SINGAPORE (Feb 26): In 2015, the World Economic Forum projected that 10% of global GDP would likely to be stored on blockchain platforms by 2027. Our Market Watch story on Page 25 highlights a few companies whose products and services are in demand as financial services companies focus on commercialising blockchain and distributed ledger technologies (DLT) for their transactions.
Following heightened attention on cryptocurrencies in the closing months of 2017, four so-called blockchain exchange-traded funds launched in quick succession in January this year. At first glance, their component stocks are familiar US and Asian tech names. None of the ETFs have sufficient history to gauge their performance, having just gotten listed.
With banks, stock and futures exchanges, and central banks so involved in DLT, it is no surprise that banks are components in these new ETFs. Among them, BOC Hong Kong (Holdings), Citigroup, Goldman Sachs and Deutsche Boerse are components in a couple of ETFs; so too is the Nasdaq.
In another first, the US Securities Exchange Commission asked the providers of the ETFs to remove the word “blockchain” from the fund names, supposedly to calm investor obsession with the word. There was no such restraint for the Toronto Exchange, however. The first Canadian blockchain ETF — Blockchain Technologies ETF — was listed on Feb 7.
Riot Blockchain exposé
Blockchain Technologies ETF is different from the four US-listed ETFs in that its mandate allows it to also invest in equity-related securities, which would include convertible debt, income trust units, single issuer equity options, preferred shares and warrants. Its components are somewhat more aggressive. The stock with the largest weightage is Nasdaq-listed Riot Blockchain. This company, which was previously called Bioptix and had a patent for a veterinary product, took its present name last October.
In November, Riot Blockchain acquired some cryptocurrency mining equipment, consisting of 1,200 mining rigs, from Bitmain Technologies, a private Chinese company that makes application-specific integrated circuits for mining bitcoin. Bitmain also operates Antpool, one of the largest mining pools in the world. A mining pool is the pooling of resources by miners mining for the same crypto coins, and then splitting the proceeds of the coins.
On Feb 16, Riot Blockchain’s shares collapsed after a CNBC exposé indicated that a major shareholder was exiting. According to the report, annual meetings were being postponed at the last minute. CNBC also claimed there was insider selling soon after the name change and dilutive issuances on favourable terms to large investors. Since then, a shareholder has filed a suit against the company. Shareholders are upset that the mining rigs acquired from Bitmain for US$11 million ($14.5 million) are estimated to be worth only US$2 million.
New ETFs hold largely traditional components
The new ETFs were not just launched in the same month, their components are similar too. As they claim to be blockchain ETFs, their main weightings include the most obvious hardware and software providers. NVIDIA, Advanced Micro Devices and Intel are a common thread. Other familiar hardware names include the Taiwanese foundries, Taiwan Semiconductor Manufacturing Co and United Microelectronics Corp. These are providers of the hardware necessary for blockchain and DLT pilots being undertaken by service providers such as International Business Machines and Microsoft, which are also components of the ETFs.
Interestingly, Overstock.com is a component in three ETFs. George Soros’ Quantum Fund took an 8.99% stake in Overstock last November. The company is an ecommerce platform for items such as home décor and furniture. However, it announced last year that it planned to commence digital coin trading. Additionally, Overstock is part of a consortium called tZero, which is attempting to produce a distributed ledger platform for capital markets.
Another upstart that has appeared in these ETFs is HIVE Blockchain Technologies, a company involved in mining cryptocurrencies. Unlike Riot Blockchain, HIVE says it is cash flow-positive. However, it made a loss of US$19.8 million for the three months to Nov 30, 2017.
The US-listed ETFs are available on Nasdaq and NYSE Arca, and accessible via local brokers with a US link, TD Ameritrade and Saxo Capital Markets
US-listed blockchain ETFs
Amplify Transformational Data Sharing ETF was listed on Jan 17 and is the largest of the quartet with an asset size of US$120.8 million ($159.6 million). Most of the fund is invested in equity, with less than 1% in cash and other investments. It is actively managed, has the highest expense ratio and states that its focus is to invest in companies developing or utilising transformational data-sharing technologies. These companies will primarily include, but are not limited to, those developing or utilising blockchain-based and other distributed ledger technologies.
Reality Shares Nasdaq NexGen Economy ETF was also listed on Jan 17, sticks to bigger companies and devotes a larger share of assets overseas to companies such as SBI Holdings, Deutsche Boerse and Hitachi. It also holds BOC Hong Kong (Holdings), Tencent Holdings, Alibaba Group Holding and Fujitsu.
First Trust Indxx Innovative Transaction & Process ETF tracks the price and yield (before the fund’s fees and expenses) of an index called the Indxx Blockchain Index. It invests in three types of companies. The first are companies actively developing blockchain technology products or systems for their own internal use and for the sale and support of other companies. Second are those that are direct service providers for blockchain technology. Third are companies with business models that rely on delivering products or services that use blockchain technology.
Innovation Shares NextGen Protocol ETF tracks the Innovation Labs Blockchain Innovators Index. It is invested mainly in equity, largely in the US and Asia, and in large-cap traditional tech stocks.
