cgtoolbox
Introduction
I have written prior articles on the Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK) (hereinafter “BLOK” or the “Fund“) in the past (see here and here for example). The purpose of this article is to upgrade BLOK from a Sell (per my July 29, 2022 article) to Neutral today.
Background
During the last crypto bull run, the Fund was my go-to for blockchain equity exposure and trading. Per its website, the Fund invests in companies involved in the development and utilization of blockchain technology (see Blockchain Basics below). Specifically, the Fund consists of companies that are partnering with and/or directly investing in companies that are engaged in the blockchain space.
The Fund is actively managed. It invests at least 80% of its net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies. BLOK’s investment strategy and portfolio selection are managed/sub-advised by Toroso Investments, LLC (“Toroso“). Toroso is an experienced investor in publicly traded blockchain equities, having focused on the space since 2016.
Blockchain Basics
A blockchain is a digital ledger that records transactions across a network of computers. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Each block in the chain contains a number of transactions, and every time a new block is added to the chain, all the transactions in that block are considered to have been verified and recorded.
The most well-known example of a blockchain is the one that underlies Bitcoin (BTC-USD). However, the technology can be used for a wide variety of other applications as well, such as in supply chain management, voting systems, and in recording legal and financial transactions more generally.
One of the key advantages of a blockchain is that it is decentralized and distributed; thus, no single entity controls the network and everyone can access the same information. This makes it difficult for any one person or group to manipulate the network. Additionally, because each block in the chain contains a record of all the transactions that came before it, it is difficult to go back and alter past transactions, providing a high degree of security and transparency.
View on BLOK
In my July 2022 article concerning BLOK, I concluded that:
I am Bearish on BLOK ([then] trading near $22…) and crypto in general due to the Fed action, the bubble hangover, and the attendant recession.
The [crypto] space experienced an epic bubble and it will take time (and likely more pain) before the space is investable again (bear market rallies notwithstanding), particularly with the Fed raising rates and engaging in quantitative tightening, not to mention the recession that will come with the bubble hangover…
At the moment, I remain BEARISH on BLOK and crypto in general and am waiting patiently to enter back into the space.”
That article’s thesis played out as I expected and the performance of that call (compared to the S&P 500) is shown below (note, as of January 9, 2023, BLOK was trading under $17).
___________________________________________________________
Macro Headwinds And Broad Diversification Are A Stumbling BLOK
Sell Jul. 29, 2022/(Status of trade as of January 10, 2023)
- BLOK change to date:-26.15%
- S&P 500 change to date:-5.77%
Source: Seeking Alpha
___________________________________________________________
With BLOK down over 60% in 2022, I am upgrading the ETF to NEUTRAL, notwithstanding the fact that the Fed is still increasing rates, the bubble hangover is ongoing, and the attendant recession is near, if not already here.
However, I am not ready to dive back into the crypto equities space. Furthermore, my current allocation to crypto and crypto equities is very low (see portfolio allocations included in my 2023 Forecast).
Also, I do still expect the Fund to perform poorly should the market, in general, perform poorly (and that is my base case for the next 4-6 months!). However, I would expect any losses from here to be more in line with the market, unlike 2022 when BLOK’s losses dwarfed those of the S&P 500.
Portfolio
Per the Fund’s website, the top ten (10) holding as of January 9, 2023 are as follows:
| TOP 10 HOLDINGS | |||
|---|---|---|---|
|
Accenture plc Ireland 5.29% GMO Internet Group 5.20% International Business Machs Com 5.18% CME Group Inc. 4.66% SBI Holdings, Inc. 4.53% |
MicroStrategy Inc. 4.37% Digital Garage 4.12% Overstock.com, Inc. Del 4.02% Block, Inc. 3.90% Galaxy Digital Holdings Ltd. 3.82% |
||
As can be seen from the above, a number of these top holdings (e.g., IBM and Overstock) are not full on blockchain companies.
While such broad diversification of the Fund is probably a plus, and likely helped mitigate the Fund’s downside in 2022 even if BLOK’s 1-year decline still exceeded 60%, if (and when?) the space reignites on a bull run, BLOK is not likely to capture the full upside compared to some other (purer) crypto ETF products.
Fund Basics (as of 1/9/23)
TICKER: BLOK (NYSE)
CUSIP: 032108607
EXPENSE RATIO: 0.71%
AUM: $371 MILLION+
INCEPTION: 1/17/2018
HOLDINGS: 47
Risks
The principal risks of investing in the Fund are outlined in the Fund’s Prospectus. Of course, investors should be aware that the crypto space is extremely volatile.
At more than 71 basis points (0.71%), the Fund’s management fee is relatively high, particularly when the number of less expensive passive products in the space has multiplied.
In addition, in light of the bankruptcies of Voyager, BlockFi, and FTX, among others, regulation remains a huge risk for the crypto space in general.
Conclusion
I am upgrading BLOK from sell to neutral in light of the huge losses experienced by the Fund in 2022. In a down market, I expect BLOK to perform in line with the general market, while in an upmarket, I would expect the Fund to outperform the S&P 500.
Cheers!
Be the first to comment