Bitcoin Soup- Pick-And-Shovel Plays With The BLOK & BITQ ETF Products

Samuel Langhorne Clemens, aka Mark Twain, did some dabbling in gold in his time. He was one of the thousands of men who traveled to California and Nevada at the height of the gold rush in search of a fortune. The experience prompted the American writer, humorist, entrepreneur, publisher, and lecturer to write that his definition of a gold mine is “a hole in the ground with a liar standing at the top of the hole.” Over a century later, I wonder what he would think of the cryptocurrency miners looking to stake their claims to riches by solving computer equations to mine Bitcoin and other tokens. 

On October 20, Bitcoin rose to another new high at $67,680 per token after the SEC approved a futures-based ETF product, the ProShares Bitcoin Strategy ETF (BITO). BITO began trading on October 19, and the leading cryptocurrency rose to a new all-time peak the next day. Bitcoin has a habit of rising when events expand the crypto’s addressable market. In December 2017, the price rose above $20,000 for the first time as the CME rolled out Bitcoin futures. On April 20, 2021, the Coinbase (COIN) listing on NASDAQ sent it to a record high at $65,520. In the wake of each significant event, the price moved higher and ran out of steam. On November 1, Bitcoin was back below $62,000. 

There are many choices for investors and traders in the cryptocurrency arena. The tokens offer the most direct route for market participation. However, the burgeoning asset class has given birth to companies that will move higher and lower with the cryptos. The Transformational Data Sharing Amplify ETF (BLOK) and the Bitwise Crypto Industry Innovators ETF (BITQ) are two products that are likely to move higher and lower with the asset class. 

Fintech innovation moves rapidly

The evolution of the fintech revolution is moving at a head-spinning pace. A little over a decade ago, no one ever heard of the blockchain or any cryptocurrency. Today, a growing number of market participants are piling into the asset class. The increasing acceptance of the libertarian means of exchange and advances in financial technology have led to a crypto rush, not unlike the US gold rush in the 1850s. While cryptos burst onto the scene in 2010, the discovery of gold at Sutter’s Mill in California on January 24, 1848, marked the start of the rush. 

Over my lifetime, technology has been nothing short of incredible. When I first began working in markets in the early 1980s, the computer room was a refrigerated area with massive machines and programmers working on punch cards. Today, a simple smartphone has more power than any of the computers available forty short years ago. Technology has touched every part of our lives. During the recent pandemic, it allowed us to stay at home and work, shop, socialize and conduct many activities that would have been impossible without the innovations. 

Blockchain and cryptos are changing the status quo in finance. They threaten traditional banking and the government’s control of the money supply. The rapid appreciation of cryptocurrencies has only hastened the revolution. Just as people flocked to California to pan for gold in the mid-1800s, more and more are mining for and investing in cryptocurrencies that have provided wealth beyond one’s wildest dreams for the early believers in the asset class. 

What is a pick-and-shovel investment?

In the world of metals, minerals, and energy investing, a pick and shovel investment is a wager that the companies that extract the raw materials from the earth’s crust or supply the equipment for mining will profit. Miners and equipment manufacturers invest significant capital, betting that the cost of production will be lower than they can sell the commodity. The world’s mining companies and those that service them are pick and shovel plays. As commodity prices rise, they often produce leveraged returns that outpace the price appreciation in the raw material. When prices fall, they tend to experience poorer returns than the commodity because of the capital costs. 

It is more than a challenge to outpace the percentage returns of Bitcoin, Ethereum, and many of the other thousands of successful tokens in the cryptocurrency world. Meanwhile, new businesses are popping up each day to stake a claim and participant in the bull market boom. The latest example was Coinbase (COIN). On its opening day on the NASDAQ, a speculative frenzy lifted the shares to a price where the company was worth more than $100 billion. For a brief moment, COIN was worth more than the two most established exchanges, the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). As of October 29, the CME and ICE had marker caps of $79.208 billion and $77.974 billion, respectively. COIN’s market cap stood at the $67.375 billion level, not far below the two leading global exchanges. 

Pick-and-shovel fintech companies tend to correlate with Bitcoin prices

I view the CME, ICE, and COIN shares as pick and shovel plays as they act as intermediaries that earn profits on volume. As trading volume grows, profits soar. COIN is the leading cryptocurrency exchange with a leadership position in perhaps the greatest bull market of all time. 

Everyone loves a bull market. When prices are rising, the greed impulse drives a growing number of people to participate. As people flocked to California and Nevada in the 1800s to find gold, they are flocking to the crypto arena in growing numbers. 

As the asset class grows, the pick and shovel plays have experienced substantial growth. Many market participants remain cautious of holding cryptocurrencies in computer wallets or on exchanges because of the fear of custody issues or security breaches. Owning shares in a publicly traded company or ETF is becoming the safest and easiest route for participation by newcomers. As these products tend to correlate with Bitcoin and other crypto prices, they provide exposure to the asset class acceptable for an expanding number of investors and traders. 

BLOK is a diversified ETF product

The Transformational Data Sharing Amplify ETF product (BLOK) was at $55.47 per share on Friday, October 29. The ETF had a $1.465 billion market cap, trades an average of 457,205 shares each day, and charges a 0.71% management fee. The fund summary states:

The product’s top ten holdings include:

The BLOK ETF is a pick and shovel pay on the growth of the cryptocurrency asset class. 

The ETF began trading in January 2018 at $20.05 per share and was at the $55.47 level on the final trading day of October 2021. Unlike many pick and shovel plays in commodities, BLOK has underperformed Bitcoin during rallies and outperformed during price corrections. 

BITQ is Bitcoin soup

I like to call the new Bitwise Crypto Industry Innovators ETF product Bitcoin soup as it holds a diversified portfolio of cryptocurrency pick and shovel companies. The fund summary states: 

Since the asset class is new, the Bitwise Crypto Innovators 30 Index companies are likely to change with market conditions. At $28.22 on October 29, BITQ had $97.65 million in assets under management, traded an average of 108,240 shares each day, and charges a 0.85% management fee. 

As the chart highlights, BITQ only began trading on May 12, 2021, opening at $24.69 per share. At $28.22 on October 29, the pick and shovel play has moved higher as the bull market continues. 

I expect that BLOK and BITQ will continue to underperform Bitcoin, Ethereum, and the other leading tokens on the upside and outperform on the downside during price corrections. However, the growth trajectory of the asset class makes the two ETFs products a route for investment via the stock market, which could be very attractive for the growing addressable market looking for exposure. 

Mark Twain would have had an interesting perspective on the crypto crazy. I wonder what he would have thought.