As of February 28th, BLOK is down 6.04% total return (NAV, view standardized performance), year-to-date (YTD), following a 10.07% decline in February—a rough start for sure. However, compared to the decline of 25-35% in Bitcoin and other crypto blockchain-related platforms, this related-performance suggests that exposure to equity infrastructure has provided some differentiation during a weak period for the asset class. We believe companies leaning in on this technology shift may be positioned to benefit as the industry develops.
We are an actively managed fund. Active means different things to investors, but to us it reflects an analysis defined not only by valuations, portfolio turnover, and traditional KPIs. It also involves engaging closely with the people who are building the evolving future rails and infrastructure of the Blockchain Decentralized Finance (DeFi) ecosystem. As a result, we are often asked by investors what we look for in a company and in management leadership.
| Management led by founders or CEOs who are positioning their companies strategically with long-term business objectives, focusing on the use to capitalize on blockchain solutions to impact their industries by streamlining costs and/or supporting future revenue generations. |
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| The universe of public companies in our network is in the hundreds, but those that qualify for inclusion in the portfolio have articulated a strategic plan or provided dedication to using blockchain technology to change traditional business processes. Benefits such as speed, transparency, and lower costs on a ledger often are referred to as part of a broader (block)chain-based approach. |
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| Valuation is a relative risk/reward metric for us and helps inform when and how we enter a stock, as well as when we may trim a position. | |
| Long-term earnings objectives help inform and support our overall portfolio thesis. |
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| Our access to company management teams is important to us. Building the right corporate culture, with the right ambition to embrace disruption, is not an easy journey. Having engaged with many management teams over the past nine years, we have a unique perspective on what is meant by native crypto, “wild west” ambitions, and the distinction of real business adoption. |
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| We are long-term investors in our ninth year of this work, and value direct straight communication. Most people who believe in blockchain view it as a system grounded in the truth, particularly native to the ecosystem. We can handle management teams that need to pivot or iterate along their journey; however, exaggerated or unsupported tall tales are a different story. |
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A MYTH We do not look for founders or CEOs named Michael to lead the companies in the portfolio; however, there are eight individuals named Michael across our portfolio of about 48 companies. These include Michael Saylor (MSTR), Michael Novogratz (GLXY), Michael (Mike) Cagney, founder (FIGR), Michael Tannenbaum, CEO (FIGR), Mike Ho, founder (HUT), Michael Belsche, founder (BTGO), and Michael Dell (DELL). If you are named Michael, please note that this 17% hit ratio is purely coincidental. |
The performance data quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For most recent month-end performance, visit BLOKETF.com.
Headlines around the progress around the CLARITY Act / market structure bill have been mixed until very recently, we believe that some of this noise reflects ongoing negotiations between banks and crypto industry leadership. Building consensus can be challenging and, at times, necessary, so tweets and public chatter are part of the modern-day process. According to some analysts, the likelihood of such a bill passing by mid-year is in the range of 60% to 70%.1 While the positive headlines this week were influenced by a President Trump tweet2, we would highlight that the Senate Banking Committee may need to postpone and garner more support.
However, to be clear, we do not believe that blockchain technology adoption is predicated on the approval of this bill. The administration, the Securities Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) are working together to establish foundational support aimed at creating a more constructive friendly environment than in the past, and even leadership within the banking industry has expressed support for blockchain technology. For example, just ask the ultra-competitive Jamie Dimon3 who claims to be “one of the biggest users of Blockchain” why blockchain technology is important, and ask Brian Moynihan, CEO of Bank of America, why the bank’s extensive blockchain-related patent filings.4
Nevertheless, we figured addressing some of the myths surrounding stablecoins, particularly given their role in industry disruption and the discussion around why this technology is considered beneficially so important.
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Most of the $300 billion currently represented by stablecoins has originated from abroad, largely from individuals seeking U.S. dollar exposure. Bank deposits, which remain at or near record levels, have not shown material impact, as this demand is typically invested in U.S. Treasury bills. Growth in stablecoins could actually increase demand for Treasuries. Stablecoins are among one of the largest holders of U.S. Treasuries, with countries such as China reducing Treasury purchases, market participants continue to discuss the need for additional sources of demand to support U.S. deficit financing.5
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Stablecoin competition won't hurt lending, just bank profits which are enjoying very healthy net interest margins.6 Banks could simply choose to compete by paying depositors higher interest rates — the national average savings yield is currently around 0.62%. The question of why should banks not pay depositors fairly for their capital? Arguably it must be nice to have $18 trillion in free de-posits that you can then go against. It is also notable that approximately 17.8% of bank deposits are held at the Federal Reserve, earning a risk-free return of 3.6%. Most importantly, banks provide most of the credit in the system. Wall Street, fintech firms, private equity, and credit unions are all significant sources of credit.
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Wrong – this view is often debated, if stablecoins offer yields similar to money market funds and/or Treasuries, the incentive to move away from bank deposits already exists, with and ease of use cit-ed as a potential differentiator. Sure, Millennials and Gen Z are increasingly engaging with the narrative around digital money and crypto, a trend often discussed as part of broader shifts in how these generations think about their capital and savings. Not all savers require 24/7 liquidity, and many alternatives already exist in the U.S., such as Zelle, Venmo, PayPal, and Apple-Pay. Money market funds and high-yield paying liquid pools of capital—whether offered through traditional structures or in tokenized form—are frequently cited as presenting similar challenges for banks. |
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Banks operate under extensive regulatory frameworks. Firms that issue or market stablecoins are also subject to regulatory scrutiny, though without the same backstops or support mechanisms provided by the Federal Reserve. As a result, these structures are often discussed as operating under different regulatory considerations—Again, there is no free lunch! Just a fair meal! If coding on crypto follows first-principal rules, with transactions reconciled in milliseconds to minutes, then automation on a blockchain must also operate within proper reconciliation processes and established Know Your Customer (KYC) requirements. For this reason, we believe that the CLARITY Act may help identify a common framework between banks and participants support-ing DeFi protocols. |
Bottomline:
We are optimistic on the possibility that Congress may identify a bridge to advance a market structure bill (which may ultimately be referred to as the CLARITY Act). Ongoing discussions continues around modernizing U.S. financial infrastructure through blockchain technology, alongside considerations of how the traditional banking models adapt within that framework and did not deserve a free lunch. Additionally, the growth of money markets to approximately $8 trillion did not disrupt capital flows into the banks, which has led some market participants to question whether newer, modernized structures would necessarily result in disruption?
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Attribution: Interesting parallels? Figure and Galaxy BLOK is down 6.04% total return NAV, (YTD), reflecting a 10.07% drawdown in February following a very volatile January. The decline was broad-based, in nature, and our diversified weightings did not provide meaningful insulation during the period. However, Figure Technology Solutions (FIGR) and Galaxy Digital (GLXY) were two stocks that stood out, given a number of uncommon situational parallels.
To be clear, other positions also declined substantially in February. However, none detracted more than 1% from the portfolio. With no outsized positions, the portfolio declined alongside other high-beta11 strategies. Robinhood (HOOD) was the next-largest decliner at approximately -24%, resulting in a 0.87% impact on performance. Questions around the impact of AI on the portfolio are difficult to quantify, particularly when even companies such as IBM experienced historic drawdowns. IBM may also be pursuing a longer-term hardware strategy around quantum computing, which has been discussed as a potential offsetting area of focus. We have been long-term investors in IBM, in part due to its Hyperledger blockchain open source software12. IBM declined 21% during the month, contributing to a 0.74% decline in BLOK’s performance, despite reporting results above estimates. Our point is that recent sector rotation has left many stocks under pressure, regardless of reported results or stated management objectives. Given our strategy focuses on exposure to the convergence between AI and blockchain, we continue to monitor how these themes evolve within the portfolio. |
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Transaction and Repositioning: February was a month where we trimmed small positions and trimmed back some larger positions. An overweight position for us is in the range 4.5-5.5% and by month end we were below such levels. We remained at about 35% in our top 10 holdings, but did trim PayPal and Cleanspark. Separately, we also captured further profits from GPGI, formerly CompoSecure (GPGI). We exited small position in Bitdeer (BTDR) and Canaan (CAN) which together were less than 1%. |
1https://www.theblock.co/post/391680/jpmorgan-crypto-market-structure-bill-positive-catalyst-second-half?utm_source=twitter&utm_medium=social