Financial advisors should be watching blockchain technology carefully given the growing interest by investors in new exchange traded funds in the sector.
Advisors need to provide more specific knowledge to investors about the technology and realize that regulators appear more interested in the industry, too, according to specialists in the field.
Recently, in a single week, investors put approximately $240 million into two new blockchain-themed ETFs, which launched on January 17.
Amplify Transformation Data Sharing ETF (BLOK) increased to $164.9 million from $2 million, according to reports from FactSet and CNBC. On the other hand, the Reality Shares Nasdaq NexGen Economy ETF (BLCN) jumped nine times in a week to $86.27 million, the reports add.
Experts urge that advisors get more familiar with blockchain, its opportunities and possible risks, because investors want answers to questions on the possibly-volatile sector.
“We expect with a variety of blockchain ETFs currently available — and soon to launch — there will demand for financial advisors to provide insight into which one is most appropriate and why,” Todd Rosenbluth, director of ETF research at CFRA, told ThinkAdvisor.
Meanwhile, Jamie Hopkins, a professor at The American College of Financial Services, said blockchain and cryptocurrency holdings “are drawing serious money right now.”
“They are hot. People are interested. If anything, some clients just don’t want to miss out. They want to talk about how they tried and were part of it all,” he said.
“The reality is that companies, businesses, and start-ups are just now starting to figure out how to use blockchain technology in a beneficial way,” Hopkins added. “Almost every large financial service company I work with is looking at how blockchain can benefit them. They all have taskforces and, in some cases, entire internal departments trying to figure it out.”
He suggests that advisors preach long-term investment strategies and not short-term trends in investing.
As a result, Christian Catalini, a professor at MIT, said that financial advisors “will have to familiarize themselves with this new type of digital assets.”
“Due diligence and analysis is not easy, as advisors need to understand not only the business and economic details of these projects and startups, but also the quality of their technical codebase and technical feasibility of their ideas,” he explained.
Hopkins further points out that current existing blockchain ETFs, like BLOK and BLCN, “are heavily correlated with technology stocks, and a lot of the blockchain ETFs are holding traditional technology company stocks inside, like Microsoft and Intel.”
Regulators are also watching the sector more closely. For instance, Securities and Exchange Commission Chairman Jay Clayton recently warned that the SEC “is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws.”
Adam Sterling, executive director of the Berkeley Center for Law and Business, agrees that government regulators are becoming increasingly concerned. “That can have an impact on the entire market,” Sterling said. New ETFs can lead to greater interest on the part of regulators, and more consumer interest can lead to even more interest on the part of regulators, as well, he added.
“If I was in the business, I would be watching the regulatory landscape very closely,” Sterling warned.
Looking more long-term, blockchain could have a disruptive impact on different sectors, such as financial services or more precisely, banks, especially with its ledger technology.
“There’s potential long-term significant disruptive applications,” Sterling said. He compares it to when the Internet was still early in its development and people did not fully understand it.