BLOK, A Diversified Way To Enter The Cryptocurrency Market. – Seeking Alpha

Leonid Sukala/iStock via Getty Images

Editor's note: Seeking Alpha is proud to welcome Diego Prados as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more

The growing blockchain ecosystem is a fast-changing environment that involves many different industries due to its high number of applications. This relatively young market has a lot of growth potential as adoption increases and developers continue to build the so-called new internet.

Since the launch of Hashcash, which was originally proposed as a mechanism to throttle systematic abuse of un-metered internet resources such as email and anonymous remailers, in May 1997, an uncountable number of projects have made the crypto space. As of December 2021, more than 16,000 projects were listed on Coinmarketcap averaging a total market capitalization of around 2 trillion.

Additionally, crypto-related stocks have been listed on many exchanges giving investors a different exposure to the crypto market than those who only invest in digital assets. This is where the Amplify Transformational Data Sharing ETF (BLOK) stands out as it helps investors gain exposure to Bitcoin and other cryptocurrencies through a mix of pure and diversified crypto-friendly companies.

On November 17, 2021, Amplify ETFs announced that they have surpassed $5.21 Billion in assets under management combining all the ETFs they offer. The company had also said that this was an increase of 57% in their combined assets under management (AUM) for 2021, way above the US average for the same period. Most of the ETFs managed by the company are thematic and focused on high growth potential industries such as the Lithium & Battery ETF (BATT) or the Digital & Online Trading ETF (BIDS). Thematic ETFs accounted for $2.98 billion which is 57.2% of the total AUM for which BLOK accounts an astonishing 32.6% of the total company AUM with $1.7 Billion in AUM as of the date of the announcement, following an increase of more than $900 million in inflows year-to-date.

The Amplify ETF team is managed by leading professionals in the ETF sector. The CEO and Founder of the company, Christian Magoon has launched over 70 ETFs in his more than 15 years' experience in the financial sector. The President of the company, William Belden, has previously worked closely with Christian in developing the ETF product line for Claymore Securities, a company which was launched on 2006 by the actual CEO of Amplify ETF.

The company also works with numerous firms for their expertise and specialized focus across various market segments including names like Toroso Investments (BLOK's portfolio managers), EQM Indexes or Emerita Capital.

BLOK is an actively managed ETF that focuses on the blockchain ecosystem. The fund will have at least 80% of their holdings dedicated to companies involved in the crypto space independently of the sector they belong to and it is classified as diversified by the company. It invests in different sectors such as Software & Services, Banks, Semiconductors or Diversified Financials. Geographically, de-fund distributes its assets mainly across North America, with a 74% weight but also targets Asia-Pacific and Eastern Europe both with an 18% and 8%, respectively.

BLOK "is designed to invest in the public companies that are further in the blockchain and participating in this transformational change in how data is shared", said Michael Venuto, portfolio manager of the BLOK ETF and co-founder of Toroso Investments.

Bitcoin reached an all-time high on November 10 last year of 69,044.77 US$ according to CoinGecko. This is a 704.736% increase in price since last halving event in May 2020. The following graph shows how Bitcoin has performed over the last 3 halving events, and the standard deviation of the daily returns for that same period of time.

Author

Source: made by the author using matplotlib with daily close data up to 1/12/2022 from investing.com.

On one hand, the data shows that volatility has decreased from 0.1136 between 2012 and 2016 to 0.0425 between 2016 and 2020. On the other hand, returns have been affected dropping from an astonishing 5156.45% in period 1 (from the first halving to the second) to 1216.32% in period 2. As of 11/01/2022, Bitcoin has yielded 385.03% since the reward for bitcoin mining was reduced to 6.25BTC per block mined. This number is far from the gains of past halvings at this point in time (around 600 days after the halving event occurred), but there is still plenty of time until the end of this cycle so in my opinion, I think there still exists a possibility that new all-time highs can take place during 2022.

As the cryptocurrency market rallied this year, with Bitcoin gaining a 45%, BLOK had a 14% increase in price in FY2021 falling from a >75% gain when it had hit a new all-time high in November. Performance for the past two months can be explained by the selling pressure coming from China.

To illustrate this picture, it has to be said that December 2021 was the deadline for exchanges to close their existing users' accounts in Mainland China.

Considering technical indicators, it is relevant to mention that during 2020, the average trading volume for BLOK was 25,153.97$ and last year that number increased to 392,479.43$ a 1460.3% increment YoY. It is also to be said that, over the last 3 months, the average volume goes up to 660,491 which can be interpreted as if the asset volumes hadn't lost momentum despite the fall in price in the past few weeks.

Furthermore, as said before during the introduction, the product's assets under management topped $1,7 billion as of November 2021, current AUM nears $1Billion during the first week of 2022 as the price tanked as much as 40% since all-time highs.

We will start the analysis of the security by comparing different statistical methods to assess the risks involved in the profitability of holding the asset against different alternatives.

Yahoo Finance

We will first take a look at the risk metrics of the asset from top to bottom. First thing to analyze is the Alpha and the Beta coefficient. These parameters come from the Capital Asset Pricing Model which derives from the Markovitz Model. The model tries to explain an asset's return by simply running a linear regression of an asset's daily returns against the market to obtain an expression like:

Asset's return = Alpha + Beta * Market return + Error

So, in this particular case, the returns of the asset explained by the market would be measured by the Beta coefficient, and the Alpha coefficient would represent the returns that cannot be related to market movements. With all that said, we are happy to see a positive and greater than category average number for the alpha coefficient, but market risks are higher than the sector average. This is caused by a greater covariance between the market and the asset. A higher standard deviation for the returns also signals a greater risk in comparison to the sector but when considering the Sharpe's and Traynor's we conclude that the risk weighted returns are much larger than the category average. The Sharpe ratio stands at 1.06 against 0.86 even though BLOK has a standard deviation twice as large as the category. Same thing happens with the Traynor's ratio as the beta of the asset is greater than the average but still beats the market's average.

Metric

Blok

S&P 500

iShares ACWI

BTC-USD

VaR 95%

-0.0352

-0.0192

-0.0177

-0.0603

CVaR 95%

-0.0537

-0.0344

-0.0313

-0.095

Median

0.0014

0.0011

0.0009

0.0007

Source: Produced by the Author with data on daily returns from Yahoo Finance and Investing.com.

To finish with the risk-return analysis we will look at Value at Risk and Expected Shortfall (CVAR) both at a 95% confidence level combined with a return metric which is the median. The table shows us that the highest median daily returns are achieved with BLOK but it also shows that the risk we assume by having exposure to BLOK rather than the S&P 500 or ACWI is a lot higher too. Meanwhile, BTC remains the riskiest asset with the lowest median return of the table, and the reason BTC appears on this chart is to compare the risk of holding BTC with respect to BLOK as we can appreciate the value at risk of the ETF is close to half of what Bitcoin shows.

According to the company, the ETF invests in numerous sectors such as Diversified Financials, Software and Services or Semiconductors. We will now examine the assets with the biggest weights in the fund and compare them with the sector averages to judge on valuation.

Diversified Financials

In the ETF, as of July 31, 2021, 22.2% of the holdings were concentrated in the financial sector. This sector encompasses a broad selection of companies involved in the crypto market both in a direct and direct way. In this sector, the company tries to put together the most representative companies involved in crypto trading and payments. The companies with the biggest weights in this sector are displayed below with their respective valuation ratios.

Holdings as of 1/14/22

Weight (%)

PE Ratio

PEG Ratio

P/CF Ratio

P/S Ratio

SBI Holdings

4.82

7.1746

0.0431

7.6397

1.1885

Coinbase

4.66

17.3051

0.0061

5.0029

5.5023

CME Group

4.36

32.9165

2.531

33.5008

8.5238

PayPal

3.66

42.8972

0.7529

35.3867

17.2674

Weighed Sample Mean

17.5(Total)

17.4455

0.8962

14.0141

5.1120

Sector Median (Financials)

11.80

0.20

9.03

3.44

Source: made by the author using data from seeking alpha.

SBI Holdings is the company with the biggest weight in the portfolio as of 1/14/2022, but also the one with the best valuation ratios among the sample, beating the market with an attractive valuation. Second in the list is Coinbase, the famous cryptocurrency exchange that completed its IPO back in April last year. Coinbase manages to achieve better valuation ratios than the median of the market except for the P/S ratio, but it stays close to it.

To finish with our sample, both CME and PayPal fail to beat the market in terms of valuation. PayPal at least beats the market when it comes to growth beating the market in the PEG Ratio by 16%.

The main characteristic of this sector the growth rate at which the companies increase their cash flows and earnings with an average PEG ratio of 0.8962 comparing to that of the S&P 500 of 1.11 recorded on November 2021.

Software

The main activity developed by companies chosen for the ETF within the sector of Software is cryptocurrency mining. this activity accounts for more than 22.5% of the fund's investments as of 1/14/2022. In the fund's holdings, there are included 9 out of the top 10 crypto mining stocks that control more than 50% of the Bitcoin network.

Bitcoin Mining Stocks

This particular type of stocks are very good to replicate bitcoin prices as the ETF does not invest in bitcoin itself. Moreover, these are cash flow generating companies against bitcoin itself that can be better seen as a commodity.

Bitcoin Fundamentals: Mining Profitability Ratio & BTC Dominance

Historically, halfway between halving events, a huge increase in prices follow, increasing miner's revenue due to higher transaction fees. This pattern is likely to occur in the following months. According to Coinmetrics.com, total miners' revenue has topped $38 Billion since the genesis block. In 2021, total revenue grew an outstanding 80.95% from $21 Billion. Furthermore, the ban on cryptocurrencies coming from China helped the network to decentralize and redistribute miners' rewards.

After performing an analysis of the fund, the conclusion is that the ETF can be a good buy opportunity for the following reasons:

Read more here:
BLOK, A Diversified Way To Enter The Cryptocurrency Market. - Seeking Alpha