Blockchain ETFs: Red Hot But Crypto Not

Until recently Wall Street has pretty much been sitting on the sidelines of the cryptocurrency boom.  Most of the capital raised has come from ICOs so there have been no fat investment banking fees for Wall Street to feast on. But that is all changing.  

Late last year a tiny struggling beverage company,  Long Island Iced Tea, changed its name to Long Blockchain where upon the shares rose 289% in short order.  Wall Street was quick to notice.

Since then, blockchain ETFs have been raising money faster than you can say Long Island Iced Tea.  It is hard to get a precise amount raised, but a decent guess is well in excess of $1 billion just this year.  This includes over $660 million Global X Robotics and Artificial Intelligence Thematic ETF (BOTZ). This comes after trade reports of $200 million having already been raised before BOTZ.  

The current pace of ETF formation is three times faster than last year explosion of cryoto ICOs.

The Pros: Low Fees, Lots of Liquidity

So the question is raised:  are ETFs the right choice for you?  If you are an active trader, the answer is simple: no way.  Your style is to do your own homework and make your own decisions.   

But if you are the kind of person that only has a few hours a week to devote to you financial interest, there are advantages to consider.

ETF’s or Exchange Traded Funds, are a way for individual investors to get professional money management at bargain prices.  Fees are typically well under 1% and ETFs can be traded with an online broker for pennies.

A random check of several blockchain ETFs showed fees between 0.8% and 1%. Compare that to the typical hedge fund where fees are commonly 2% and you give up about 20% of profits to the general partner.  

The Cons:  No Crypto

Blockchain ETFs don’t invest directly in cryptocurrencies.  Instead, professional analysts and managers seek candidates that either participate in or benefit from blockchain technology.  

Overstock is a popular choice for the fact that it is an online retailer that accepts bitcoin for payment. So is IBM, which is a popular holding.  Beyond that, each ETF is a unique portfolio of publicly traded companies.

Unproven Benchmarks  

When ETFs were created about 25 years ago, they offered real advantage.  In one single transaction, an investor could own each of the individual components of an index such as the Nasdaq 100 market weighted.  The principal benefit is to identify and manage risk.

But do they provide the risk protection that ETFs were created for in the first place?  Personally, I think many investors could be better off simply buying a group of cryptocurrencies.  Here is why.

In the case of blockchain ETFs there is no publicly traded benchmarks like the Nasdaq 100 or others. This seriously weakens the main purpose of tying an ETFs strategy to match a certain time tested benchmark.  In my view, this heightens the risk for the investor. If risks are increased then it is only appropriate the rewards should heightened equally. In this case, we think they are not.

At the present time there is a substantial difference in valuation between common stocks and cryptocurrencies.  With ETFs, the investor is buying into higher risk assets. One of the benefits of crypto investing is their non correlative nature to other assets.  ETF can not offer this benefit.

Blind Diversification

The blockchain ETF that we have looked at so far seem to have low cost and professional management on their side.  However, for the investor they appear to amount to little more than blind diversification with limited upside offered by direct investment in a package of cryptocurrencies.  So before joining the huge wave of investors who seem to have found nirvana, buy 15-20 cryptocurrency names in equal weight and put them in a secure place for the long run. And if you are cheap like me, you will save the EFT fee.

Featured image courtesy of Shutterstock. 

James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.