BLOK: Maybe The Optimal Blockchain Strategy, But Volatility May Be Too Risky For Many

Summary Amplify Transformational Data Sharing ETF offers concentrated exposure to blockchain and bitcoin-related companies, with top holdings like Coinbase, Robinhood, and MicroStrategy driving performance. The BLOK ETF benefits from strong liquidity and recent outperformance versus peers, but charges a relatively high fee and is not ideal for income-focused investors due to variability from period-to-period. Significant risks include high concentration in top holdings, volatility tied to bitcoin prices, and industry-specific financial reporting challenges. Given these factors, I rate BLOK as a Hold and suggest a modest 2-4% portfolio allocation for investors seeking targeted blockchain exposure. The Amplify Transformational Data Sharing ETF ( BLOK ) is an investment strategy designed to invest in companies that engage in blockchain technology as leading innovators and infrastructure companies, as well as digital assets inclusive of bitcoin exchange-traded products [ETPs]. BLOK is a relatively concentrated portfolio strategy, with the top 10 holdings making up 41.26% of the total portfolio weight. The ETF’s top two holdings are Coinbase Global, Inc. ( COIN ) and Robinhood Markets, Inc. ( HOOD ), two brokerage platforms that heavily engage in cryptocurrency trading and other financial services. Coinbase is in a unique position as a financial services provider given its breadth of utilization for cryptocurrency transactions. The platform engages in brokerage services as well as asset-backed lending for bitcoin-related organizations like miners and developers. Given the growing interest in bitcoin across enterprises, asset-backed lending has grown in popularity, particularly amongst the bitcoin mining firms like CleanSpark, Inc. ( CLSK ) and Riot Platforms, Inc. ( RIOT ). Coinbase and Robinhood make up 5.74% and 5.67% of the portfolio weightings, respectively. MicroStrategy Incorporated ( MSTR ), now known as Strategy, is also a major component of BLOK with a weight of 4.64%. Though Strategy doesn’t necessarily partake in the direct development of bitcoin as a component of its core operations, the organization has become a notorious investor in bitcoin, acting as a “leveraged bitcoin strategy” for investors. In short, Strategy issues debt and equity to raise capital for additional bitcoin investments, providing investors with a unique vehicle for indirectly investing in the cryptocurrency. Roughly 20% of the portfolio’s weight is across bitcoin mining companies. In general, many bitcoin miners have been pivoting into data center hosting operations while simultaneously operating as bitcoin miners given that mining bitcoin has become increasingly more expensive following the bitcoin halving event in 2024. These bitcoin mining stocks are directionally correlated to the price of bitcoin, with performance generally varying based on cost efficiency in mining operations. TradingView The bitcoin mining industry may pose certain risks to financial reporting as the price of bitcoin can vary substantially quarter-to-quarter as a result of the mark-to-market reporting of digital assets on the profit/loss statements. Though diversification into other data center-related markets may provide stability for the organizations partaking, these industries are relatively crowded and specialized depending on the target market. In addition to operating companies, BLOK also invests in blockchain ETPs, providing direct exposure to the price changes of Bitcoin. This can provide a certain degree of stability when considering that many of the holdings in the portfolio depend on the price of bitcoin to operate. ETF Details BLOK commands a relatively high fee of 73bps when compared to peer portfolios being in the range of 51-68bps. Seeking Alpha Performance can be relatively volatile in the industry and may provide investors with large price swings throughout a holding period. Comparing BLOK to peer portfolio performance, BLOK has experienced substantial upside in recent months following the strong bitcoin performance. BLOK has outperformed many of its peers by a wide margin net of the VanEck Digital Transformation ETF ( DAPP ), which has performed closely to BLOK while offering a lower fee of 51bps. Seeking Alpha By comparison, BLOK may be a more appealing trading vehicle given its liquidity. BLOK has $1.11b in assets under management with an average of 312k shares trading hands daily, valued at $18.25mm. This can be a major asset to investors and traders seeking to actively manage a position in BLOK, potentially minimizing the cost-in/cost-out risk. BLOK also pays out an annual distribution with the most recent payout rate being $2.59/share, yielding 4.43%. Investors should consider the historical payout rate as distributions can significantly vary from year-to-year due to the performance of assets. Given this variability, I wouldn’t recommend BLOK to be utilized as an income ETF. Seeking Alpha Risks Related to BLOK BLOK is an industry-specific ETF, providing investors with a substantial concentration on the bitcoin ecosystem. This may pose a major risk to investors during periods of major bitcoin declines, potentially resulting in substantial losses in the portfolio strategy. BLOK may also exhibit substantial upside during periods of bitcoin value accumulation as the value of bitcoin directly impacts many of the portfolio’s holdings. Investors must also consider the financial risks related to operating companies in the ETF wrapper. The value of digital assets is reported on the profit/loss statement with large price swings substantially impacting quarterly reports. This can potentially impact the price performance of companies held within BLOK and may be reflected in the performance of the ETF. The portfolio also displays substantial concentration risk with the top 10 holdings making up 41.26%. The strategy is heavily dependent on the performance of the top 10 holdings, adding certain risks to diversification across holdings. Final Thoughts BLOK is a blockchain-oriented ETF designed to provide investors with exposure to bitcoin and operating companies that partake in bitcoin-related businesses. The strategy provides investors and traders with substantial depth for actively managing a position in the ETF, allowing them to enter and exit positions without the limitations of thin liquidity. Given the risks involved in trading bitcoin and related operating companies, I am recommending BLOK with a Hold rating with a 2-4% target allocation.

Source: Seeking Alpha