Exchange-traded funds (ETFs) are an easy way for investors to gain exposure to securities they don't want to hold directly. As many index a specific industry or sector, investors can invest in the knowledge their portfolio will grow when that sector experiences growth, or contract when it falls. And, just as with other industries, commodities, and stocks, there are plenty of investors taking a good look at the ever-expanding blockchain industry, leading to the creation of blockchain ETFs.
So, what is a blockchain ETF, and how does it work?
What Is An ETF?
Firstly, let's discuss ETFs. An ETF is, in simple terms, a basket of securities sold on an exchange. Securities include stocks, bonds, mutual funds, and so on. These are often designed to reflect a certain market sector to track how that specific sector is performing.
An ETF can do this by purchasing the commodities that make up whatever section of the market is being tracked, but they can also track individual assets. ETFs can be traded on an exchange like any stock, unlike mutual funds, so their price constantly fluctuates between trades.
An ETF typically receives investments from multiple sources and pools them together. The process of making an ETF is complex, so we won't dive into that today.
Many different ETFs are used today, including commodity, stock, bond, and industry or sector ETFs, under which umbrella blockchain ETFs reside. So, let's get into the fundamentals of blockchain ETFs.
What Is a Blockchain ETF?
A blockchain ETF, then, will invest solely in blockchain-based companies. You may think that blockchain technology is pretty exclusive to cryptocurrency, but this isn't the case at all. A number of organizations incorporate blockchain technology into their infrastructure, including voting systems, lending services, real estate businesses, and data storage platforms. Even Amazon uses blockchains in some of its operations!
There are several big blockchain ETFs out there right now, including the Siren NASDAQ NexGen Economy and Bitwise Crypto Industry Innovators ETFs. While their names are a little long and confusing, these ETFs share the goal of investing in promising companies to generate a return. Any investors with a stake in the fund are paid in yearly dividends if the fund, and its securities, perform well enough to generate a profit (though not all ETFs pay a dividend).
Each company that has the potential to be part of a blockchain ETF is given a blockchain score, which indicates how influential the company is in the blockchain industry and therefore determines whether it would make a promising addition to the ETF. The companies that land one of the top spots on this score league are then introduced to the ETF.
Who Can Invest in a Blockchain ETF?
Anyone can invest in blockchain ETFs, and this investment option is currently gaining traction with the popularity of blockchain technology through crypto. However, blockchain ETFs are still pretty new and, like the cryptocurrency industry, are therefore seen as a little risky. While there are many successful companies out there that use blockchain technology, many have not succeeded, and this is the point of contention surrounding these funds.
Is a Blockchain ETF the Same as a Bitcoin ETF?
It's important not to get blockchain ETFs mixed up with Bitcoin ETFs and Ethereum ETFs, also known as cryptocurrency ETFs. While blockchain ETFs span across all kinds of companies using blockchain tech, the value of a cryptocurrency ETF relies solely on the value of the token it is associated with, which generally makes them even more volatile than blockchain ETFs could ever be. Their primary use is to gain exposure to cryptocurrency markets without holding the asset itself.
Blockchain ETFs Could Become Major Players
With blockchain technology becoming progressively more popular, we may soon see a lot more people investing in blockchain ETFs as a way to get in on the action and make a buck from this budding industry. While this kind of fund is still relatively new, it could have an exciting future if the rise of the blockchain continues over time.