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  • Thematic Investing

    DAPP: Question & Answer

    Meghana Pakala, ETF Product Analyst
    November 30, 2021
     

    The digital asset space has seen exponential growth in recent years and companies at the forefront of the industry range across business lines, including digital asset exchanges, miners, and other infrastructure companies. Digital asset returns have generated substantial investor interest, both retail and institutional, and the broader ecosystem presents a wide variety of investment opportunities. This blog is intended to answer frequently asked questions on digital assets and more specifically, VanEck’s Digital Transformation ETF (DAPP).

    Q: What are the different opportunities in the digital asset space right now?

    A: Digital assets can serve as a store of value, growth investment or, fixed income alternative.

    • Store of value: Bitcoin is considered “digital gold” with key features such as limited supply and fungibility. Despite volatility, it remains the best performing asset class in recent years, and many market participants argue that its finite supply intuits that bitcoin will not be devalued over time.
    • Growth opportunities come in different forms:
      • Public equities – digital asset companies cover various business lines supporting the digital asset ecosystem and have exhibited high growth numbers (ex: Coinbase).
      • Private companies – there are many firms doing similar business as public companies that have yet to IPO.
      • Tokens – generally associated with a specific project or application. Investors can participate in a project in two different ways: 1) purchase a token and spend it within the context of the project/application or 2) purchase the token and hold it, in the hopes that it goes up in value.
    • Fixed income: there are emergent fixed income opportunities that are now available to investors willing to provide liquidity and cash within the crypto ecosystem.

    Q: What is the difference between Bitcoin and Ethereum?

    A: Bitcoin can be considered a pure store of value or medium of exchange, while Ethereum can be considered a toolkit that is used to build new applications or use cases.

    Bitcoin (BTC) is a digital currency that can be traded online and stored in cryptocurrency wallets. The underlying blockchain technology was used to launch Ethereum, a network of applications and contracts that is powered by Ether (ETH), the network’s cryptocurrency. Similar to BTC, ETH is also traded as a cryptocurrency, however its primary purpose is not to establish itself as an alternative monetary system, but rather to facilitate and monetize the operation of the Ethereum smart contract and decentralized application platform.

    Q: What types of companies are considered to be digital asset companies?

    A: There are many different business lines in digital assets, and companies have many different focuses.

    Digital Asset Companies at the Forefront of the Digital Transformation

    Source: VanEck

    These companies are distinctly different from digital assets themselves. Digital asset companies may range from mining to hardware to exchanges that facilitate the trading of digital assets. They may engage in only one of these business lines or, they may engage in multiple, depending on their goals, capabilities and focus within the broader digital asset space. See more on digital asset companies here.

    Q: Why would somebody invest in a company instead of the underlying asset class?

    A: Individual companies are centralized organizations working towards a common goal of generating profits and cash flows for investors and shareholders, along with other characteristics shared by the majority of publicly traded companies. Digital assets, on the other hand, aim to be decentralized software protocols, without a CEO or voting rights for shareholders.

    Digital asset companies also generate cash flows related to their various business lines, while the vast majority of cryptocurrencies do not generate cash flows. For a user to make a profit on a bitcoin trade, the user has to sell bitcoin at a higher price than what it was bought for, which is not the same as a business-related cash flow.

    Companies are also currently regulated, so investors can gain access to digital asset disruption in the known format of a traditional equity ETF wrapper.

    Q: What are the risks associated with digital assets?

    A: As early stage companies in an early stage asset class, the primary risks are volatility, regulatory and the potential for extended valuations.

    • Digital Asset Volatility – volatility in digital assets may affect digital asset companies, as their profitability and revenue metrics can be closely tied to the price of digital assets themselves.
    • Regulatory – changes in laws and regulations could materially impact investor access and sentiment related to digital assets, which could in turn negatively affect digital asset companies.
    • Valuation – digital asset companies may become overvalued as digital adoption grows, leading to the possibility that digital asset companies may undergo a drop in price or high levels of volatility.

    It is important to keep in mind that the U.S. is not China- regulators have indicated they will not “shut down bitcoin,” and regulation is coming across a number of fronts. The government has been supportive and has seen the potential of the digital asset revolution, making it unlikely they will regulate the opportunity away.

    Q: Where does DAPP fit into a portfolio?

    A: The VanEck Digital Transformation ETF can provide exposure in a growth, disruption, innovation, or alternative sleeve, along with serving as a core-satellite allocation. These names are not in the broad market benchmarks (yet), and the return profile does indicate low correlation to the broad market. Investors receive diversification and potential for alpha over a longer time horizon. It’s also important to emphasize that the MVIS Global Digital Asset Equity Index is a new index without a long track record, and that correlations to both digital assets and broad equity benchmarks will most likely not remain static.

    Weekly Correlation of Returns (4/4/2021 – 9/25/2021)

    Investment 1 2 3 4 5 6 7 8
    MVIS Global Digital Assets Equity Index 1.00              
    MVIS CryptoCompare Bitcoin Index 0.64 1.00            
    MVIS CryptoCompare Ethereum Index 0.57 0.74 1.00          
    NASDAQ 100 Index 0.50 0.19 0.11 1.00        
    S&P 500 Index 0.37 0.17 0.28 0.81 1.00      
    MSCI ACWI Index 0.34 0.02 0.17 0.73 0.91 1.00    
    LBMA Gold Price PM (USD) -0.29 -0.17 0.00 0.02 0.37 0.45 1.00  
    NYSE Arca Gold Miners Index -0.11 -0.12 0.07 0.13 0.44 0.58 0.86 1.00

    Source: Morningstar Direct as of 9/30/21.


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    Important Disclosures:

    The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The securities/ financial instruments discussed in this material may not be appropriate for all investors.The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/financial instrument, or to participate in any trading strategy.

    Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data.

    The Fund will not invest in digital assets (including cryptocurrencies) (i) directly or (ii) indirectly through the use of digital asset derivatives. The Fund also will not invest in initial coin offerings. Therefore the Fund is not expected to track the price movement of any digital asset.

    Investors in the Fund should be willing to accept a high degree of volatility in the price of the Fund’s Shares and the possibility of significant losses. An investment in the Fund involves a substantial degree of risk. An investment in the Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Therefore, you should consider carefully various risks before investing in the Fund, each of which could significantly and adversely affect the value of an investment in the Fund.

    An investment in the Fund may be subject to risks which include, among others, risks related to investing in digital transformation companies, investing in equity securities, Canadian issuers, small- and medium-capitalization companies, information technology and financials sectors, foreign securities, market, operational, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks which may make these investments volatile in price or difficult to trade. Small- and medium-capitalization companies may be subject to elevated risks.

    The technology relating to digital assets, including blockchain, is new and developing and the risks associated with digital assets may not fully emerge until the technology is widely used. Digital asset technologies are used by companies to optimize their business practices, whether by using the technology within their business or operating business lines involved in the operation of the technology. The cryptographic keys necessary to transact a digital asset may be subject to theft, loss, or destruction, which could adversely affect a company’s business or operations if it were dependent on the digital asset. There may be risks posed by the lack of regulation for digital assets and any future regulatory developments could affect the viability and expansion of the use of digital assets.

    Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus , which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

    Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance.

    Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.

    The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.

    • Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
    • An investment in cryptocurrency is not suitable or desirable for all investors.
    • Cryptocurrency has limited operating history or performance.
    • Fees and expenses associated with a cryptocurrency investment may be substantial.

    There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies. Past performance is not a guarantee of future results.

    Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.

    MVIS Global Digital Assets Equity Index: intends to track the largest and most liquid companies in the digital assets segment.

    MVIS CryptoCompare Bitcoin Index: intends to track the price of Bitcoin.

    MVIS CryptoCompare Ethereum Index: intends to track the price of Ethereum.

    NASDAQ 100 Index: intends to track 100 of the largest non-financial companies listed on the Nasdaq stock market.

    S&P 500 Index: intends to track the performance of 500 large companies listed on stock exchanges in the United States.

    MSCI ACWI Index: seeks to track the investment results of an index composed of large and mid-capitalization developed and emerging market equities.

    The LBMA Gold Price is administered independently by ICE Benchmark Administration (IBA). IBA independently administers the price and provides the auction platform on which the LBMA Gold Price is calculated, while LBMA own the intellectual property rights. The platform is electronic, tradeable, auditable and in line with the IOSCO Principles for Financial Benchmarks.

    NYSE Arca Gold Miners Index (GDMNTR) is intended to track the overall performance of companies involved in the gold mining industry.

  • Authored by

    Meghana Pakala
    ETF Product Analyst