Cryptocurrencies have mostly started the new year on a down note. For instance, Bitcoin and Ethereum, the two largest digital assets by market capitalization, are down around 11% and 14%, respectively. But in the past year, they returned more than 19% and 163%.
However, not all cryptos are down in 2022. Cardano, Cosmos, ChainLink, Fantom and Internet Computer have already seen significant gains over the past two weeks.
Yet, the volatility in the digital asset space, especially in the short run, is not appropriate for all retail portfolios. There are currently over 15,000 cryptos. For most investors, analyzing these names to find out which will emerge the next winner is nearly impossible.
Also, not all investors have accounts with crypto brokers, like Coinbase Global (NASDAQ:COIN). Therefore, a large number of small investors would not be able to buy these assets, either.
So, today, we introduce two exchange-traded funds (ETFs) that might be appropriate for those following Bitcoin as well as the blockchain technology that is behind digital assets. Such funds enable investors to access these assets through regular brokerage accounts.
We recently covered the VanEck Bitcoin Strategy ETF (NYSE:XBTF) and the Grayscale Ethereum Trust (OTC:ETHE). Today’s discussion builds upon that analysis.
1. ProShares Bitcoin Strategy ETF
- Current Price: $27.17
- 52-Week Range: $24.88 - $44.29
- Expense Ratio: 0.95%
The last quarter of 2021 saw the launch of ProShares Bitcoin Strategy ETF (NYSE:BITO), the first Bitcoin futures-linked fund to be listed in the US. This ETF wrapper does not invest directly in Bitcoin, but instead tracks the performance of Bitcoin futures, which deviates from the spot price.
A futures fund like BITO has to be regularly rolled forward by fund managers—in most cases, on a monthly basis. Such funds usually trade “in contango,” which means the futures price of the asset is higher than the spot price.
As a result, investors in such funds have contango risk, that can easily add up to 6%-9% a year—if not more. Thus, futures-based ETFs come with a sizeable performance tag.
When we remember that the annual expense ratio of BITO is currently 0.95%, it is easy to see why not everyone on Wall Street is very enthusiastic about Bitcoin futures-based ETFs. Potential investors should understand their potential risk and return profiles well before hitting the ‘buy’ button.
Readers should also note that the other term used in defining the structure of the forward curve is backwardation, which refers to when futures prices are lower than the spot price. Backwardation is a rare event that does not usually last for long. Therefore, long-term investors in BITO should not necessarily expect to benefit from it.
On Oct. 19, BITO opened at a price of $40.88. Then, on Nov. 10, it saw an all-time high of $44.29. But the new year has already brought a record low of $24.88. Now, the fund price is at $27.17, having lost well over 30% since inception.
Despite the volatility and decline, assets under management stand close to $1.1 billion. Although we remain bullish on the increased adoption of digital assets, Bitcoin futures-based ETFs are not appropriate for all investors.
2. Global X Blockchain ETF
- Current Price: $20.11
- 52-Week Range: $18.55 - $41.25
- Expense Ratio: 0.50% per year
Research by PWC highlights:
“Blockchain is the technology that enables the existence of cryptocurrency (among other things). Bitcoin is the name of the best-known cryptocurrency, the one for which blockchain technology was invented. A cryptocurrency is a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds.”
Recent metrics suggest that the blockchain market is forecast to increase from around $5 billion in 2021 to more than $67 billion in 2026, implying a compound annual growth rate (CAGR) of over 68%. Therefore, many seasoned investors are paying close attention to companies at the center of such growth.
The Global X Blockchain ETF (NASDAQ:BKCH) invests in businesses that are advancing or benefiting from blockchain technologies. Such names include crypto miners or those that develop blockchain applications and offer digital asset integration.
BKCH, which has 25 holdings, was first listed in July 2021. The top 10 holdings account for close to three-quarters of net assets of $105.1 million.
In terms of the sub-sectors, we see information technology (73.7%), financials (18.7%), communication services (2.6%) and real estate (2.2%). Close to 60% of these companies are based in the US. Next in line are those based in Canada (18.5%), China (9.5%), and Germany (7.4%).
Coinbase Global has the largest slice in the fund, with 12.98%. Other leading names on the roster are crypto miners Riot Blockchain (NASDAQ:RIOT) and Marathon Digital (NASDAQ:MARA), Germany-based IT group Northern Data (DE:NB2), which focuses on artificial intelligence and machine learning, and digital asset broker Voyager Digital (OTC:VYGVF).
Since inception, BKCH is down about 20%, and saw a record low in early November. Long-term investors who are bullish on the blockchain technology could consider researching the fund further. Many of the names in the fund are also likely to benefit from potential increases in digital assets like Bitcoin.