Is It Worthwhile to Invest in Blockchain Funds Amidst Crypto Volatility?

Currently, there are thousands of Cryptocurrencies available all around the world. Bitcoin, Ethereum, Cardona, Dogecoin, Tron, and Ripple are some of the most well-known digital currencies. Although Cryptocurrency has gained global prominence in the last few years as an asset class, they are not as widely used as conventional assets like equity, debt, or gold.

Blockchain works like a massive digital spreadsheet or ledger in which every cryptocurrency transaction is recorded. It is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

However, most investors are unaware of the Crypto markets and the blockchain technology that supports each of these cryptocurrencies. Due to the extreme volatility and speculative character of cryptocurrencies, many investors are reluctant to engage with direct trading in these crypto markets or invest in blockchain stocks.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

Given that, mutual fund houses are aiming to launch a fund of fund schemes that will offer Indian investors exposure to global companies that are involved in blockchain technology and cryptocurrencies. Compared to investing directly in Cryptocurrencies and blockchain technology stocks, passively investing in these themes through mutual funds entails less risk.

In November 2021, Invesco Mutual Fund announced the launch of its new fund - Invesco CoinShares Global Blockchain ETF Fund of Fund following the approval from the capital market regulator, SEBI. This will be an open-ended fund of fund scheme, it will invest in Invesco Elwood International Blockchain UCITS ETF, an abroad exchange-traded fund listed on the global stock market.

However, soon enough, due to regulatory concerns, Invesco Mutual Fund quickly decided to postpone or shelve this fund launch. In its media representations, Invesco Mutual Fund has cited potential legislative changes in India pertaining to crypto-assets and likely uncertainty thereof as the primary reason.

Invesco MF's underlying blockchain ETF had a holding pattern where it partly invested in companies that are into cryptocurrency mining (the act of digitally making new coins by solving an algorithmic puzzle). Although the underlying fund hasn't been betting actively on cryptocurrencies, it had significant exposure to listed crypto infrastructure companies. For example, Tesla - which holds over a billion dollars in Bitcoin and has accepted Bitcoin payments in the past, is included in any index funds/ETFs that tracks the S&P BSE 500 index.

The behaviour of Cryptocurrencies differs from that of conventional financial assets sold on the stock exchange. Cryptocurrency is volatile by nature. Cryptocurrencies have no cash flow; therefore, traders must rely on shifts in sentiment to determine the price. Because of this, the value of Bitcoin plummeted when Tesla said that Cryptocurrency would not be accepted as a form of payment. But the price of Dogecoin increased after Tesla's CEO, Mr Elon Musk, wrote "Doge" in a tweet.

The volatility of the cryptocurrency market is being increased by a number of influencing factors, much as how the values of a certain company's shares tend to increase when a famous investor purchases those shares. Growing acceptance and maturity of the crypto market go hand in hand.

The aggressive rising of interest rates is commonly viewed as a leading recession indicator. Following the recent news of a hike in interest rate by the US Federal Reserve, the global and domestic stock market, as well as the crypto market, witnessed a huge downfall. Investor sentiment weakened, and many began selling off their digital assets, leading to a bloodbath in the crypto market.

Top digital assets like Bitcoin and Ethereum have fallen from their record highs as the crypto market has collapsed to multi-month lows. The past few months have been dark times for the crypto industry. Between April and June, Bitcoin's value dropped to more than half, from just over $45,000 to around $20,000; other coins have also been negatively impacted. Established companies like Coinbase, a popular crypto exchange, have announced layoffs, and seemingly the whole crypto market has been sinking this year.

Given these facts and the turbulence in the crypto market, you must be wondering if investing in blockchain funds is a wise decision. There are also a number of sectoral mutual funds focused on the IT sector that hold securities of businesses adopting blockchain technology.

Blockchain got tied up with Cryptocurrencies mainly due to Bitcoin. Despite the fact that blockchain technology and cryptocurrencies are not the same, many investors think investing in blockchain technology is the same as investing in cryptocurrencies. Blockchains are designed to use cryptocurrencies as the "ink" for writing records on the blockchain ecosystem. Thus, Cryptocurrencies are distinct from blockchain yet nonetheless a crucial component of blockchain technology.

With the prevalent volatility in the crypto market, it is crucial to distinguish between methodologies of cryptocurrency and blockchain technology. Investment in mutual funds that own shares of blockchain-focused companies includes more than just cryptocurrency trading, cryptocurrency mining, and cryptocurrency technology development. Businesses from all industries are looking at Blockchain to streamline their operations because of its enormous long-term potential for a wide range of applications.

All types of investments carry risk, but experts believe that crypto experiences volatility more often and at higher rates. It's a speculative asset, which means it has a limited history and high price fluctuations. That means the crypto market can swing between rabid optimism, as it did in early 2021, to pessimistic despair, as it did recently in 2022. Nevertheless, crypto is an emerging market that's creating a space for itself globally, with countries legalising it and businesses incorporating blockchain technology into their payment processes. India has introduced a new section 115BBH that will tax cryptocurrencies and other virtual assets at a rate of 30%.

Should you invest in Blockchain Funds?

There are two main areas that concentrate on blockchain technology: first, pure Cryptocurrency investments, which are highly risky and therefore need to be avoided; and second, Mutual Fund schemes that indirectly invest in businesses looking to capitalise on the development potential of blockchain technology.

While it is true that blockchain technology is considerably larger than the cryptocurrency ecosystem and cryptocurrencies are only a small element of it. However, it is equally true that the prominence of blockchain technology may suffer if cryptocurrency prices plunge due to factors such as the prevailing volatility in the crypto market, global legislative changes, or interest rate hikes.

The opportunity to invest in blockchain technology may offer investors the chance to leverage the potential offered by this revolutionary technology. However, you must first evaluate your risk tolerance, investment horizon, and objectives before investing in schemes based on the potential future expansion of blockchain technology. Investors with a moderate to low appetite for risk should avoid making any investments in the 'Blockchain Fund' until they can assess the fund's solid performance track record.

Blockchain technology is at a nascent stage in India, but it has enormous potential. Although investors are eager to participate in this new-age technology, many are still unfamiliar with the blockchain technology theme. Do not make an investment influenced by a market trend; take the time to gain a thorough understanding of the fund and its blockchain-focused underlying scheme before making a decision.

In order to enhance your wealth creation journey, it is important to include worthy mutual funds scheme in your investment portfolio. You should not allocate more than 5-10% of the portfolio to any sectoral/thematic funds.

PS: If you wish to select actively managed worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

As a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

PersonalFN recommendations go through our stringent process that assesses both quantitative and qualitative parameters, providing you with Buy, Hold, and Sell recommendations on equity and debt mutual fund schemes. Read here for more details...

If you are serious about investing in rewarding mutual fund schemes, Subscribe now!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst