The driving technology behind cryptocurrencies is what creates the inherent value of each digital token. By establishing a robust blockchain, a cryptocurrency can boost utilization and, in turn, value.
However, investing in singular cryptocurrencies is risky, as they're extremely volatile. Investors can diversify their crypto holdings by purchasing shares of a blockchain ETF like the Global X Blockchain ETF (BKCH). But is investing in an array of cryptocurrencies a good idea?
What's a blockchain?
Before you throw all of your life savings into the Global X Blockchain ETF, it’s best to understand just what a blockchain is. Blockchain technology was created to reduce the risk of fraud, corruption, or data manipulation by a central authority, like a bank or government. By decentralizing how the data is stored, it’s nearly impossible for the information to be manipulated. Storing and maintaining records on an open ledger solves this issue.
In a blockchain, a network of independent computers is linked by a shared database and operates on the same software system. Once new information becomes available, it's recorded in the open ledger as a block of data. Everyone has access to an identical record.
Blockchains aren’t just for facilitating cryptocurrencies. Companies like General Electric (GE), Microsoft (MSFT), PayPal (PYPL), Starbucks (SBUX), Salesforce (CRM), and IBM (IBM) employ blockchains to ensure quality control and bolster cybersecurity.
What's a blockchain ETF?
Traditional ETFs allow investors to gain diversification in various indexes and even market sectors, such as autonomous vehicles, cloud computing, and artificial intelligence. Blockchain ETFs work in the same way, except the sector is of companies with direct exposure to blockchains or entities that stand to benefit from blockchain and cryptocurrency proliferation.
In a passively managed blockchain ETF, a fund manager buys a basket of blockchain-related stocks within a broad index. In turn, investors in the ETF gain exposure to the entire blockchain index. By exposing the fund to the entire index, fund managers don’t need to select individual companies.
In contrast, actively invested blockchain ETFs rely on a fund manager’s ability to pick securities and provide above-average returns. As a result, these investments often come with higher fees and greater volatility.
What's the Global X Blockchain ETF?
The Global X Blockchain ETF is a passively managed ETF that invests in companies positioned to benefit from the increased adoption of blockchain technology. Holdings of the ETF include companies in digital asset mining, blockchain and digital asset transactions, blockchain applications, blockchain and digital asset hardware, and blockchain and digital asset integration. The fund tracks the Solactive Blockchain Index.
BKCH can be an excellent option for investors looking to add crypto-adjacent companies to their portfolios without being subject to the market’s extreme volatility. Investors nearing the end of the risk-affordable investing years could turn to BKCH as a way to capitalize on the new technology without risking their nest egg.