Interactive Investor

Cryptocurrency crash takes its toll on popular blockchain ETF

21st May 2021 10:33

Tom Bailey from interactive investor

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While the ETF has plenty of exposure to cryptocurrency ‘pure plays’, it has a much wider remit.

It has been a tough few days for cryptocurrency investors. On 19 May, bitcoin plunged by as much as 31%. The newly created S&P Bitcoin Index, on 20 May, showed month-to-date losses of over 30%.

Other popular cryptocurrencies such as Ethereum and Dogecoin also fared badly, seeing large sell-offs. The also newly created S&P Cryptocurrency MegaCap Index, which tracks the price of both bitcoin and Ethereum, shows month-to-date losses of around 25%.

The sell-off took a toll on many cryptocurrency-related companies. Coinbase, one of the biggest crypto exchanges, for example, has lost around 30% since its IPO in April. Bitcoin mining companies Blockchain Riot and Argo Blockchain are also both down by around 50% since the start of April.   

What has this meant for the popular Invesco Elwood Blockchain ETF (LSE: BCHN)? Taken from the start of April to 20 May, the exchange-traded fund (ETF) has lost over 18%, in sterling terms. Since the start of May, it is down almost 14%. These are steep losses, albeit not as painful for those invested in bitcoin exchanges and mining companies or cryptocurrency directly.

In part, these smaller drawdowns are because of the wide remit of the ETF and the index it tracks, the Elwood Blockchain Global Equity Index. While it has plenty of exposure to cryptocurrency ‘pure plays’, it has a much wider remit, investing in companies deemed to be able to tap into the “potential growth of blockchain technology”. As Invesco notes, the ETF provides exposure to companies that “participate or have the potential to participate in the blockchain ecosystem”.

As a result, the portfolio has exposure to companies that do not have any direct involvement with bitcoin or cryptocurrencies. For example, the portfolio includes TSMC (NYSE: TSM), Oracle (NYSE: ORCL), Banco Santander (LSE: BNC) and Rio Tinto (LSE: RIO). The share prices of these companies and many others in the portfolio are largely uncorrelated to cryptocurrency.

However, as the above figures show, the ETF has suffered some losses, and that’s because the index does include several pure-play cryptocurrency stocks. For example, as I pointed out in March, Ethereum miner HIVE Blockchain Technologies (TSX: HIVE), bitcoin miner Hut 8 Mining Corp (TSE: HUT) and bitcoin exchange Bitcoin Group (XETRA: ADE) were all added to the index at the end of 2020.

Elwood also appears to be moving the index much more in the direction of cryptocurrency pure plays. Elwood’s most recent quarterly update (to April 2021) revealed the addition of several more cryptocurrency pure plays. The update notes: “Driven in part by a frenzy of IPOs, SPACs and other M&A activity in the cryptocurrency space, this rebalance contains seven new members, five of which we consider as cryptocurrency pure plays, businesses where all, or the dominant operations, are conducted within the cryptocurrency space.”

As a result, after the index’s rebalance, 17 of the 50 stocks in the ETFs portfolio are now deemed pure plays by Elwood. These 17 stocks account for 34.6% of the portfolio, representing an increase of 4%.

Elwood certainly sees the performance of its index moving at least partially in tandem with cryptocurrency prices. They note in the update: “Performance this quarter can be characterised as strong during February, as cryptocurrency prices rallied, and then volatile for the remainder of the quarter.”

The difference in performance, however, shows that the ETF is a less volatile way of gaining exposure to the cryptocurrency theme. While losses the ETF has experienced over recent weeks have been notable, they are considerably less than investors would have experienced with direct cryptocurrency exposure or owning shares in a cryptocurrency miner or exchange company.

However, these smaller losses also mean that the ETF has enjoyed less of the upside of the cryptocurrency boom. So, while the ETF is still up 16.5% year to date, the S&P Bitcoin Index is sitting on returns of 35% over the same period, despite the recent crash in prices. As ever, the diversification offered by the ETF means fewer losses but a cap on the potential gains.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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