How To Invest In Blockchain Without The Crypto Risk

By Louis H-P on January 3, 2021

Blockchain and cryptocurrencies are used interchangeably by many without realising the difference. Crucially for investors they carry different levels of risk. Cryptocurrency is the payment method to buy or sale a good or service. Blockchain is a ledger which accounts for the movement in the chosen cryptocurrency. Find out why blockchain is a safer way of capturing the cryptocurrency trend. 

What is Blockchain?

A blockchain is a growing list of records, called blocks, that are linked using cryptography. It can also be verified by all users. This creates a computing system where the transactions are transparent for all to see.

This computing system has created a framework where a new currency can be created and controlled by its users: cryptocurrency. Traditionally a currency is controlled by a nation state, and you can go to jail for creating more of that nation’s currency.

Why not buy a cryptocurrency?

The debate as to whether cryptocurrencies are a fad or here to stay still rages. Yet they are permeating society with PayPal announcing that its members could use Bitcoin. In turn this makes crypto’s more mainstream and encourages others to adopt them too.

The issue for investors is how to value a cryptocurrency, especially as they have a habit of being stolen. It is not even clear which is the best cryptocurrency to buy as Glen Goodman describes in his interview below. As a result, cryptocurrency trading may be beyond the average medium risk investor.

Why investing in blockchain could be best

With direct holdings of cyprocurrencyes too volatile, what about investing in the infrastructure behind it? If you buy the company providing the software, you are removing yourself from the day-to-day currency volatility and possible cryptocurrency scams.

Bitcoin may not be the best cryptocurrency.

With cyptocurrency seemingly having a role going forward, it is not clear which one will become dominant. By investing in the companies building the software to run blockchain, you gain the upside in crypto’s popularity, without the risk of backing the wrong one and losing out.

How can I invest in block chain?

Picking which blockchain company to invest in, so as to follow the cryptocurrency thematic investing idea is difficult. Just as it is difficult to predict which cryptocurrency is the best to own. It would therefore be best to invest in  a portfolio of such companies.

A word of warning. When a sub-sector of an industry, in this case technology, develops an interesting new invention, many funds or trackers will relabel themselves to capture the business (your money) which is flowing into this area. As a result check the largest underlying holdings to ensure they correlate with the trend you are trying to capture.

Suggested Blockchain trackers to buy

In selecting a fund or tracker you should check what exactly it holds. If you buy the First Trust Indxx Innovative Transaction & Process UCITS ETF, you will find yourself exposed to Alibaba, Baidu and JD.com. All of these are fine companies, but their profits from Blockchain are relatively small. This ETF may appeal to investors who prefer a larger cap exposure to the blockchain trend.

For a more targeted blockchain ETF exposure, the Elwood Global Blockchain UCITS ETF could be of interest. It invests in companies whose profits have increased correlation to blockchain.

Conclusion

Investing in blockchain requires an awareness that you may lose all your money. Although cryptocurrencies are probably here to stay, they may not be as important in the future. If demand for cryptocurrencies reduces, then so will demand for blockchains.

As a result, you should understand what may be pushing up the price of your ETF investment. It could be retail investors buying the ‘name’ (blockchain) of the ETF, rather than focusing on the future cash flows of the underlying companies.  Although a business/industry can survive without profits for a substantial time, eventually it will falter.

Cryptocurrencies, and by attachment blockchain, seems to be different in that there is a desire by many to have their own currency, free from government control. Also with cash seemingly on the way out, cryptocurrencies may be one of the areas to benefit, although this is theoretical. Failing to have an exposure to such a publicly supported development could be an opportunity you do not want to miss. 

The writer holds both the trackers mentioned in this article. 

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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