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What Is Blockchain Technology and why Invest in Blockchain ETFs

 

Blockchain Technology

What Is Blockchain Technology?

Blockchain is a digital ledger that records data—frequently cryptocurrency transactions, though it can handle any type of data—and distributes it across a broad network of computer systems. All of the nodes participating in the network hold identical copies of the digital leger, which is a big reason why it can be difficult (but not impossible) to hack or cheat the system.

It’s helpful to break down the word blockchain to grasp how the system works. Computers that participate in the network encode data—smart contracts, Bitcoin transactions or supply chain information for a logistics company, for instance—into “blocks” that are added to the continuously evolving digital ledger, aka the “chain.” As new blocks of information are added, duplicate copies of the entire database are updated on each node.

As new blocks are added, all nodes must confirm the legitimacy of the data. For a cryptocurrency, that could mean a majority of nodes have to verify transactions making up a new block. That would mean confirming that individual crypto coins had not been spent more than once. For a logistics company, it could mean different nodes register or verify the receipt or dispatch of shipments. 

What Are Blockchain ETFs?

Blockchain ETFs are thematic exchange-traded funds that own the stocks of companies that use or develop blockchain technology. They tend to invest in a wider variety of assets than Bitcoin ETFs or crypto ETFs, which focus more narrowly on tracking the price of individual cryptocurrencies.

While cryptocurrencies like Bitcoin and Ethereum are the most popular use for blockchain today, the technology offers the potential to serve a very wide range of applications that go well beyond crypto. Take Walmart’s Canadian division, which used blockchain technology to create an automated system for managing invoices and payments for its logistics partners.

The ETFs listed above invest in hundreds of different companies. They can be broken down into a few broad categories:

Companies that own cryptocurrency. Firms like MicroStrategy and Tesla have large amounts of Bitcoin and other digital assets on their balance sheets.

Crypto exchanges and crypto miners. Coinbase is a leading cryptocurrency exchange, for example, while Marathon Digital is a Bitcoin mining company.

Financial services firms. Take Galaxy Digital Holdings, which manages crypto assets that derive their value from blockchain. Meanwhile, global banks HSBC and BNP Paribas finance blockchain initiatives and are developing their own blockchain applications.

Tech companies. Microchip makers like NVIDIA Corp and Advanced Micro Devices supply hardware that is widely used to support blockchain systems. Software companies like VMWare, a leader in cloud computing, have blockchain-focused businesses. 

Why Invest in Blockchain ETFs?

It’s a buzzy, exciting technology, but blockchain is only in the early stages of development. Cryptocurrencies have been making dramatic headlines for their outsized gains and tremendous losses, but more pragmatic blockchain applications have had a much lower profile.

Large, established public companies have dabbled in blockchain businesses while smaller, more focused firms have put blockchain and crypto at the core of their operations. In either case, there has yet to be a killer app that has made the case for blockchain as a core part of the future of business and technology.

This means investing in the stocks of just one or a few blockchain or crypto-focused companies is very risky. That makes choosing a diversified blockchain ETF a less risky way to get exposure to the industry. The blockchain ETFs on our list invest in dozens or even hundreds of stocks, providing plenty of diversification in a single fund.

Given how rapidly the blockchain space is evolving, choosing a blockchain ETF for your portfolio could be the best possible choice for investing in the industry.

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