Chainlink ETF Explained: What It Is and How It Works
With Bitcoin and Ethereum ETFs already approved in the United States, the focus has shifted toward speculation. Which crypto is next to get an ETF? Investors are eyeing the potential of popular altcoins such as Chainlink, Solana, XRP, and more. This Chainlink ETF guide examines the potential of these regulated financial instruments and their current status in 2024.
In this guide:Unpacking the Chainlink ETFPossible features of Chainlink ETFChainlink ETF guide: How will things work?The concept of underlying assetsGlobal presence of Chainlink ETFsBenefits of investing in Chainlink ETFsChainlink ETF guide: Are there any risks?Chainlink vs. Chainlink ETFChainlink ETF vs. Bitcoin ETFChainlink ETF vs. Ethereum ETFShould you be excited about Chainlink ETFs?Frequently asked questions
Unpacking the Chainlink ETF
Chainlink ETFs are like any other exchange-traded fund. They expose investors to LINK, the native crypto of the Chainlink ecosystem.
Chainlink is a popular decentralized oracle ecosystem that connects the blockchain world to the off-chain world. Simply put, blockchains requiring real-time information from across the globe can take Chainlink’s assistance. LINK is used within the ecosystem as a mode of payment.
Possible features of Chainlink ETF
Here are some features that you can expect from Chainlink ETFs:
Investors could gain direct exposure to Chainlink’s decentralized oracle network, which is a critical component that enables smart contracts to interact with real-world data (e.g. APIs, payment systems, and so on).Considering that these ETFs would hold LINK as their primary asset, they will likely allow investors to actively participate in the growth of the Chainlink ecosystem.These products could incorporate mechanisms that align with Chainlink’s core tenets of decentralized governance. This would give ETF holders a say in strategic decisions affecting the fund’s health.Such ETFs could enhance investors’ exposure to DeFi platforms that use Chainlink’s oracles. This could potentially lead to exciting liquidity pools and yield farming opportunities.Chainlink ETFs could make use of smart contracts to automatically recalibrate and rebalance their holding based on market conditions or other predefined criteria.These ETFs are likely to assist investors in expanding their knowledge about decentralized oracles and blockchain technology in general.
Chainlink ETF guide and components: BIC
Chainlink ETF guide: How will things work?
As mentioned earlier, Chainlink ETFs will operate similarly to traditional exchange-traded funds (ETFs) but with a focus on digital assets and blockchain technology. Let’s delve a bit deeper into the process.
Creation and redemption process
The process of creating and redeeming shares in a Chainlink ETF is quite similar to that of traditional ETFs. Authorized participants (APs) play a crucial role. These are typically large financial institutions that create new ETF shares by depositing an equivalent value of the underlying asset ($LINK, in this case) into the fund. In return, they receive shares of the ETF. Conversely, they can redeem ETF shares for the underlying Chainlink tokens.
Chainlink ETF creation flow: BeInCrypto
The concept of underlying assets
An underlying asset physically backs all ETFs. This means that a Chainlink ETF holds actual LINK tokens in a secure, institutional-grade custody solution. This backing provides the security and assurance that the ETF’s value is directly tied to Chainlink’s performance.
For example, the 21Shares Chainlink ETP is 100% physically backed and keeps the LINK tokens in cold storage for security.
Exchange trading in regard to Chainlink ETFs
Just like traditional ETFs, Chainlink ETFs can be listed and traded on major stock exchanges. Investors can buy and sell shares of the ETF through their brokerage accounts, making it easy to gain exposure to Chainlink without interacting with crypto wallets and exchanges.
The Global X Chainlink ETP (LI0X), for example, is traded on exchanges such as Deutsche Börse Xetra and offers cost-efficient access to Chainlink. However, as of Aug. 1, 2034, it is only one of the few examples in play.
The concept of regulatory framework
All ETFs must undergo the rigors of regulatory scrutiny before being approved. As such, despite the global presence of comparable products like Chainlink ETNs and other ETPs, Chainlink ETFs are still unavailable in the U.S.
The APs, underlying assets (LINK in this case), and the concept of regulatory approval or the lack thereof lay the foundation of LINK ETFs.
Global presence of Chainlink ETFs
As mentioned, Chainlink ETFs are not yet approved in the U.S. Even globally, the exchange-traded fund presence is minimal. However, there are a few exchange-traded notes (ETNs) and other exchange-traded products (ETPs) that you can look at to understand the structure and operation better. These include the following:
21Shares Chainlink ETP: Switzerland and Germany
Name: 21Shares Chainlink ETPTicker: LINK, 21XLISIN: CH1100083471Nature: Exchange-Traded Product (ETP), listed as an ETNTrading platforms: SIX Swiss Exchange, Deutsche Börse XetraAssets Under Management (AUM): $13.95 million (as of July 2024)YTD return: -3.04%One year return: +99.83%Performance metrics:Volatility one year: 79.71%Maximum drawdown one year: -41.39%
Key features
100% physically backed by LINK tokensCold storage by institutional-grade custodianCarbon neutral since 2018Expense ratio: 2.50%Custodian: Coinbase Custody Trust Company, LLC
VanEck Chainlink ETN: Germany
Name: VanEck Chainlink ETNTicker: VLNKISIN: DE000A3GXNV0Nature: Exchange-traded note (ETN)Trading platforms: Deutsche Börse XetraAssets Under Management (AUM): $4.65 million (as of July 2024)YTD return: -10.15%One year return: +165.60%Volatility one year: 80.37%Maximum drawdown since inception: -41.92%
Key features
Fully collateralized, replicates MarketVector™ Chainlink VWAP Close IndexDirect exposure to LINK tokens stored in cold storageProvides right to redeem against delivery of the respective cryptocurrencyExpense ratio: 1.50%Custodian: Regulated crypto custodian
Global X Chainlink ETP: Germany
Name: Global X Chainlink ETPTicker: LI0XISIN: GB00BM9JYJ86Nature: Exchange-traded product (ETP)Trading platforms: XetraYTD return: +22.25%Volatility one year: Data not availableMaximum drawdown since inception: -41.92%
Key features
Provides exposure to Chainlink by replicating the performance of the underlying indexCollateralized debt obligation backed by physical LINK holdings
It is also important to mention the U.S-based ARK 21Shares Bitcoin ETF. Although not an out-and-out Chainlink ETF, it utilizes Chainlink’s proof-of-reserve (PoR) platform for its operation. This integration ensures that investors can verify the ETF’s holdings in real time, providing a higher level of trust and security. Here are the key details.
Ticker: ARKB
Nature: Bitcoin ETF
Partnership: ARK Invest and 21Shares are the key players behind this ETF. They utilize Chainlink’s technology to improve the reliability of data related to the ETF’s assets.
Impact on the price of LINK tokens: Following the integration, Chainlink’s price saw a notable increase, reflecting market optimism about the utility of Chainlink’s technology in enhancing financial products.
Benefits of investing in Chainlink ETFs
Investing in any cryptocurrency-backed exchange-traded product comes with a host of benefits. The most obvious ones include:
Better portfolio diversificationEasy access to crypto-focussed investingImproved transparencyBetter security, as the LINK tokens completely back the ETPs and ETNs while being stored in cold wallets.Contribution towards Carbon neutrality in line with Chainlink’s environmental commitmentsTax benefitsDecent returns with products like the VanEck Chainlink ETN, even reporting a one-year return of +165.60%.
Chainlink ETF guide: Are there any risks?
ETFs are closer to traditional market instruments than general crypto investments. Yet, if you are eyeing crypto ETFs, there are a few considerations to take note of:
Regulatory risks related to cryptocurrencies existTechnological risks involving smart contract failures and moreLiquidity risks, mostly on smaller exchangesSecurity risksLack of historical dataMarket volatility led by changing sentiments and perceptionsCounterparty risks
Chainlink vs. Chainlink ETF
Should you opt for the standard LINK token or look to invest in the Chainlink ETF? Here is a table to help you decide:
AspectChainlink (LINK)Chainlink ETFOwnershipDirect ownership of LINK tokensIndirect ownership through sharesSecurityRequires secure crypto walletManaged by institutional custodiansAccessibilityRequires understanding of crypto exchangesTraded on traditional stock exchangesVolatilityHigh due to direct crypto exposureSlightly mitigated within the ETF structureRegulationLess regulated, subject to crypto regulationsMore regulated, subject to financial market regulations
Now that the token and ETF-specific differences are out of the way, let us focus on ETF-related differences.
Also, here is how a standard investor flocking would look should Chainlink ETFs be approved in the U.S.
Chainlink ETF and investor flow: BIC
Chainlink ETF vs. Bitcoin ETF
Here is how the Chainlink ETF compares against the original crypto-based ETF:
AspectChainlink ETFBitcoin ETFTechnologyUses Chainlink’s proof of reservesUses Bitcoin’s blockchainVolatilityHigh due to DeFi integrationHigh due to Bitcoin market swingsUse caseFocus on decentralized oracles and smart contractsDigital gold and store of valueMarket adoptionGrowing in DeFi applicationsWidely adopted as a primary cryptocurrencyRegulatory statusEvolving clarityIncreasing regulatory acceptance
The below quote highlights the importance of Bitcoin ETFs in propelling the momentum around to Chainlink ETFs.
“Net new buyers drive more adoption and market cycles.”
Sergey Nazarov, Co-Founder of Chainlink: X
And, notably, nothing has driven more net new buyers than the Bitcoin ETF.
Chainlink ETF vs. Ethereum ETF
Chainlink ETFs should take cues from the recently approved Ethereum ETFs. Here is how they differ on paper.
AspectChainlink ETFBitcoin ETFTechnologyDecentralized oracle networkSmart contract and DApp platformVolatilityHigh due to integration in multiple DeFi projectsHigh due to extensive DeFi and DApp useUse caseSecure off-chain data for smart contractsPlatform for building decentralized applicationsMarket adoptionGrowing in specialized DeFi areasWidely adopted across various blockchain applicationsRegulatory statusEvolving clarityIncreasing regulatory acceptance
As you can see, some elements of the Ethereum ETF are quite similar to the Bitcoin ETF, courtesy of their presence in the U.S.
Should you be excited about Chainlink ETFs?
This Chainlink ETF guide shows that while these TradFi-friendly investment vehicles have not yet been approved in the U.S., their potential will be significant when that time comes. Note that while investing in ETFs can offer greater protection than direct LINK investment, this does not mean profits are guaranteed. ETFs in any form carry risk, and the crypto market is volatile, regardless of the form of exposure you choose.
