BLOK-Chain Monthly Commentary March 2023
THE MANDATE
The Amplify Transformational Data Sharing ETF (BLOK) is an actively managed fund, seeking to identify the leading companies focused on the transformation and development of the blockchain and cryptocurrency markets. The managers focus on how companies can capture the growth, innovation, and disruption of the blockchain paradigm shift. The evolution of the internet has changed how people communicate. We believe growth companies that embrace blockchain evolution will capture secular growth trends that are accelerating and disrupting core processes in business. We think this is an important secular trend, as Gartner forecasts business value generated by the blockchain could be $176 billion by 2025, and $3.1 trillion by 2030.
FEBRUARY MONTHLY
The Fund was down 2.94% in the month of February. Year to date, the fund is up 19.48%, as February follows a strong January. More to the point, there are real reasons to believe that long term foundations for growth are built during these times.
■ A new Bitcoin narrative could provide more utility value and adoption for Blockchain as a new programing solution for NFTs. Investors are encouraged to review the piece below from Galaxy Digital.
■ Headlines around regulations continue to be front and center, which to us suggests that this is a very well-known challenge that will ultimately be addressed. It is difficult to measure capitulation, but it would be reasonable to think that if you remained optimistic with the disruption in 2022, your optimism in 2023 will only increase further throughout the year.
■ Despite some retrenchment by venture capital, large corporate spending on Blockchain continues behind the scenes, and we hear that venture capital funds remain available for “quality deals.” An example of this came from the GrainChain/Overstock announcement in mid-February. We believe that GrainChain could be a big winner for Overstock as it demonstrates enormous growth and benefits to farmers in the agriculture supply chain. Included in the press release was the statistic that “since 2020, the company has grown its user base at a compound rate of approximately 125% and revenues by nearly 400%.” Now as an investor, imagine what this could mean if the revenue run rate was about $100 million headed into 2024, and Overstock owned 15% to 20% of the company.
FEBRUARY PORTFOLIO TRANSACTIONS
In February, we realized profits in MicroStrategy, a top holding with an almost 6% weighting in the fund and cut our position in Silvergate into a rally that did not make sense to us given the precarious capital and regulatory pressure they were under. We added to our mining holding by buying more Bitfarms, and further added to Galaxy Digital. As per our risk management process, we maintain discipline and trim top 5 positions as they eclipse above a 5.5% weighting in the portfolio. Conversely, the buys on Bitfarms and Galaxy came as these firms leaned into restructuring opportunities. In the case of Bitfarms, we highlight that they strengthened their balance sheet through the repayment of $21 million in debt with $7.75 million. Investors should know that the Fund’s present exposure to the mining sector closed month-end at 16.13%, up substantially from 9.51% at year-end. As we noted in the January report, Galaxy closed on a number of key infrastructure acquisitions in February. We encourage those who want to learn more about the mining sector to review the Blockware Solutions 101 Guide.
The monthly decline came in part from Overstock which, as a top 5 position, was down almost 20% resulting in a 0.86 Bps decline in the value of the Fund. Overstock is extremely well capitalized with over $300 million in cash and a business that will have positive free cash flow in 2023. We believe analysts that cover the stock and investors in general see weak operating results in an extremely competitive market for home goods as a reason to sell and are giving the company no credit for its Blockchain portfolio.
EDUCATION
For those who want to educate themselves about blockchain regulations, here are some links:
■ Luxor Technologies: A Newsletter about the Mining Industry5
■ Galaxy Digital: Podcast6 & Whitepaper: Programing on “Inscriptions and Ordinals” – the next Bitcoin narrative. Bitcoin Inscriptions & Ordinals7
■ Satoshi Nakamoto Original Bitcoin White paper: Bitcoin: A Peer-to-Peer Electronic Cash System https://bitcoin.org/bitcoin.pdf
SUMMARY
We are clearly off to a solid start in this first quarter. While the Fund gave back 2.94% in the month of February, BLOK is well positioned to capture the uptrends from the Blockchain transformation we see happening across industries. We understand that growth as a factor in the short term is underappreciated by investors, but when growth is led by paradigm disruption, it ultimately overtakes value, in our experience.
Thank you for your interest and confidence.
These are challenging and exciting times! If you are an investor in BLOK, please know we appreciate your confidence and willingness to continue on this journey with us. We are open to questions and all inquiries, even if they challenge us!
Disclosure
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in Amplify Funds statutory and summary prospectus, which may be obtained above or by calling 855-267-3837, or by visiting AmplifyETFs.com. Read the prospectus carefully before investing.
Click HERE for BLOK’s top 10 holdings.
Click HERE for BLOK’s prospectus.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. The Fund’s return may not match or achieve a high degree of correlation with the return of the underlying index.
The Fund is subject to management risk because it is actively managed. Narrowly focused investments typically exhibit higher volatility. A portfolio concentrated in a single industry, such as companies actively engaged in blockchain technology, makes it vulnerable to factors affecting the companies. The Fund may face more risks than if it were diversified broadly over numerous industries or sectors. Blockchain technology may never develop optimized transactional processes that lead to realized economic returns for any company in which the Fund invests.
The Fund invests at least 80% of the Fund’s net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies. Such investments may be subject to the following risks: the technology is new and many of its uses may be untested; theft, loss or destruction; competing platforms and technologies; cybersecurity incidents; developmental risk; lack of liquid markets; possible manipulation of blockchain-based assets; lack of regulation; third party product defects or vulnerabilities; reliance on the Internet; and line of business risk. The investable universe may include companies that partner with or invest in other companies that are engaged in transformational data sharing or companies that participate in blockchain industry consortiums. The Fund will invest in the securities of foreign companies. Securities issued by foreign companies present risks beyond those of securities of U.S. issuers.
The Fund may have exposure to cryptocurrencies such as bitcoin indirectly through investment funds, including through an investment in the Bitcoin Investment Trust ("GBTC"), a privately offered, open-end investment vehicle. Even when held indirectly, investment vehicles like GBTC may be affected by the high volatility associated with cryptocurrency exposure. Holding privately offered investment vehicle in its portfolio may cause the Fund to trade at a premium or discount to NAV. Many significant aspects of the U.S. federal income tax treatment of investments in cryptocurrencies are uncertain and such investments, even indirectly, may produce non-qualifying in- come for purposes of the favorable U.S. federal income tax treatment generally accorded to regulated investment companies.
Amplify Investments LLC is the Investment Adviser to the Fund, and Toroso Investments, LLC serves as the Investment Sub-Adviser.
Amplify ETFs are distributed by Foreside Fund Services, LLC.
Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in Amplify Funds statutory and summary prospectus, which may be obtained by calling 855-267-3837 or by visiting AmplifyETFs.com. Read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.
Amplify ETFs are distributed by Foreside Fund Services, LLC.