ETF BLOK: Exposure Beyond Crypto Balance Risk (NYSEARCA: BLOK)

The Amplify Transformational Data Sharing ETF (NYSEARC:BLOK) 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 tied to cryptocurrencies, the attraction is the growing number of use cases across industries that go beyond Bitcoin volatility (BTC-USD) and other digital assets.

Still, the fund’s performance was nearly a disaster, overtaken by the market’s selloff last year and that particular crypto exposure of the top underlying holdings. BLOK is more than 75% off its all-time high in 2021, during a period defined by its speculative frenzy.

What we see is that BLOK’s strategy has quietly moved away from a pure “crypto” game, while adopting a broader definition of blockchain companies to include more global tech leaders. We see BLOK entering 2023 as a more diversified fund that is still positioned to capture high-level blockchain trends, but with a more balanced risk profile. The fund has rebounded from its lows and we see several reasons why the recent momentum may continue.

What is the BLOK ETF?

A key point about BLOK is that the fund is actively managed meaning it does not track any 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 stocks of companies “actively involved in the development and use of blockchain technologies.” According to the fund’s prospectus, the companies selected largely belong to one of the following three categories:

• Actively participate in the research and development, testing and/or implementation of transformational data sharing technology.
• Take advantage of the demand for transformational data sharing applications such as transaction data, cryptocurrency and supply chain data.
• Partner with and/or invest directly in companies actively engaged in the development and/or use of transformational data sharing technology.

The conclusion for us is that these criteria have a certain margin of interpretation allowing the strategy to go in different directions. That’s the setup today with BLOK’s top 10 holdings, including global consultancy Accenture plc (ACN), International Business Machines Corp (IBM) and CME Group Inc (CME). These large-cap industry leaders have a peripheral connection to “blockchain” but are not the first names that come to mind when thinking of crypto. According to our calculations, approximately 55% of 48 current participations are non-pure-play crypto stocks.

The rationale with ACN is likely the company’s willingness to offer blockchain consulting services, although this is probably only a small part of its current activity. With IBM, it makes sense that its data center solutions represent the critical infrastructure side of digital assets that use cloud networks. This is also the case of the Internet group GMO based in Japan (OTCPK: GMOYF) focusing on a variety of Internet infrastructure services.

The theme continues with other smaller stakes in stocks like Oracle Corp (ORCL), Sysco Corp (SYY), Intel Inc (INTC) and advanced microdevices (AMD). Visa Inc. (V) and Mastercard Inc (MY) are the traditional leaders in payments, but have recognized the importance of new technologies. Even Walmart Inc (WMT) finds its niche with its potential use of blockchain for its e-commerce supply chains.

To be clear, there are still many pure-play crypto names out there, including MicroStrategy Inc (MSTR) where the company’s $2.2 billion market cap is made up almost entirely of its on-balance sheet Bitcoin holdings. BLOK owns Coinbase Global Inc (PIECE OF MONEY), recognized as a major crypto exchange and a survivor of other high-profile bankruptcies in the industry.

Moving on, Galaxy Digital Holdings Ltd (OTCPK: BRPHF) and Silvergate Capital (IF), as well as several small positions in Bitcoin miners like Riot Platforms Inc (RIOT), Marathon Digital Holdings Inc (MARA), Bitfarms Ltd (BITF) are all directly related to the value of digital assets.

The reason we focus on this dynamic is that BLOK today is very different from when it was essentially all-in on crypto. The feeling is that this group has somehow taken a step back from its more publicized position during the height of the crypto boom. Over the past year, it’s clear that crypto names have significantly underperformed companies less directly involved in blockchain technologies.

For context, here’s a screenshot of what the BLOK wallet looked like at the end of Q1 2021, where nine of the top 10 holdings were direct digital asset names. Again, it appears the strategy has attempted to hedge against the more speculative side of the blockchain theme in the relative safety of the leaders in the large-cap segment.

What is the next step for BLOK?

Putting it all together, we think BLOK can work for investors who want exposure to crypto and blockchain technologies with a cautiously bullish approach. This contrasts with a few alternative blockchain and crypto ETFs which can be more aggressive and carry higher risk in terms of portfolio positioning.

We can mention the Global X Blockchain ETF (BKCH), VanEck Vectors Digital Transformation ETF (DAPP), and Bitwise Crypto Industry Innovators ETF (BITQ) where many of the same stocks are hedged, but pure crypto players play a larger role in the portfolio.

For us, we are bullish on equities and see value in beat tech names that can benefit from a changing macro environment where inflationary pressures are easing, opening the door for the Central Bank to ease aggressive bullish policies. rates. By this metric, the most diversified global stocks within BLOK in names like IBM, CME, PYPL, V, and MA should benefit from this market tailwind while high-beta crypto stocks add to the upside potential.

On this point, BLOK’s biggest risk still lies in the future of digital assets and Bitcoin given the cumulatively large direct exposure to the portfolio’s underlying holdings. A scenario where BTC crashes below its recent cycle low or regulatory changes like a “Prohibition of cryptographyhave been discussed by various governments. Any move to limit the adoption or proliferation of digital assets and blockchain technologies would jeopardize the long-term bullish scenario.

From a technical standpoint, it’s encouraging to see BLOK rebound in recent weeks away from its lows. A break above $17.00 would lead to a fresh wave of momentum which is our baseline scenario going forward.