The portfolio manager of the largest blockchain ETF in the US is reducing the portfolio’s exposure to names trading with the price of bitcoin amid the current market conditions.
Bitcoin hovered around $21,000 Monday morning while ether stood at roughly $1,200 — down roughly 70% and 75%, respectively, from last November’s all-time highs.
Crypto companies are facing liquidity issues, and some are freezing or putting restrictions on withdrawals. Certain bitcoin miners are selling BTC they intended to hold to shore up their balance sheets.
Michael Venuto, portfolio manager of Amplify Investments’ Transformational Data Sharing ETF (BLOK), has positioned the fund defensively as crypto markets have soured.
“We’re always looking to participate in the beta of the blockchain industry, but we’re also willing to hide out in high-quality names that are tangentially participating or doing it on the edges,” Venuto said.
BLOK, which launched in January 2018, currently has roughly $530 million in assets — off its high of more than $1 billion.
The fund is down nearly 52% year to date, according to FactSet data. Meanwhile, the index-tracking Siren Nasdaq NexGen Economy ETF (BLCN) and the First Trust Indxx Innovative Transaction & Process ETF (LEGR) are down roughly 38% and 20%, respectively, the data shows.
The Amplify ETF’s top five holdings, as of Monday, are IBM, Overstock.com, CME Group, Core Scientific and Accenture. Names more synonymous with the crypto space, such as Microstrategy and Coinbase, rank eighth and 11th in terms of weighting within the portfolio.
Miners, which made up about 25% of the portfolio a year ago, amount to about 17% of the fund today, Venuto added. In addition to Core Scientific, the fund still holds miners such as Hive Blockchain Technologies, Riot Blockchain and Hut 8 Mining. BLOK exited its position in Northern Data in the fourth quarter of last year due to supply chain concerns.
“There’s a trend toward camels instead of unicorns, and it’s going to stay that way until we get clarity from our regulators or clarity on what our Fed is going to do,” Venuto said. “Can they carry the water through the desert? Those are the ones that we’re looking for.”
Blockworks spoke with Venuto to learn, in more detail, how he is positioning the portfolio amid the turmoil and what trends he is seeing in the space.
Strack: What do you make of the state of the blockchain industry right now?
Venuto: This has obviously been a challenging environment because it’s very hard to talk about blockchain without having some sort of bitcoin or cryptocurrency beta.
There’s a lot of noise to the beta of the price movements of the underlying protocols and tokens, but in reality, there’s an enormous amount of work being done to actually create real applications and real use cases for this technology.
They’re not scared by the price movements; everybody expects volatility in a new technology, so I see a lot of optimism and a lot of investment going on.
Strack: How do you go about managing BLOK in this type of environment?
Venuto: This isn’t our first winter. We launched four years ago, and in the world of blockchain, that makes us like a grandma.
The first winter we went through was in the second half of 2018 and during that time we did exactly what we’re doing right now, which is, we moved to higher-quality companies like IBM and Accenture that are using blockchain but are not the high-flying names that are going to go up 300% when bitcoin moves.
We still have those [companies], but a year ago they were 50% of the portfolio. Now they’re about 25%.
Right now, [CME] is one of the biggest positions in BLOK because they participate in the volatility. They’re the one-stop-shop to be long or short bitcoin for traditional finance.
Strack: How have you adjusted your outlook on miners?
Venuto: Back in December, when we started to see the weakness in crypto, we started to look at our portfolio of miners — because miners are always a big part of a blockchain fund.
We’ve really honed in on the [miners] we think can survive a crypto winter or can access traditional finance markets so that they don’t have to sell off bitcoin and panic.
Today we’re down to owning about half of the publicly traded miners because we spent the time talking with a lot of them, doing the on-site visits and deciding which ones we think can access markets.
You start to move toward the higher-quality ones, meaning the ones that have a lot of cash on their balance sheet or have already secured traditional finance exposure.
Strack: What specific companies or sectors do you have your eye on?
Venuto: New York Community Bank is now working with Figure, which is a private company, to generate mortgages on the blockchain. They’re getting it done in five hours instead of five weeks. That gives them a huge competitive advantage over Wells Fargo or whatever.
We’re also this year starting to add some of the metaverse-type names, such as Roblox. We have a tiny position in Facebook because I’m trying to figure out if they’re going to lead here or not.
A recent purchase for us was Nubank…They made a big announcement making transactions in crypto available to all its users in Brazil.
A backer of Nubank is Warren Buffett…so the guy who calls it rat poison is backing this amazing fintech company that’s servicing all these investors in Brazil and making crypto a very real thing.
We’re constantly looking for names in the [non-fungible token] space. Nothing has materialized yet in the public markets that we feel comfortable with.
Strack: How does the level of BLOK’s assets under management, which has been cut in half in recent months, affect the way you run the strategy?
Venuto: It actually makes things easier. We’ve always been on the cutting edge of companies — we were able to invest in small-cap companies — however at $1 billion in opportunity set, you’ve got to be a little bit more diverse to make sure you maintain liquidity.
Am I happy being down 50%? No. Do I feel like our active management has made a difference? Yeah, absolutely. We are more positioned conservatively right now with things like CME…and we’re still getting very nice beta on the up days, primarily because of direct exposure to bitcoin through the Canadian spot ETFs out there.
Strack: How could the approval of a spot bitcoin ETF impact BLOK?
Venuto: I’m all for a spot bitcoin ETF in the US and I think it could happen amazingly quickly. It could literally happen the day after the administration says this is what bitcoin is.
I expect they’re going to come out and say something along the lines of [bitcoin’s] not a currency, it’s a commodity asset…but as an investment, even though it’s not a security, it’s still subject to the same disclosure rules as a security.
What does that change for BLOK? Honestly nothing. When [the ProShares Bitcoin Strategy ETF (BITO)] came out and got $1 billion, BLOK was taking in money every day during that time because we were in a bull run.”
BLOK will be an infrastructure play on the technology and the public companies, and a spot bitcoin ETF will be a play on owning the biggest protocol. I see no risk for us. I see only upside because it will bring the [space] up, and I will probably own it in BLOK.
Strack: How long do you expect the so-called crypto winter to last?
Venuto: The current situation needs either regulation or it needs the Fed to stop trying to raise rates. Once they say anything dovish again, I would expect the crypto cycle to turn right back on.
We need regulatory clarity. It’s funny because we all say regulators need to come in. I don’t really want them in — I just want them to say this is how we’re going to treat [crypto], here are the rules and now you can go play.
We’re basically all playing chess on a board that doesn’t have a finite amount of squares. You don’t know what you can get in trouble for, and institutions don’t need that risk.
This interview has been edited for length and clarity.