomach dips of 50% – 70% in any given year time period, which is a severe ulcer index for the majority of investors.

The fees for GBTC are quite high at 2% per year for a hold-only trust which holds only one cryptocurrency, Bitcoin. However, if you are not tech competent, I guess it is a safe enough way to play the investment space and you can usually buy it through your normal brokerage company or through your investment portfolio. The fund has $1 billion under management.

Furthermore, the premium above the bitcoin price is quite high. The average premium has been around 40%. That is a very high premium to pay above the bitcoin market price. Instead, you could invest an hour of your time learning how to buy bitcoin via our beginner’s guide to cryptocurrency.

However, if you don’t have enough spare time for example or you need to buy bitcoin quickly with your current brokerage or IRA, then I guess this is a fast, stable way to get into cryptocurrency.

I see Grayscale now offers trusts for Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Ripple’s coin, XRP and ZCash. The fee on all of them is 2.5% per year. It also has a cap weighted fund with a hefty 3% p.a. fee. You can do better using Coinbase’s equal cap weighted fund.

GBTC is not listed on the main stock exchanges, it is an Over-The-Counter (OTC) stock.

The First ETF to Hold Bitcoin: ARKK ETF

The first ETF that held cryptocurrency was the innovative ARKK ETF which held some shares in GBTC, but only a tiny amount. For much of the fund’s history, its Bitcoin allocation via GBTC was relatively stable, making up around 6% – 10% of the portfolio. ARKK was up over 87% in 2017 and the ARKK ETF is up over 20% this year.

In the chart below, you can see that the ARKWW ETF has beaten the Grayscale Bitcoin Trust (GBTC) since the start of the year. Bitcoin started falling in December 2017 with the launch of Bitcoin futures when Wall Street started betting that the price of Bitcoin would fall and cryptocurrency regulation worldwide were uncertain.

The ARK Innovation ETF (ARKK) took home ETF.com’s “ETF Of The Year” award for innovation in the ETF industry as it allowed access to disruptive technologies in 2017. Basically, it improved diversification for the average ETF investor’s portfolio construction.

ARK began trimming their exposure to Bitcoin in January to only 0.5% which, looking back, represented a shrewd move. I would imagine ARK will begin to increase exposure now that regulation is looking more steady and institutional money starts to pour in as custody solutions improve.

The First Cryptocurrency ETF in the World: H10 ETF

Huobi, a Singapore-based trading platform currently ranking among the world’s top three cryptocurrency exchanges, has beaten the pack and has become the first cryptocurrency ETF in the world on June 1, 2018.

The Huobi H10 is an exchange traded fund that tracks an index of the top 10 cryptocurrency assets against Tether, a stable cryptocurrency tied to the US dollar. However, there have been issues with Tether including a lack of an audit and cries of manipulation. A better way to stay safe is to move your cryptocurrencies to cash in bear markets or move cryptos to the new stable cryptocurrency TUSD (True USD), as opposed to USDT (Tether). See the bottom of this article for our suggestions on the safest way to invest in cryptocurrencies.

The First US-Based Cryptocurrency ETF

The Winklevoss twins of Facebook fame who became the first Bitcoin billionaires, have marked another milestone in the cryptocurency world as they have acquired a patent for the creation of a long-awaited Bitcoin exchange traded fund (ETF). The United States Patent and Trademark Office awarded a patent to Winklevoss IP LLP for exchange-traded-products (ETP) on June 19th, 2018.

The Winklevoss twins have been trying to file a Bitcoin ETF since 2014, but have been rejected by the SEC due to security concerns. However, they have now teamed up with the Chicago Board Options Exchange (CBOE) in their latest offering which means a Bitcoin ETF might see the day of light soon.

The CBOE is one of the most important and influential financial institutions in the world and is offering the key missing ingredient, insurance for loss or theft of any bitcoins held by the ETF.

The SEC rightfully had major concerns listing a Bitcoin ETF, for example, what happens to investors if there’s a hack or the private keys get lost? What happens in case of fraud? CBOE’s insurance might be the missing key to getting a Bitcoin ETF finally listed.

Two ETF providers, Van Eck Associates Corp. and SolidX Partners Inc., have also filed a request to list a Bitcoin-linked Exchange Traded Product (ETP) to the U.S. Securities and Exchange Commission at the beginning of June this year. They are taking a slightly different route by focusing on institutional rather than targeting retail investors. The product will be priced at 25 Bitcoins per share or nearly $200,000 at today’s prices.

SolidX would handle the custody of bitcoin using a cold storage solution, which means private keys, which are the encryption keys to access funds, are kept offline. The ETF will be insured one-to-one by a syndicate of insurers, which the companies didn’t disclose.

Blockchain ETFs

Blockchain ETFs all cropped up out of nowhere a few months ago when Bitcoin shot up to $20,000 in price. As there were no cryptocurrency or Bitcoin ETFs in sight, ETF companies were looking to capitalise on consumers’ appetite for investing in the blockchain space, so a bunch of these ETFs popped up.

Please note that Blockchain and cryptocurrency are not the same thing. A cryptocurrency is hosted on a blockchain. A blockchain doesn’t necessarily have to carry a cryptocurrency. For example, Bitcoin with a capital “B” is typically associated with Bitcoin the protocol and payment network; a lowercase “b” written as “bitcoin” denotes bitcoin as the currency.

Blockchain is simply a distributed ledger. In the case of cryptocurrencies, this blockchain is usually decentralised.

Blockchain ETF Performance

As these Blockhain ETFs are new, there is no yearly data. Here is how they have performed over the last 4 weeks.

BLOK Amplify Transformational Data Sharing ETF 2.0%
BLCN Reality Shares Nasdaq NexGen Economy ETF 1.13%
LEGR First Trust Indxx Innovative Transaction & Process ETF 1.23%
KOIN Innovation Shares NextGen Protocol ETF 2.14%
BKC REX BKCM ETF 1.21%
BCNA Reality Shares Nasdaq NexGen Economy China ETF -6.45%

Unsurprisingly, the Chinese ETF has performed the worst since Trump announced his trade war with China.

In January this year, the regulators at the SEC warned these companies to remove the name “blockchain” from their ETFs and as you can see from the list above, they no longer have “blockchain” contained in the ETF names, so whether these ETFs last or not is another matter.

ETFdb and other sites still list them as “Blockchain ETFs” and that might be enough to sustain at least one of them.

Now, let’s drill down into the holdings of these ETFs and show why they aren’t really Blockchain ETFs at all: they are either mainly tech ETFs or fintech ETFs.

A very easy tool to use to compare these ETFs is the ETFdb head-to-head comparison tool.

Let’s look at the BLOK ETF against the large cap tech ETF XLK.

Click for head-to-head comparison of the BLOCK ETF vs XLK ETF

You can see only 50% of holdings of BLOK are in the USA with 50% outside; 73% are large cap stocks; 78% are technology companies, whilst 17% are financial companies. I think a better name for this ETF is the FINTECH ETF.

Their top holdings include INTEL, Google, Oracle, IBM, Red Hat, Taiwan Semiconductor and other large tech players whose primary model has nothing to do with the Blockchain. Scroll to the next page and you see Citigroup, Goldman Sachs, Samsung, Alibaba, Facebook. None of which can claim to be disruptive blockchain companies. Only a tiny portion of their business is invested in blockchain technologies or solutions.

The KOIN ETF was similar, except with a higher concentration in large cap companies at 98% and 71% in North America.

The LEGR ETF has the least exposure to the USA at 45%.

The BCNA ETF is true to its word with 100% of holdings in Asia, but only 37% of its stock were invested in tech stocks! The CQQQ ETF would give a much purer exposure to Chinese tech stocks involved in the Blockchain.

Many of these ETFs are relatively small with only a few million dollars under management; also fees are averaging around 0.7% which is much higher than the large tech ETFs which are usually under 0.2% per year.

BKC and BCLN were almost identical Fintech ETFs.

What is much more interesting is Amplify’s excellent presentation on the use case for Blockchain with it adding $3.1 trillion in estimated business value by 2030 according to the Gartner Trend Insight Report.

Blockchain and Cryptocurrency as an Asset Class

The reason I feel like it is almost pointless to invest in these so called Blockchain ETFs is firstly, they are invested in large fintech companies. Secondly, the point of investing is to diversify. Blockchain and cryptocurrency is now seen as a separate asset class. This is one of many reasons that institutional monies are starting to flow into the cryptocurrency/blockchain space. See the chart below for more explanation of cryptocurrency as an asset class.

Blockchain JV Funds

Blockchain joint venture equity funds are a lot more promising. However, most of these need a personal invite or you must be a sophisticated investor; this varies country to country, but often means you have property & assets valued at $2m or more and an annual income of $100,000 or $200,000+ per year. Entry into many of these funds are often $300,000 up. I know, as I emailed many of them to enquire. But, if you have the money and the right contracts, these can be excellent investments. But, often your money isn’t liquid, it is tied up for many years and requires you to trust the manager to know when to exit their investments in the various companies.

Blockchain ICOs

These are few and far between. Invictus Capital’s Hyperion fund ran an ICO for syndicated venture capital, but they closed their ICO to new funding already.

Alternative Methods to Invest in the Blockchain

The other way to invest in the Blockchain is to invest in individual shares. Obviously, you will need to do a lot of due diligence and research. Investing in the Blockchain is not easy. It is not clear who the winners and losers will be, so you either take a gamble and invest in projects where you know the leaders or take a more conservative approach and put cash into the ETFs with the hope that some of these larger companies will scoop up the successful blockchain companies.

Investing in a Cryptocurrency Fund

We have been investigating many funds and now think we have the safest way to invest in a cryptocurrency digital assets portfolio via Hudson James Investment Management, a BVI licenced and regulated investment management company.

The digital assets will be custodied in Switzerland in a cold storage solution locked in secure underground, military grade vaults.

The portfolio will use a momentum strategy, which is a trend driven strategy. As cryptocurrencies are difficult to value and it is difficult to see which ones will be growth driven, the safest method is to use a momentum strategy. Momentum strategies have been around for two hundred years and can be applied to all sorts of markets, such as equities, bonds, ETFs and futures.

Momentum strategies make the most logical sense for the cryptocurrency world. Below is the latest iteration of testing the model.

The black line represents the Bitcoin price. The blue bars represent the holdings of the fund. At present, these results are backtested only. Past performance is not indicative of future results. Investing in cryptocurrency is highly speculative and you may lose some or all of your capital.

Conclusion

Best Blockchain ETF – there really isn’t one, the best way to invest in blockchain is through JV equity or ICOs. However, for institutional investors or retail investors who aren’t tech savvy, you can look at the BLOK ETF or KOIN ETF if you want to invest in the USA or BCNA for some Chinese exposure. However, I prefer the ARKWW ETF to any of these, which is not a pure blockchain play, but an investment in 44 innovative companies for the future.

Best Cryptocurrency ETF – there is only one on the Singapore exchange, the Huobi H10 ETF, maybe the US ones will follow in Q3 2018.

Best Cryptocurrency Fund – Hudson James Investment Management’s Cryptocurrency Momentum Strategy will have secure custody in cold storage vaults in Switzerland, rebalancing portfolios automatically once per month.