For investors who are curious about crypto but don’t want to actually buy any, a blockchain ETF could be an interesting middle ground.
Blockchain technology — referring to a decentralized and unalterable digital record of transactions — is the foundation on which cryptocurrency is built. A blockchain ETF lets investors buy into a fund that includes shares of multiple companies that are investing in or already using blockchain technology.
[READ MORE:] What is Blockchain?
If you do decide to invest in cryptocurrency via a blockchain ETF or by buying crypto directly, experts say you should keep any holdings to 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 to invest in blockchain ETFs:
How to Invest in Blockchain
At a high level, investing in blockchain means investing in companies that are developing blockchain technology or using it in their business infrastructures. Big banks, Amazon, and even credit card issuers have announced new investment in blockchain technology in recent months, so the list of companies exploring and incorporating the technology is quickly growing with big, familiar names.
These companies and businesses leaning on the blockchain infrastructure are what you would look to invest in. “We’re now starting to see businesses layering on top of these infrastructures,” says Theresa Morrison, a CFP and co-founder of the Beckett Collective, a financial advisory firm.
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 computing operations in order to mine cryptocurrencies, or support those 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 companies on the front lines lets everyday investors skip the complicated part, but still put their money into businesses at the forefront of cryptocurrency. “You don’t want to be the one out digging in the mountain hoping you find a vein, you want to be the one in town selling the picks and shovels,” says Morrison. “So mining in the blockchain world is a bit like providing the picks and shovels.”
But just like experts advise against individual stock picking, 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 greater risk and volatility, a blockchain fund lets investors spread that risk over many companies, and to do it within a retirement or investing account 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 shares of companies known to have invested in or incorporated blockchain technology into their business. And just like any ETF, investors should consider what companies are included, and what that means for your overall portfolio.
You can minimize your risk by investing in an ETF that holds blockchain-involved companies, but you still shouldn’t consider these funds to be necessarily low-risk. “The biggest thing to understand when investing in blockchain ETFs is what holdings are actually in the fund,” says Michael Kelly, a CFP at Switchback Financial. “The term blockchain carries a wide-ranging definition these days.”
Because of that wide-ranging definition, blockchain ETFs can vary significantly in terms of their risk, says Kelly. “It’s crucial to understand what you are actually putting your money into with the fund.”
Kelly recommends looking for a fund that holds large-cap, well-known 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 pay attention to any additional costs associated with investing in the ETF as they might be more costly than traditional ETFs depending on what they hold.
Many traditional ETFs have low expense ratios, but specialized versions can often carry an expense ratio closer to 1%, which experts agree is pretty pricey. While you might decide extra costs like this are worth it for a small, specialized portion of your portfolio, experts agree the best way to invest for long-term wealth is via index funds with expense ratios of .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 etf.com’s comparison tool.
Here are the three biggest blockchain ETFs by total assets:
BLOK (Amplify Transformational Data Sharing ETF)
- Largest blockchain ETF by total assets
- Top holdings: PayPal, MicroStrategy, Square
- 3-year return: 162.43%
- Expense ratio: .71%
BLCN (Siren Nasdaq NexGen Economy ETF)
- Top holdings: Coinbase, Accenture, Square
- 3-year return: 108.64%
- Expense ratio: .68%
LEGR (First Trust Indxx Innovative Transaction & Process ETF)
- Top holdings: NVIDIA, Oracle, Fujitsu
- 3-year return: 53.50%
- Expense ratio: .65%
Should You Invest in Blockchain ETFs?
Just like you should never invest in cryptocurrency at the risk of not meeting other financial goals, you should view speculative investments in blockchain technology similarly. If you’re interested in cryptocurrency and blockchain technology, know and accept the risks, and have money you’d like to invest, then blockchain ETFs can give you exposure without directly investing in crypto.
Another pro to investing in a blockchain ETF instead of cryptocurrency is “it’s available in the traditional legacy market. You can put it in your IRA or in a Roth, or in a taxable account. It’s a great way to get exposure,” says Morrison.
While you can’t buy cryptocurrency through a broker or within your tax-advantaged retirement accounts, you could buy a blockchain ETF that way. But even within a tax-advantaged account like a Roth IRA, make sure you keep speculative investments, like blockchain ETFs, to less than 5% of your total portfolio.
Most experts we turn to for advice believe the best way for investors to generate wealth in the long-run is by investing in low-cost index funds, especially within your IRAs and 401(k) accounts. Specialized blockchain ETFs or cryptocurrency can be a healthy part of an overall portfolio, so long as it doesn’t represent more than a very small portion of your overall investments.
Bitcoin and Other Crypto ETFs
Investors in the United States can’t currently buy cryptocurrency through an ETF that directly holds the currency. The only similar option is private trusts that hold crypto, like Grayscale Bitcoin Trust or Osprey Bitcoin Trust.
But funds like this come with extra hoops and complexities to navigate. “I’m not really a fan of investing that particular way,” says Morrison. “It’s an expensive way to get exposure to something that you can just buy right in Coinbase.”
Plus, if your aim is to get exposure without buying and holding 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 actually buying the coins while also paying fees and commissions.