Summary Despite BLOK’s steep price drop, I can still only get to a Hold rating on this volatile ETF. BLOK invests in stocks focused on blockchain technology, many of which happen to be involved in cryptocurrency. I’m bullish on blockchain and bearish on cryptocurrency, and I believe blockchain has potential in many industries that don’t involve crypto as the world becomes increasingly technology-oriented. The Amplify Transformational Data Sharing ETF ( BLOK ) is in many ways the mother of blockchain funds. Blockchain was originally created for the purpose of recording cryptocurrency transitions, but has recently shown to be potentially integral in industries with no involvement in crypto. Blockchain’s underlying infrastructure is creative and has shown to be effective, which is why I believe more firms may capitalize on this technology in the future. Adoption of blockchain technology could increase companies’ profits in the long-term through reducing transaction costs as well as enhancing the efficiency and transparency of transactions. However, these long-term prospects do not change the fact that BLOK is very volatile and attaining long-term profits could require some serious trust and self-control. This leads me to take a neutral stance with this ETF and rate it a Hold. BLOK’s price trend since its inception in 2018 resembles that of a roller coaster that drives one up into the air only to send them plunging down moments later, then repeating this several times until the rider is sick to their stomach. In this case, the rider is an investor, and the roller coaster's next steep incline or drop are quite hard to predict. That being said, just like someone with a weak stomach shouldn’t ride an adrenaline-pumping roller coaster, investors with limited risk-tolerance might want to stay away from BLOK. ETF Profile Strategy BLOK tracks the MSCI ACWI NR USD Index. This index’s selections and weighting are determined by the results of proprietary research. This ETF also strongly overweights small cap companies, giving it a small tilt compared to its benchmark. BLOK MSCI FaCS and Factor Box (etf.com) In determining the weight of each holdings in this ETF, companies are first assessed on their involvement in the utilization and development of blockchain technology. Criteria include the degree of participation in research and development of transformational data sharing technology as well as their ability to profit from its expansion. Furthermore, companies are also noted for having partnerships and affiliations with companies focused on blockchain. Qualifying companies are then classified as either core or secondary based on their forecasted ability to derive revenue from blockchain expansion and hence drive the price of BLOK. BLOK is also actively managed, meaning that its management will periodically adjust weightings to ensure that this ETF is optimally-positioned for growth amid various external conditions. Holdings Analysis BLOK’s holdings mainly reside within the sectors of technology and financials, sparing only a fifth of holdings to companies not affiliated with these sectors. Companies within this ETF are predominantly located in the United States. BLOK also represents non-U.S. regions like Japan and Canada which account for almost a third of geographical composition. This composition enhances geographical diversification but can also create currency risk, both of which investors may want to keep in mind. Institutions within BLOK are mainly centered on the development and utilization of blockchain-based transformational data sharing systems. The top 10 holdings account for 43% of the entire fund while the top 25 comprise 81%. Given that this ETF consists of 46 holdings, BLOK could be considered decently top heavy, meaning investors might want to consider relevant concentration risks. ETF Fundamentals: Underlying Factors Strengths BLOK may provide quality exposure to the blockchain market, which could be well-positioned for growth in the upcoming periods. The global blockchain market could reach almost $165B in revenue by 2029, growing at a CAGR of 56%. The chart below depicts the market forecast for blockchain in North America alone. North America Blockchain Market Size, 2018-2029 (USD Billion) (Fortune Business Insights ) Blockchain could have some serious momentum that could earn greater recognition with time, making BLOK a potentially attractive investment for those bullish on technology and finance. BLOK’s relatively high AUM and longer track record distinguish it from many of its peers and could give it an edge in the long run. Blockchain itself is a pretty nascent invention whose popularity surged only within the last 5-10 years. As a result, the blockchain ETF market is home to a lot of smaller funds with more fundamental liquidity issues. As these are BLOK’s competitors, this ETF’s higher liquidity and more developed grounding could make it a more compelling investment. Weaknesses BLOK’s higher AUM could grant it some power over its peers, but this ETF’s overweighting of small-cap stocks could bring its own detrimental implications. I’ve previously addressed how small-cap companies could grant advantages during a market reversal as they provide exposure to early stages of long-term growth. However, small-cap overweighting is also associated with greater volatility and larger price fluctuations, which are apparent in this fund. This ETF also underweights stocks characterized by momentum, quality, and low volatility. These qualities could explain BLOK’s erratic movement relative to that of the S&P, which is visualized later in this article. Furthermore, this ETF’s turnover is somewhat high, which could shed light on its high costs, lack of transparency, and possible susceptibility to tracking error. Seeking Alpha Past Performance And Future Implications BLOK Vs. The S&P: Powered By Speculation and Hype BLOK exploded in price a couple years after its inception, only to one year later incur a greater decline than that of any ETF I have covered thus far. Such erratic performance is likely attributable to BLOK’s investments in companies involved in the mining and trade of cryptocurrency, particularly Bitcoin USD ( BTC-USD ). Data by YCharts From the chart, it is apparent that his ETF is highly volatile, just like cryptocurrencies themselves. Therefore, BLOK is likely vulnerable to the effects of hype and speculation that mainly surround crypto. During the last year, not only has this ETF underperformed against the broader market, but its performance is highly inconsistent and moving choppily. Data by YCharts The same case appears to only get worse when narrowing in on the last six months. Data by YCharts On a different note, BLOK appears to be outperforming the broader market so far this year, but its price trend is still far from steady. Data by YCharts BLOK has clearly picked up some momentum this year. However, this ETF’s past performance combined with the generally volatile tendencies of crypto make me question whether this momentum is actually warranted or just fueled by trigger-happy speculators. BLOK Vs. Peers During the past year, BLOK has outperformed some of its potential alternatives, but is still an inferior option in several respects. Data by YCharts As depicted in the chart above, this ETF outperformed the Global X Blockchain ETF ( BKCH ) and the iShares Blockchain and Tech ETF ( IBLC ), showing that it may have some advantages against other funds with a similar focus. However, BLOK also may have some underlying disadvantages against the First Trust Indxx Innovative Transaction & Process ETF ( LEGR ), which it appears to underperform against. This performance gap is likely attributable to LEGR’s relatively lesser expenses and risks while offering many of the same benefits as the more volatile BLOK. What Is Next For Blockchain And BLOK? Opportunities Blockchain could encounter many new opportunities for expansion in the coming periods as non-crypto companies become more dependent on technological innovation. Expansion targets may include but are not limited to healthcare , finance , and supply chain management. I could see more companies within these fields adopting blockchain technology with time, which could ultimately drive up the price of BLOK. Though investors could be in for some serious price fluctuations along the way, holding this ETF may generate significant returns with patience. Threats Innovations like blockchain are great but also create a lot of new potential targets for hackers . Blockchain in particular opens several doors to certain kinds of cyberattacks that are left closed by other technological systems. Blockchain is uniquely vulnerable to 51% attacks which occur when a hacker gains ownership of more than half of the nodes within a network, allowing them to manipulate blockchain data as they please. This could mean reversing previous transactions as well as preventing future transactions from processing. Such attacks increasing as blockchain grows could potentially hurt the profits of BLOK by demanding heavy theft reparations expenses and diminishing trust in blockchain technology. Blockchain’s services could extend beyond crypto with time, but BLOK is still heavily exposed to crypto stocks that are weighed down by their volatility. In short, blockchain can exist without crypto, but it’s harder to see crypto existing without blockchain as crypto today is so heavily dependent on it. On this same note, I think the prices of crypto may well decline in the long-term. This could result from more investors realizing that cryptocurrencies aren’t that sound of an investment and pose numerous downsides to traditional investment vehicles like stocks, bonds, and real estate. Conclusion BLOK could well profit in the coming periods from ongoing developments in the realm of technology, but its volatility and crypto-focus could hinder both its stability and overall performance down the road. For this reason, I rate BLOK a Hold. As interesting as blockchain is to research, this ETF seems to be more unpredictable than any I have covered thus far. Therefore, I believe its audience may be limited to those with high tolerance to price fluctuations. Blockchain could nonetheless go far and benefit those who utilize its technology, but those eager to tag along on this journey may be in for a very bumpy ride.
