BKCH - BKCH: The Bumpy Ride Towards The Future Of Blockchain

2023-04-28 03:04:56 ET

Summary

• BKCH invests in companies focused on Blockchain technology.
• Blockchain is used heavily in cryptocurrency exchange, making the blockchain industry uniquely vulnerable to the same effects of speculation and hype as that of crypto.
• BKCH and similar small-cap blockchain ETFs are therefore burdened with high volatility and highly unpredictable returns, despite potential outside of crypto.
• I rate this ETF a Hold, as blockchain may gain momentum in the near future and achieve growth in the long term, despite BKCH’s erratic price movements along the way.

Blockchain is a relatively new innovation which many are starting to gain interest in, regardless of whether or not they are interested in cryptocurrency. However, blockchain assets are some of the more volatile investments, and small-cap, early growth ETFs only make performance more erratic. Despite its volatility, I’m covering blockchain at the moment because I believe this technology could have a lot of untapped potential outside of just crypto. That being said, I could see a number of businesses adopting its technology with time. Some potential opportunities for blockchain include but are not limited to applications in healthcare , supply chain management , and banking . For this reason, I rate the Global X Blockchain ETF ( BKCH ) a Hold.

I also believe there may be better investment vehicles with slightly lesser volatility as well as better liquidity for those that wish to gain blockchain exposure. A more notable alternative to BKCH is the Amplify Transformational Data Sharing ETF (BLOK), which I like to refer to as the “mother of blockchain ETFs”. Since newer, small-cap ETFs often bring their own risks , investors may want to consider more veteran alternatives when dabbling in an industry as volatile as blockchain.

Strategy And Holdings Analysis

BKCH tracks the Solactive Blockchain USD Index using a full replication technique. This ETF’s designated index invests in blockchain companies. To qualify as a blockchain company, contending stocks must derive at least half of their revenues, assets, or operating income, from specific business endeavors. Such endeavors include but are not limited to those focused on digital asset mining, transactions, hardware, and integration. Such companies are also required to meet certain market capitalization and liquidity requirements. In particular, eligible companies’ market capitalization must be no lesser than $50 million, with also a minimum three month average daily turnover of at least $500,000.

This ETF’s holdings are mostly classified under financials, with just over a quarter devoted to technology. All but a quarter of BKCH’s holdings are headquartered within the United States. Non-United States appearances in this fund are mainly in Canada and China. These locations are associated with heavy cryptocurrency use , hence their high concentration of blockchain establishments.

The top 10 holdings in this ETF account for 74% of the overall portfolio, which consists of a mere 25 holdings. This makes BKCH very top-heavy. The top two holdings in BKCH are Riot Platforms Inc. ( RIOT ) and Block Inc. (SQ), which together account for more than a quarter of the entire fund.

This is likely to only add to the inherent volatility possessed by blockchain funds, and fuel this ETF’s drastic price fluctuations. Investors may want to consider the possibility of concentration risk eating into their returns, especially as some of BKCH’s top holdings have highly unstable price trends.

Strengths

The blockchain industry is well-positioned for growth especially as its services extend past the domain of crypto. At a rate of 56%, the North American blockchain market could grow to almost $165B by 2029. Blockchain growth in the long term could significantly drive up the price of this ETF, especially as it is still in its early growth stages.

Small-cap assets have come to light recently as investors are turning to early growth potential amid the prospect of a market turnaround. Though the market is likely due for more hikes before a reversal, smaller funds like BKCH that follow emerging trends could be some of the first to profit from a revitalized economy. During this time, investors could become more open to putting money in more volatile securities with more room for long term growth. This could even give BKCH an edge over BLOK, as BLOK has already had several years to prove itself at this point.

Weaknesses

This ETF is quite volatile similar to other funds that are heavily focused on blockchain and crypto. Since crypto is often fueled by speculation and less by educated investing and research, its associated assets are known to move erratically.

Despite having outperformed the market so far this year, this ETF moves quite spontaneously which could make it very hard to assess its trajectory in the future. During the current market conditions where uncertainty is already rampant, many investors may deem the risk unworthy and eventually sell their shares.

When looking back to the moment of its inception, this ETF’s movements have been far from consistent.

From the chart above, BKCH appears to outperform the S&P for almost a half a year, only to relentlessly decline for the next year and beyond. BKCH may have a fundamental problem with stability, which could hurt its performance in the long-term despite being a potentially profitable investment. Furthermore, BKCH is more likely to have underlying liquidity issues compared to alternatives like BLOK. This is due to the fact that this ETF is relatively smaller and undiscovered compared to some of its peers.

Opportunities

Integrations of blockchain technology into bank payment systems could drive the blockchain market to new heights within the next few years. With time, banks could begin to use blockchain to enhance the speed, security, and transparency of their payment systems. This could work to foster a closer, more profitable connection between the industries of blockchain, financials, and fintech.

In addition to banking, blockchain is continuously fortifying its position in energy trade, which could position it well for long term profit. For example, GridPlus is a blockchain energy company that specializes in wholesale energy distribution. In doing so, GridPlus utilizes internet of things (IoT) and blockchain mechanisms to allow consumers to make energy transactions directly with the grid rather than with retailers. As blockchain gains popularity, more companies like GridPlus could emerge, hence driving up the profits of the blockchain market and BKCH alike.

Threats

The cryptocurrency industry could face scalability barriers in the coming periods, which could ultimately eat into the profits of BKCH. In this regard, blockchain could have trouble handling a large volume of transactions within a short period of time without running into network problems and congestion. This could ultimately require relevant companies to sacrifice some degree of decentralization, which could be detrimental for the blockchain industry.

Cryptocurrency has before been subject to environmental scrutiny, as mining crypto involves extensive electricity consumption, which ultimately proliferates carbon emissions. Though it generally requires energy to protect the value of assets, crypto’s ability to generate alpha in the long-term is still up for questioning, and could become unproportional to the carbon footprint it leaves. With time, this could damage the reputations of various institutions within BKCH and ultimately drive down the price of this ETF.

Though many have come to associate crypto mining with environmental costs, this predicament has also catalyzed the growth of new, more environmentally-conscious cryptocurrencies. Such currencies may include Tezos (XTZ-USD) and Ethereum (ETH-USD). Time will tell if these investment vehicles’ ability to profit can match their energy expenditures.

Conclusion

This ETF is likely to struggle with both momentum and maintaining stable performance in the coming periods. At the same time, those who wish to gain exposure to blockchain and crypto may want to consider more veteran funds like BLOK, as smaller ETFs could have trouble gaining enough momentum for the time being. This is likely to continue being the case as the economy is positioned for more rate hikes throughout the rest of this year and possibly next year as well. For these reasons, I rate BKCH a Hold.

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