These new funds offer indirect exposure to blockchain and bitcoin. But buyer beware

These new funds offer indirect exposure to blockchain and bitcoin. But buyer beware
  • Blockchain technology is in the early stages of development, much like the internet was in the 1990s and early 2000s.
  • As the technology evolves, winners and losers will emerge, which could usher in high gains and losses for investors.
  • As new funds provide some access to these trends, financial advisors still warn individual investors to be cautious.

If you’re curious about trendy blockchain and cryptocurrency, yet don’t know where to start, there’s good news: Financial firms are making it easier to get some exposure to these investments.

However, you could still lose all of the money you put into this volatile space, experts warn.

Blockchain has the potential to be a truly disruptive technology that could change the way all kinds of economic activity is handled, said Jim Sinegal, senior equity analyst at Morningstar, at the firm’s recent investment conference.

“Ignoring blockchain today is like ignoring the internet 30 years ago,” Sinegal said.

However, as with the early days of the internet, winners and losers will emerge.

“We’re going to see a lot of successes and failures, things that happen in 2018, 2019 that don’t necessarily reflect on the entire future of blockchain and decentralized technology,” Sinegal said.

Even as traditional financial firms grapple with how to integrate access to this developing market, many investment professionals still signal caution.

New funds

There are about 10 funds including both exchange-traded funds and mutual funds that offer some exposure to blockchain, according to Tayfun Icten, senior analyst focusing on alternative strategies at Morningstar.

The Securities and Exchange Commission currently does not allow those funds to invest directly in cryptocurrencies like bitcoin, Icten said.

And Morningstar does not cover these funds and has not rated them. “I am hesitant to even quote any of these funds,” Icten said.

Lipper, another fund research firm, also does not track these funds, according to a company spokesman.

The funds generally invest in emerging technologies, including companies that utilize blockchain, Icten said. The funds are also still small in terms of asset size and experimental in nature, he said.

Blockchain exchange-traded funds

Fund Symbol Net assets
Amplify Transformational Data Sharing BLOK $184.4M
Reality Shares Nasdaq NexGen Economy BLCN $124.5M
First Trust Indxx Innovative Transaction & Process LEGR $44.3M
Innovation Shares NextGen Protocol KOIN $13M
REX BKCM BKC $6M
Reality Shares Nasdaq NexGen Economy China BCNA $2.3M

Some of the funds also invest in larger companies that are working directly with blockchain, such as IBM, which is trying to establish itself as a leader with this technology, and Overstock.com, which accepts bitcoin for payments.

The question for investors who invest in these companies — either directly or indirectly — is whether they are true blockchain bets.

“It’s unclear as to what percent of IBM business is even linked to this technology at this point,” Icten said. “Investors need to make sure that it really moves the needle for IBM before they consider it to be a related investment opportunity.”

Bitcoin futures

One firm that has been ready and willing to experiment with these investments is TD Ameritrade.

When the Commodity Futures Trading Commission gave the OK for bitcoin futures, the firm listed its own bitcoin futures “pretty much immediately,” said JJ Kinahan, chief market strategist at TD Ameritrade.

Futures, which require an investor to purchase an investment at a predetermined future date and price, are not for all investors, Kinahan said.

“Just like most products, when bitcoin gets hot, we have momentum traders getting back in there,” Kinahan said. “You can kind of predict, just like you would predict if gold gets hot, that some people will come in if bitcoin trades near $10,000.”

Caution ahead

Many financial advisors still urge caution.

“The technology is very interesting and is very likely to have a dramatic impact on a host of different things,” said David Mendels, director of planning at Creative Financial Concepts in New York. “The problem with the funds is nobody really knows what’s going to work. It’s sort of like the early days of the internet. You might end up with Amazon, or you might end up with Pets.com.”

As a result, Mendels said, investors who want to dabble in these trends should heed an old maxim: “Never gamble more than you can stand to lose.”

 

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