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For investors who are curious about crypto but don’t really want to buy one, a blockchain ETF can be an interesting middle ground.
Blockchain technology – referring to a decentralized and immutable digital record of transactions – is the foundation upon which cryptocurrency is built. With a blockchain ETF, investors can buy into a fund that contains 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 to less than 5% of your total portfolio. It is also important never to invest in these speculative assets at the cost of failing to achieve other financial goals, such as paying off high-yield 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 develop or use blockchain technology in their business infrastructures. big banks, Amazonand 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 rapidly with big, household names.
You would want to invest in these companies and companies that lean on the blockchain infrastructure. “We are now starting to see companies coming on top of these infrastructures,” says Theresa Morrisona CFP and co-founder of the Beckett Collective, a financial consulting firm.
Read more: What is blockchain? The ‘Transformative’ Technology Behind Bitcoin, Explained
Another way to invest in blockchain technology is to look at companies involved in blockchain mining – in other words, companies that conduct large-scale computing to mine cryptocurrencies, or otherwise support those activities. Some examples are Marathon Digital Holdings, RIOT Blockchain and Galaxy Digital.
Crypto mining is very complex and can be resource-intensive, so investing in frontline companies allows ordinary investors to skip the complicated part, but still put their money into companies that are at the forefront of cryptocurrency. “You don’t want to be the one digging in the mountains hoping to find a vein, you want to be the one in town selling the picks and shovels,” Morrison says. “So mining in the blockchain world is a bit like providing the picks and shovels.”
But just as experts advise against individual stock selection, investing in a single blockchain-related company is a riskier proposition than investing in a fund containing 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 to do it within a retirement or investment 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 hold shares of companies known to have invested in or integrated blockchain technology into their business. And as with 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 with 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 what positions are actually in the fund,” said Michael Kelly, a CFP at Switchback Financial. “The term blockchain has a broad definition these days.”
Because of that broad definition, blockchain ETFs can vary significantly in terms of their risk, Kelly says. “It’s critical to understand what you’re actually putting your money into with the fund.”
Kelly recommends looking for a fund with large-cap, well-known companies such as Square, Microsoft, IBM or Visa – all companies that can be included in a blockchain ETF based on their integration of the technology into their business models. You should also keep an eye out for any additional costs associated with investing in the ETF, as they may be more expensive than traditional ETFs, depending on what they contain.
Many traditional ETFs have low expense ratios, but specialized versions can often have expense ratios closer to 1%, which experts say is quite pricey. While you may decide that such extra expense is worth it for a small, specialized portion of your portfolio, experts agree that the best way to invest for long-term wealth is through index funds with expense ratios of 0.2% or less.
Examples of Blockchain ETFs
Blockchain ETFs can include well-known companies such as Paypal or IBM, as well as lesser-known startups such as Galaxy Digital. At 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 largest blockchain ETFs by total assets:
BLOK (Amplify Transformational Data Sharing ETF)
Largest Blockchain ETF by total assetsTop Positions: PayPal, MicroStrategy, Square3-Year Yield: 162.43% Expense Ratio: 0.71%
BLCN (Siren Nasdaq NexGen Economy ETF)
Top Positions: Coinbase, Accenture, Square 3-Year Yield: 108.64% Expense Ratio: 0.68%
LEGR (First Trust Indxx Innovative Transaction & Process ETF)
Top Positions: NVIDIA, Oracle, Fujitsu 3-Year Yield: 53.50% Expense Ratio: 0.65%
Should You Invest in Blockchain ETFs?
Just as you should never invest in cryptocurrency at the risk of failing other financial goals, you should view speculative investments in blockchain technology the same way. If you are interested in cryptocurrency and blockchain technology, know and accept the risks, and have money you would like to invest, blockchain ETFs can give you exposure without investing directly in crypto.
Another benefit of investing in a blockchain ETF over cryptocurrency, for the most part, 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,” Morrison says.
The recent launch of the BITO Bitcoin ETF allows you to invest in crypto within traditional accounts, but it is the first of its kind and still very speculative.
In general, if you want to buy crypto within your tax-advantaged retirement accounts, you should buy a blockchain ETF. But even within a tax-advantaged account like a Roth IRA, make sure to keep speculative investments, such as blockchain or crypto ETFs, to less than 5% of your total portfolio.
Most of the experts we consult believe that the best way for investors to generate wealth over the long term 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, as long as it does not represent more than a very small portion of your total investments.
Bitcoin and other crypto ETFs
Investors in the United States currently cannot buy cryptocurrency through an ETF that holds the currency directly – even BITO does not have Bitcoin directly, but Bitcoin futures, which are different. The only comparable option is private trusts that hold crypto, such as Grayscale Bitcoin Trust or Osprey Bitcoin Trust.
But funds like these come with additional hoops and complexities to navigate. “I’m not really a fan of investing that way,” Morrison says. “It’s an expensive way to get exposure for something that you can just buy in Coinbase.”
And if your goal is to gain exposure without buying and holding the coins themselves, investing in a fund that holds the currency directly is just one step away, and it will be just as volatile and risky as actually buying the coins while also paying fees and commissions.