Bitwise 10 Crypto Index Fund: Riding The Cryptocurrency Wave
Summary
- The crypto boom continues with recent new highs posted in Bitcoin.
- Ethereum has outperformed Bitcoin as alt coins gain further traction.
- An index that offers broader exposure to the asset class has appeal.
- The article below examines the case for the Bitwise 10 Crypto Index Fund.
Bitcoin
Keeping with the theme of recent articles covering the Bitcoin (BTC-USD) Ecosystem, a pivot towards funds that operate in the space is warranted. Unlike the pure plays such as the Grayscale Bitcoin Trust (OTC:GBTC), a pure-play on the rise of BTC, or its chief rival the Grayscale Ethereum Trust (OTCQX:ETHE), the Bitwise 10 Crypto Index (BITW) offers investors a broader basket of Crypto. The concept has merit for investors as a unique way to profit from the next BTC. A broader basket's diversity has a few drawbacks that an investor needs to be comfortable with.
Source: Bitwise
Fund Composition
The BITW fund's primary holding is BTC, with a 79% weighting in the fund with Ethereum up next with a 15% stake. The rest of the fund is earmarked towards a broad basket of smaller crypto players with the concept of having exposure in case one takes off and proves itself. During the previous bull cycle in BTC some alt-coins managed to thoroughly trounce the performance of BTC. I view the concept as a rising tide lifts all boat theory. The BITW concept, in my view, is valid-- however, some key drawbacks need to be addressed to gain a broader picture of the opportunity. The primary risk for individual investors is the premium built into the fund. BITW offers credited investors the opportunity to invest in the fund at net asset value (NAV), which has some broad appeal. I prefer to pivot into funds at NAV and detest paying premiums as I have seen premiums evaporate over time, affecting overall performance. For non-credited retail investors, which is the majority of the audience reading this piece, you have the pleasure of buying the index at the open market at a premium of over 100% of NAV. At the close on March 1st, 2021, the fund's NAV is 42.15, with a closing price on the open market of 104 per share. The premium here of over 110% to NAV is genuinely astounding, one of the most egregious overvaluations I have come across.
The fees imposed by the fund are another area that investors need to be comfortable paying. The fee structure in the Crypto fund provider space is trending downward with new entrants into the field. The competition for assets is suitable for investors, as fees matter. BITW expense structure of 2.5% of assets is remarkable, and the provider is not in line with the broad trend in the field. For example, an investor can allocate funds into GBTC and ETHE and capture the bulk of the move of the two primary components of BITW while paying less in fees and far less in premium.
Risks
My bullish stance on Crypto has not wavered. My issue with the various products available in the marketplace is the premium over NAV. For example, in early January, I detailed my bullish stance on Ethereum found here, but I couldn't get on board with the ETHE as the premium was approaching 100%. Fast forward to today, Ethereum has more than doubled yet, and ETHE is down slightly year to date as the premium has evaporated. GBTC also traded at a steep premium throughout the year; however, the premium has shrunk to a more acceptable single-digit level over the past couple of weeks. The deflation in the premium has allowed me to allocate into both the GBTC and ETHE, allowing exposure without the custody of the coin issue. In fairness, BITW does solve the custody issue, but the price is steep.
Shorting Bitwise 10 Crypto Index
An aggressive investor has the opportunity to bet on the premium evaporating by going long BTC and ETHE and shorting BITW. The strategy is an aggressive one and comes with the unique risk of a short-squeeze appearing. There are no options available on BITW, which limits some of the methods investors have.
Concluding Thoughts
The concept of BITW holds some appeal; however, the current premium embedded in the share price has me firmly planted on the sidelines. An aggressive investor may want to explore the opportunity to short the index on a bet the premium will evaporate over time.
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Analyst’s Disclosure: I am/we are long GBTC, ETHE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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