BLOK ETF: Exposure Beyond Crypto Balances Risk (NYSEARCA:BLOK)

The Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK) invests in companies involved in blockchain technologies and related applications. While the concept of peer-to-peer distributed ledgers as a method of recording transactions was originally connected to cryptocurrencies, the attraction is the growing number of use cases across all sectors that go beyond the volatility in Bitcoin (BTC-USD) and other digital assets.

Still, the fund’s performance has been nearly a disaster, caught up in the broader market selloff last year and that particular crypto exposure from key underlying holdings. BLOK is off more than 75% from its all-time high in 2021, during a period defined by its speculative frenzy.

What we find is that BLOK’s strategy has quietly shifted away from being a pure play on “crypto”, while taking a broader definition of blockchain companies to include more global tech leaders. We see BLOK entering 2023 as a more diversified fund that is still positioned to capture the high-level trends in blockchain, albeit with a more balanced risk profile. The fund has rallied off its lows and we see several reasons the recent momentum can continue.

What is the BLOK ETF?

A key point about BLOK is that the fund is actively managed meaning it does not follow a particular index, with holdings at the discretion of the portfolio management team. According to the fund sponsor Amplify ETFs, the object is to invest at least 80% of its net assets in stocks of companies “actively involved in the development and utilization of blockchain technologies”. From the fund prospectus, the selected companies largely fall into one of three categories:

• Actively engaging in the research and development, testing, and/or implementation of transformational data-sharing technology.
• Profiting from the demand for transformational data-sharing applications such as transaction data, cryptocurrency, and supply chain data.
• Partnering with and/or directly investing in companies that are actively engaged in the development and/or use of transformational data-sharing technology.

The takeaway for us is that these criteria have some room for interpretation allowing the strategy to go in various directions. That’s the setup today with the top 10 holdings in BLOK including global consulting firm Accenture plc (ACN), International Business Machines Corp (IBM), and CME Group Inc (CME). These large-cap industry leaders have a peripheral connection to “the blockchain” but are hardly the first names that come to mind when thinking about crypto. By our calculation, approximately 55% of the 48 current holdings are non-pure-play crypto stocks.

The justification with ACN is likely the company’s push to offer blockchain consulting services, although this is likely a small part of its current business. With IBM, it makes sense that its data center solutions represent the critical infrastructure side of digital assets that utilize cloud networks. That’s also the case with Japan-based GMO internet group (OTCPK:GMOYF) focusing on a variety of internet infrastructure services.

The theme continues with other smaller holdings in stocks like Oracle Corp (ORCL), Sysco Corp (SYY), Intel Inc (INTC), and Advanced Micro Devices (AMD). Visa Inc (V) and Mastercard Inc (MA) are the traditional payments leaders but have acknowledged the importance of new technologies. Even Walmart Inc (WMT) finds its spot with its potential utilization of blockchain for its e-commerce supply chains.

To be clear, there are still plenty of pure-play crypto names including MicroStrategy Inc (MSTR) where the company’s $2.2 billion market cap is comprised almost entirely of its balance-sheet Bitcoin holdings. BLOK holds Coinbase Global Inc (COIN), recognized as a major crypto exchange, and a survivor compared to other high-profile bankruptcies in the sector.

Moving along, Galaxy Digital Holdings Ltd (OTCPK:BRPHF) and Silvergate Capital (SI), along with several smaller positions in Bitcoin miners like Riot Platforms Inc (RIOT), Marathon Digital Holdings Inc (MARA), Bitfarms Ltd (BITF) are all directly tied to the value of digital assets.

The reason we’re focusing on this dynamic is that BLOK today looks a lot different from when it was essentially “all-in” on crypto. The sense is that this group has sort of taken a back seat compared to its more high-profile position at peak of the crypto boom. Over the past year, it’s clear the crypto names have significantly underperformed the companies with less direct involvement in blockchain technologies.

For context, here is a screengrab of what the BLOK portfolio looked like at the end of Q1 2021 where nine of the top 10 holdings were direct digital asset names. Again, it appears the strategy has attempted to hedge itself against the more speculative side of the blockchain theme into the relative safety of large-cap segment leaders.

What’s Next for BLOK?

Putting it all together, we think BLOK can work for investors that want exposure to crypto and blockchain technologies with a cautiously bullish approach. This is in contrast to a few alternative blockchain and crypto ETFs that may be more aggressive and have a higher risk in terms of their portfolio positioning.

We can bring up Global X Blockchain ETF (BKCH), VanEck Vectors Digital Transformation ETF (DAPP), and Bitwise Crypto Industry Innovators ETF (BITQ) where many of the same stocks are covered, but the crypto pure plays have larger roles in the portfolio.

For us, we’re bullish on stocks and see value in beaten-down tech names which can benefit from a shifting macro environment where inflationary pressures ease, opening the door for Central Bank’s to ease off aggressively hawkish rate hiking policies. By this measure, the more diversified global stocks within BLOK in names like IBM, CME, PYPL, V, and MA should benefit from that market tailwind while the high-beta crypto stocks add to the upside potential.

On this point, the biggest risk in BLOK still comes down to the future of digital assets and Bitcoin considering the cumulatively material direct exposure to underlying portfolio holdings. A scenario where BTC crash under its recent cycle low or regulatory changes like a “Crypto ban” have been discussed by various governments. Any steps to limit the adoption or proliferation of digital assets and blockchain technologies would undermine the long-term bullish case.

From a technical perspective, it’s encouraging to see BLOK rally in recent weeks, well off its lows. A breakout above $17.00 would drive a new wave of momentum which is our base case going forward.