ABOUT BLOK
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.
AUGUST MONTHLY
In August, BLOK retraced July’s 15.05% monthly gains with a decline of 16.06%, but this does not change our optimism or our reasoning as to why the Fund’s YTD NAV returns are up 43.45%. As a reminder, this pullback comes after a 3:0 ruling in the D.C. Circuit Court of Appeals in favor of Grayscale that could begin to pry open the door to a regulatory framework that leads to several whale-like buyers. Whether that buyer is branded as Blackrock, Invesco, Fidelity, or any number of the 11-or-so other Exchange Traded Funds. Moreover, these whales will bring ease of access for institutions, additional transparency to the Bitcoin market, and a flood of additional liquidity. Whether the launch of a Spot ETF comes in January or the next 12 months, the clock is now firmly ticking. Bottom line, we are not surprised to see a whipsaw since the victory was very well telegraphed and investors tend to anticipate outcomes in asset classes. Moreover, this was the most positive outcome that could have been anticipated. In our opinion, we would expect investors and speculators to now view the regulatory framework as more friendly and view the benefits that a Spot ETF might bring as a tailwind.
REGULATION
What happened and Why It Matters to BLOK
Put simply, in a unanimous vote of 3:0, the D.C. Court of Appeals made it clear that the Securities and Exchange Commission (SEC) should not have denied Grayscale’s proposal to convert to an ETF. The court ruled that the SEC’s methodology for approving a spot ETF was “inconsistent,” “capricious,” and “arbitrary”. We believe this court decision provides a more aligned regulatory path to go forward. The SEC has 45 days from the ruling, or until October 13, to decide if it wants to appeal the decision. Politics aside, we don’t see how millions of GBTC holders should be held hostage and harmed by the inferior structure.3 Moreover, concerns highlighted by the SEC around custody and counter-party risk do need to be operationally addressed so the market for a Bitcoin spot ETF can run smoothly. Thereafter, around 90 days later, the first application deadline will come from Ark/21 Shares on January 10, 2024. BLOK is not a Bitcoin fund, but because our investment mandate aligns our investors’ capital with this important development, we felt the need to start this month’s BLOK blast with the above commentary, knowing it was top of mind. It also cannot be ignored that Bitcoin miners are highly affected by the price action of Bitcoin and sometimes anticipate the change of Bitcoin price. The anticipation of the price move makes sense. This is because the delta on the move can affect the profitability of the mining business in such a significant way (since Bitcoin miners get paid in Bitcoin). Note that at the close of the month, the Fund had a 19.88% weighting to this sector. This sector, plus certain other sectors (Direct, Transactional, and Venture Capital), make the Fund highly correlated to the price action of Bitcoin.
When will Bitcoin rally again? We admit to being biased, these conditions inspire uptrends more than downtrends and if anything, ironically, it is the lack of volatility lately in the asset class that may lead to investors missing a sharp rally. We would also like to highlight the news about the Financial Accounting Standard Board (FASB) unanimously endorsing a change in its accounting standard as an important development for market adoption by institutions. While in 2024 companies can choose to follow the new rule, in 2025 it will become the standard. Previously, when you bought Bitcoin, you could only mark the position to the lower price since it was owned without any ability to mark it back up when it went higher again. For a company like MicroStrategy (MSTR), which owns about 152,800 Bitcoin, this means that it can now properly show the value of its investment in Bitcoin. As of August 1, 2023, this amount was purchased for $4.519 billion at an average of $29,668 per Bitcoin, but cumulative impairment charges totaling $2.196 billion had the position marketed down to an average of $15,251 per Bitcoin. Thank you, FASB, for adapting to this new modern digital world! Of course, with each month passing, the Bitcoin Halving (April 26, 2024) gets closer, and momentum should be building. We are not maximalists, but we would also note with each month passing the U.S. Government is printing more dollars and deficit spending just to pay interest. Conversely, at its foundational core, Bitcoin’s supply restrictions keep its price in check as measured against the value of other forms of currencies that do not have supply limitations. It is this simple reasoning that defines why the price historically moves higher before a halving, but also why the Spot Bitcoin ETF(s) could be so important to the demand narrative. Will a Spot launch date be in January or around the halving? We don’t know, but in either case we would anticipate that investor speculation could lead to the price action building on these two outcomes.
ATTRIBUTION
As we wrote last month when the Fund was up 15.05%, certain stocks performed above our short-term expectations, and this was when Bitcoin was down about 4.5%. In August, Bitcoin pulled further down by about 10%, and energy prices moved up while difficulty rates led to additional headwinds. These conditions are mostly beyond the control of the miners, except those who have access to cheap energy and a very modern and growing fleet of miners. As a result, while our portfolio remains diversified across 48 names, we continue to trim positions when they eclipse our maximum exposure levels. Nevertheless, across the mining sector the Fund saw a pullback of 7.3% ( about half of the 14.59% decline in August ) which offset some of the gains we saw in July. Specifically, in this month Riot Platform (-38.71% vs +56.68%), Hive Digital Technologies (-32.42% vs +16.91%), HUT8 Mining (-31.55% vs +7.16% ), Marathon Digital (-27.63% vs +25.32%), Bitfarms Ltd (-26.54% vs +24.64% ) and Cleanspark (-17.97% vs +40.09%). Other holdings, that had similar volatility in their returns include: Canaan Inc (-36.79% vs 49.30%), Customers Bancorp (-16.29% vs +38.73%), CoinBase Global (-19.28% vs +37.82%), MicroStrategy (-18.35% vs +27.88%), and BLOCK Inc, formerly Square (-28.41% vs +20.97% ). Overstock, which we trimmed last month, was down 28.41% after the previous month’s rally of 11.97%, and Roblox, which we increased in August, was down 27.92%. We humbly highlight this volatility because it is a characteristic in investing in disruptive and transformational companies and the reason why we believe diversification is so critical in how we invest. Long term, however, we believe this volatility is worth it as many of the companies we are invested in have the potential for exponential returns.
TRANSACTIONS AND REPOSITIONING
During the month the position in Marathon Digital (MARA) was cut in half to about 2% due to disciplined rules around diversification. The reduction brought us to the middle level of our exposure to the mining sector. We also trimmed exposure in IBM (IBM) and CME Group (CME) and increased exposure in more direct pure plays: Roblox Corp (RBLX) and Paypal (PYPL). Taking profits into strength is always easier to explain than buying into weakness, but while our portfolio can be volatile, our decision making remains highly focused around sizing the portfolio risk.
EDUCATION
For those who just want to get educated about the blockchain, here are some links:
■ Bitcoin Mining: A Deep Dive into BTC Mining & ERCOT’s Four Coincident Peak Program (4CP) | by Foundry | Foundry | Aug, 2023 | Medium https://medium.com/foundry-digital/btc-mining-ercots-four-coincident-peak-program-8907fbf99bd2
■ April 26, 2024, is the pending date of Bitcoin Halving. Here is an explanation: https://www.coindesk.com/learn/bitcoinhalving-explained/
■ Blockchain explained in a video. https://www.youtube.com/watch?v=ru_vu-T0hd8
■ Satoshi Nakamoto Original Bitcoin White paper: Bitcoin: A Peer-to-Peer Electronic Cash System https://bitcoin.org/bitcoin.pdf
SUMMARY
Given the outlook for a Spot Bitcoin ETF and the positive news out of FASB, it is difficult not to be optimistic about the outlook for the Fund. However, the volatility of the performance in August offset what was earned in July and leaves the Fund up about 43.45% YTD. While moving incrementally and with a very disciplined approach to investing in disruptive companies, we look forward to capturing the trends in Blockchain which includes the action in Bitcoin. We appreciate that this report over emphasizes the Bitcoin Spot ETF activity and hope that we can be a resource for any questions on developments in this area. Thank you for your inquiries and confidence.