For investors curious about crypto but don’t want to buy it, a blockchain ETF could be an interesting middle ground.
Blockchain technology – referring to a decentralized, unalterable digital record of transactions – is the foundation upon which cryptocurrency is built. A blockchain ETF allows investors to buy into a fund that includes shares of multiple companies that invest in or already use blockchain technology.
[READ MORE:] What is blockchain?
If you decide to invest in cryptocurrency through a blockchain ETF or by buying crypto directly, experts say you should keep your holdings less than 5% of your total portfolio. It’s also important to never invest in these speculative assets at the expense of not meeting other financial goals, like paying off high-interest debt and investing for retirement.
Here’s how it works for investing in blockchain ETFs:
How to invest in blockchain
At a high level, investing in blockchain means investing in companies that either develop blockchain technology or use it in their business infrastructure. Big banks, Amazon, and even credit card issuers have announced new investments in blockchain technology in recent months, so the list of companies exploring and integrating the technology is growing fast with big, familiar names.
These businesses and businesses that rely on blockchain infrastructure are what you would be looking to invest in. “We are now starting to see companies overlapping this infrastructure,” says Theresa Morrison, CFP and co-founder of Beckett Collective, a financial consulting firm.
Read more: What is blockchain? The ‘transformative’ technology behind Bitcoin, explained
Another way to invest in blockchain technology would be to look at companies involved in blockchain mining, in other words, companies that operate large-scale IT operations in order to mine cryptocurrencies. or to support these activities in some other way. Some examples are Marathon Digital Holdings, RIOT Blockchain, and Galaxy Digital.
Crypto mining is very complex and can be resource-intensive, so investing in front-line businesses allows everyday investors to avoid the complicated part, while still investing their money in cutting-edge companies. cryptocurrency. “You don’t want to be the one digging in the mountain hoping to find a vein, you want to be the one selling pickaxes and shovels in town,” says Morrison. “So mining in the blockchain world is kind of like providing pickaxes and shovels. “
But just as experts advise against selecting individual stocks, investing in a single blockchain-related company is a riskier proposition than investing in a fund that contains multiple blockchain-related stocks. While any cryptocurrency investment is subject to increased risk and volatility, a blockchain fund allows investors to spread that risk across many companies, and do so as part of a retirement or retirement account. investment they already have.
ETFs, or exchange-traded funds, are baskets of investments that can include stocks, bonds, or even other commodities. Blockchain ETFs are ETFs that include stocks of companies known to have invested in or incorporated blockchain technology into their business. And like any ETF, investors should consider which companies are included and what that means for your overall portfolio.
You can minimize your risk by investing in an ETF that owns companies involved in blockchain, but you still shouldn’t view these funds as necessarily low risk. “The most important thing to understand when investing in blockchain ETFs is knowing which securities are actually in the fund,” says Michael Kelly, CFP at Switchback Financial. “The term blockchain has a very broad definition these days. ”
Because of this broad definition, blockchain ETFs can vary widely in terms of risk, Kelly explains. “Understanding what you are actually investing your money in with the fund is crucial. ”
Kelly recommends looking for a fund that owns well-known large-cap companies like Square, Microsoft, IBM, or Visa – all companies that could be included in a blockchain ETF based on their incorporation of the technology into their business models. You should also be careful of the additional costs associated with investing in ETFs as they can be more expensive than traditional ETFs depending on what they hold.
Many traditional ETFs have low expense ratios, but the specialist versions can often have an expense ratio closer to 1%, which experts say is quite expensive. While you may decide that additional costs like this are worth it for a specialized small portion of your portfolio, experts agree that the best way to invest for long-term wealth is to use index funds with expense ratios of 0.2% or less.
Examples of Blockchain ETFs
Blockchain ETFs can include well-known companies like Paypal or IBM, as well as lesser-known startups like Galaxy Digital. With any ETF, look for the lowest expense ratio you can find. You can also compare it to other ETFs, such as an S&P 500 fund, using the etf.com comparison tool.
Here are the three largest blockchain ETFs by total assets:
BLOK (ETF Amplify Transformational Data Sharing)
- Largest blockchain ETF by total assets
- Main titles: PayPal, MicroStrategy, Square
- Return over 3 years: 162.43%
- Expense ratio: 71%
BLCN (Siren Nasdaq NexGen Economic ETF)
- Main titles: Coinbase, Accenture, Square
- Return over 3 years: 108.64%
- Expense ratio: .68%
LEGR (First Trust Indxx Innovative Transactions and Processes ETFs)
- Main titles: NVIDIA, Oracle, Fujitsu
- Return over 3 years: 53.50%
- Expense ratio: .65%
Should You Invest In Blockchain ETFs?
Just as you should never invest in cryptocurrency at the risk of not meeting other financial goals, you should view speculative blockchain technology investments the same way. If you are interested in cryptocurrency and blockchain technology, know and accept the risks, and have money that you would like to invest, then blockchain ETFs can give you exposure without investing in crypto directly.
Another advantage of investing in a blockchain ETF instead of cryptocurrency is “it’s available in the traditional old-timer market. You can put it in your IRA or in a Roth, or in a taxable account. It’s a great way to market yourself, ”says Morrison.
While you cannot buy cryptocurrency through a broker or in your tax-advantaged retirement accounts, you can buy a blockchain ETF this way. But even within a tax-efficient account like a Roth IRA, be sure to keep speculative investments, like blockchain ETFs, to less than 5% of your total portfolio.
Most of the experts we turn to for advice believe that the best way for investors to build wealth for the long term is to invest in low cost index funds, especially your IRA and 401 (k) accounts. ). Specialty blockchain ETFs or cryptocurrency can be a healthy part of an overall portfolio, as long as they don’t represent more than a very small portion of your overall investments.
Bitcoin and other crypto ETFs
Investors in the United States currently cannot purchase cryptocurrency through an ETF that directly holds the currency. The only similar option is private trusts that hold cryptos, like Grayscale Bitcoin Trust or Osprey Bitcoin Trust.
But backgrounds like this come with hoops and added complexities to navigate. “I’m not really a fan of investing in this particular way,” says Morrison. “It’s an expensive way to get exposure to something that you can just buy directly from Coinbase.”
Also, if your goal is to gain exposure without buying and owning the coins yourself, investing in a fund that directly holds the currency is just one step removed, and it will be just as volatile and risky as it is. ” buy the parts while paying fees and commissions.