Chainlink ETF Explained: What It Is and How It Works

With the approval of Bitcoin and Ethereum ETFs in the US, the focus has shifted to speculation. Which cryptocurrency will get an ETF next? Investors are eyeing the potential of popular altcoins like Chainlink, Solana, XRP and more. This Chainlink ETF guide looks at the potential of these regulated financial instruments and their current status in 2024.

Unboxing the Chainlink ETF

Chainlink ETFs are like any other exchange-traded fund. They give investors access to LINK, the native cryptocurrency of the Chainlink ecosystem.

Chainlink is a popular decentralized oracle ecosystem that connects the blockchain world with the world outside the blockchain. Simply put, blockchains that need real-time information from around the world can use Chainlink to help them. LINK is used in the ecosystem as a payment method.

Potential Features of Chainlink ETF

Here are some of the features you can expect from the Chainlink ETF:

• Investors can gain direct access to Chainlink’s decentralized oracle network, which is a critical component that allows smart contracts to interact with real-world data (e.g. APIs, payment systems, etc.).
• Given that these ETFs will contain LINK as their underlying asset, they will likely allow investors to actively participate in the growth of the Chainlink ecosystem.
• These products could include mechanisms that align with Chainlink’s core principles of decentralized governance, giving ETF holders a voice in strategic decisions that affect the health of the fund.
• Such ETFs could expand investor access to DeFi platforms that use Chainlink oracles, potentially leading to exciting liquidity pools and farming opportunities.
• Chainlink ETFs could use smart contracts to automatically recalibrate and rebalance their holdings based on market conditions or other predefined criteria.
• These ETFs will likely help investors expand their knowledge of decentralized oracles and blockchain technology in general.

Chainlink ETF Guide and Components: BIC

Chainlink ETF Guide: How Will It Work?

As mentioned earlier, Chainlink ETFs will work similarly to traditional exchange-traded funds (ETFs), but with a focus on digital assets and blockchain technology. Let’s dive a little deeper into the process.

The process of creation and redemption

The process of creating and redeeming shares in Chainlink ETF is very similar to that of traditional ETFs. Authorized participants (APs) play a crucial role. Typically, these are large financial institutions that create new ETF shares by contributing an equivalent value of the underlying asset (in this case, $LINK) to the fund. In return, they receive ETF shares. Conversely, they can exchange ETF shares for the underlying Chainlink tokens.

The Chainlink ETF Creation Process: BeInCrypto

The concept of underlying assets

The underlying asset physically backs all ETFs. This means that The Chainlink ETF stores real LINK tokens in a secure, institutional-grade custody solution. This support provides security and confidence that the value of the ETF is directly linked to the performance of Chainlink.

For example, the 21Shares Chainlink ETP is 100% physically backed and stores LINK tokens in cold storage for security purposes.

Exchange Trading on Chainlink ETF

Like traditional ETFs, Chainlink ETFs can be listed and traded on major stock exchanges. Investors can buy and sell ETF shares through their brokerage accounts, making it easy to access Chainlink without interacting with crypto wallets and exchanges.

For example, the Global X Chainlink ETP (LI0X) is listed on exchanges like Deutsche Börse Xetra and offers cost-effective access to Chainlink. However, as of August 1, 2034, this is only one of a few examples..

Concept of the regulatory framework

All ETFs must undergo rigorous regulatory review before being approved. So, despite the global presence of comparable products like the Chainlink ETN and other ETPs, Chainlink ETFs are still not available in the US.

AP, the underlying assets (in this case LINK), and the concept of regulatory approval or lack thereof form the basis of the LINK ETF.

Chainlink ETF Global Presence

As mentioned, Chainlink ETFs are not yet approved in the US. Even globally, the presence of exchange-traded funds is minimal. However, there are a few exchange-traded notes (ETNs) and other exchange-traded products (ETPs) that you can look into to better understand the structure and operation. These include the following:

21Shares Chainlink ETP: Switzerland and Germany

• Name: 21Shares Chainlink ETP
• Ticker: LINK, 21XL
• ISIN code: CH1100083471
• Nature: Exchange Traded Product (ETP), listed as ETN
• Trading platforms: SIX Swiss Exchange, Deutsche Börse Xetra.
• Assets under management (AUM): US$13.95 million (as of July 2024)
• YTD Yield: -3.04%
• One year return: +99.83%
• Performance indicators:
• Volatility for the year: 79.71%
• Maximum drawdown for the year: -41.39%

Key Features

• 100% physical backing of LINK tokens
• Cold storage provided by an institutional custodian
• Carbon neutral since 2018
• Expense Ratio: 2.50%
• Custodian: Coinbase Custody Trust Company, LLC

VanEck Chainlink ETN: Germany

• Name: VanEck Chainlink ETN
• Ticker: VLNK
• ISIN code: DE000A3GXNV0
• Nature: Exchange Traded Notes (ETN)
• Trading platforms: Deutsche Börse Xetra.
• Assets under management (AUM): US$4.65 million (as of July 2024)
• YTD Yield: -10.15%
• Return for one year: +165.60%
• Volatility for the year: 80.37%
• Maximum drawdown since creation: -41.92%

Key Features

• Fully Backed, Copies MarketVector™ Chainlink VWAP Close Index
• Direct access to LINK tokens stored in cold storage
• Provides the right of redemption against delivery of the corresponding cryptocurrency
• Expense ratio: 1.50%
• Custodian: Adjustable Cryptocurrency Custodian

Global X Chainlink ETP: Germany

• Name: Global X Chainlink ETP
• Ticker: LI0X
• ISIN code: GB00BM9JYJ86
• Nature: Exchange Traded Product (ETP)
• Trading platforms: Xetra
• YTD Yield: +22.25%
• Volatility for one year: data not available
• Maximum drawdown since creation: -41.92%

Key Features

• Provides access to Chainlink by replicating the performance of the underlying index
• Collateralized debt obligation backed by physical assets LINK

It is also important to mention the US-based ARK 21Shares Bitcoin ETF. While not a pure Chainlink ETF, it does use Chainlink’s proof-of-reserve (PoR) platform to operate. This integration allows investors to check ETF holdings in real time, providing a higher level of trust and security.Here are the main details.

Ticker: ARKB

Nature: Bitcoin ETF

Partnership: ARK Invest and 21Shares are key players in this ETF. They use Chainlink technology to improve the reliability of data associated with ETF assets.

Impact on the price of LINK tokens: Following the integration, Chainlink’s price has risen significantly, reflecting market optimism about the usefulness of Chainlink technology in improving financial products.

Benefits of Investing in Chainlink ETFs

Investing in any cryptocurrency-backed exchange-traded product has many advantages. The most obvious ones are:

• Better portfolio diversification
• Easy Access to Cryptocurrency Investing
• Improved transparency
• Increased security as LINK tokens fully back ETP and ETN, stored in cold wallets.
• Contributing to achieving carbon neutrality in line with Chainlink’s environmental commitments
• Tax incentives
• Products like the VanEck Chainlink ETN have decent returns, even reporting an annualized return of +165.60%.

Chainlink ETF Guide: Are There Any Risks?

ETFs are closer to traditional market instruments than general crypto investments. However, if you are considering a crypto ETF, there are a few considerations to keep in mind:

• There are regulatory risks associated with cryptocurrencies
• Technological risks associated with smart contract failures, etc.
• Liquidity risks, mainly on smaller exchanges
• Security risks
• Lack of historical data
• Market volatility caused by changing sentiment and perceptions
• Counterparty risks

Chainlink vs Chainlink ETF

Should you choose the standard LINK token or consider investing in the Chainlink ETF? Here’s a table to help you decide:

Now that we have covered the differences regarding tokens and ETFs, let’s focus on the differences regarding ETFs.

Also, here’s what the standard investor flow would look like if Chainlink ETFs are approved in the US.

Chainlink ETF and Investor Flow: BIC

Chainlink ETF vs Bitcoin ETF

Here’s how the Chainlink ETF compares to the original crypto ETF:

The quote below highlights the importance of Bitcoin ETFs in promoting the Chainlink ETF.

“Net new buyers drive greater adoption and market cycles.”

Sergey Nazarov, Co-Founder of Chainlink: X

And, remarkably, nothing has attracted as many new buyers as the Bitcoin ETF.

Chainlink ETF vs Ethereum ETF

Chainlink ETFs should follow the example of the recently approved Ethereum ETFs. Here’s how they differ on paper.

As you can see, some elements of the Ethereum ETF are very similar to the Bitcoin ETF, due to their presence in the US.

Should You Be Excited About the Chainlink ETF?

This Chainlink ETF guide shows that while these TradFi-focused investment vehicles have not yet been approved in the US, their potential will be significant when the time comes. Please note that while investing in ETFs may provide greater protection than direct LINK investments, this does not mean that profits are guaranteed. ETFs in any form carry risk, and the cryptocurrency market is volatile no matter what form of investment you choose.