1st Blockchain ETFs Among New Launches

January 17, 2018

Reality Of Blockchain
Reality Shares’ BLCN tracks an index from Nasdaq, the Reality Shares Nasdaq Blockchain Economy Index, which targets companies that commit “material resources” to research and development, innovation, implementation and support of the blockchain technology for in-house use and for provision to others.

“We could build a methodology that was robust, but it wouldn’t be robust enough because this technology is so new. So then we brought Nasdaq into the picture and brought on this blockchain advisory board,” said Eric Ervin, CEO of Reality Shares. He points out that the board, which evaluates companies for inclusion, includes members of academia, participants in the cryptocurrency space and even someone who worked on the original development of bitcoin.

The index provider determines the universe through its research and analysis. From there, companies included in the index must have market capitalizations of at least $200 million and meet minimum liquidity requirements.

Each company is assigned a proprietary “Blockchain Score” based on how much it is likely to benefit from the advancement and commercialization of blockchain technology. The 50 to 100 companies with the highest scores are included in the index and weighted based on their scores. The index is reconstituted every six months, the prospectus says.    

For Ervin, an index approach was the route to go.

“My view is that even with the best active manager, you could create a rules-based approach that does 99% of the work of the manager,” he said, pointing out that, with active, “you lose all that transparency and the certainty of how it’s going to work.”

The fund can include depositary receipts and common stocks, according to the prospectus, and currently includes companies representing emerging and developed markets in North America, Europe and Asia.

Blockchain’s Big Picture

Despite launching competing products, Magoon and Ervin agree on quite a bit. Both cite blockchain’s similarity to the internet in terms of the impact it could have. Both also draw parallels between email as the “killer app” that drove the spread of the internet, and bitcoin as the new killer app for the blockchain space.

They further cite the security of blockchain technology, which stores its data in a decentralized manner across a vast number of machines, making it incredibly difficult to hack.

And both men agree that the technology has the power to transform our society, in particular how we conduct transactions and store data. 

“Anywhere that there’s friction in the system because of an intermediary, the blockchain can solve most of those cases,” Ervin said.

Magoon and Ervin noted the technology’s power to streamline transactions by eliminating intermediaries and to store data more efficiently and securely.

Investors might notice that neither fund contains the word “blockchain” in its name. Apparently, the SEC raised concerns with the issuers late in the launch process regarding the accuracy of the blockchain label given that there aren’t really any companies that are purely focused on blockchain. As such, the regulator was concerned a fund labeled as a blockchain ETF could be considered misleading.

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