Digital Asset ETFs Tap Disruptive Innovation

In the recent webcast, As Blockchain Disrupts the Web, Seek These Digital Asset Opportunities, Matthew Sigel, head of digital assets research, VanEck, highlighted the ongoing growth in the cryptocurrency market, pointing to expanding addresses and all-time high global hash rates in the bitcoin market as institutional adoption has helped further fuel interest in the digital currency.

Early bitcoin investors mostly came out of the retail segment, but digital currencies are beginning to attract larger institutional players. For example, 27 publicly traded corporations now own 1.15% of total bitcoin outstanding. Public pension funds are starting to accumulate bitcoin. Additionally, El Salvador’s president predicts that two more countries will declare bitcoin legal tender in 2022.

Along with the growth potential of cryptocurrencies, Sigel also argued that the digital asset could help diversify a traditional stock and bond portfolio. He explained that a small allocation to bitcoin significantly enhanced the cumulative return of a 60% equity and 40% bonds portfolio allocation mix. Since 2009, a 60/40 mix and a 100% equity portfolio both had Sortino ratios of about 1.6, meaning that annual returns were 1.6x the downside portfolio volatility. In other words, the lower volatility gained by owning some bonds didn’t make up for significantly lower total return in bull markets.

To help investors better understand and access the new digital markets, Sigel identified eight categories of digital assets: store of value, exchange, smart contract platforms, payments, infrastructure application, DeFi, stablecoins, and media & entertainment.

Looking ahead, Sigel highlighted a number of potential developments in the digital assets universe. For instance, bitcoin addresses could hit 1 billion, marking the wider adoption of bitcoin among the global population. More bitcoin miners and exchanges are expected to go public. NFTs, or non-fungible tokens, could go mainstream with millions of users across a number of platforms, notably due to the support in the new so-called metaverse. More emerging or frontier economies could begin to declare bitcoin legal tender. Additionally, ESG capital could rediscover BTC as an accelerant of green energy adoption and financial inclusion.

“In early 2017, VanEck determined that digital assets could provide a store of value alternative and provide a framework for a host of technology solutions that could bring costs down dramatically in the payments and financial investing industries,” Sigel said. “We have undertaken an array of initiatives to promote client access while helping to strengthen and enhance the ecosystem.”

For example, VanEck came out with the first pure-play U.S. ETF to invest in publicly listed companies involved in digital assets: the VanEck Digital Transformation ETF (DAPP). DAPP follows the MVIS Global Digital Assets Equity Index, which is a mix of companies with exposure to emerging digital economies. The ETF provides diversified exposure to digital asset exchanges, miners, and other infrastructure companies, along with access to companies that have the potential of receiving 50% of their revenues from digital assets.

VanEck offers a U.S. ETF investing in bitcoin futures. The VanEck Bitcoin Strategy ETF (XBTF) seeks capital appreciation by investing in bitcoin futures contracts. The fund is actively managed and offers exposure to bitcoin-linked investments through an accessible exchange traded vehicle. The fund does not invest in bitcoin or other digital assets directly.

In addition, VanEck more recently came out with the VanEck Digital Assets Mining ETF (DAM), which follows the MVIS Global Digital Assets Mining Index, which is designed to provide exposure to companies with footprints throughout the digital assets mining ecosystem.

Financial advisors who are interested in learning more about digital assets can watch the webcast here on demand.