Summary BITW is a high beta ETF focused on the top 10 cryptocurrencies, with over 90% in Bitcoin and Ether, offering robust market access. ETFs like BITW mitigate operational and regulatory risks compared to unregulated crypto exchanges, focusing solely on market risk for retail investors. BITW outperforms Bitcoin in rallies, up 56% in the past month, but carries high volatility with a 61% standard deviation and 64% annualized volatility. BITW serves as a diversification tool in the crypto space, ideal for investors seeking to increase risk/reward during bullish markets. Thesis While we are still amazed by the advent of the crypto universe, its establishment as an asset class cannot be debated. And just like any asset class, crypto has established players and high beta ones. Bitcoin and Ether are the two largest and most established cryptocurrencies, while the crypto universe has a plethora of other coins. The main difference between the established players and the secondary ones is represented by volatility and beta factor. With the significant rally in cryptocurrencies in the past two weeks, we are going to show retail investors how they can take advantage of exchange traded instruments which offer access to higher beta names in the crypto world. Bitwise 10 Crypto Index Fund ETF ( BITW ) is an exchange-traded fund that does just that, via a regulated and robust structure versus crypto exchange investing. Structure matters - ETFs over crypto exchanges Let us start with the basics - while ETFs are established capital markets instruments, crypto exchanges are a different breed : Centralized cryptocurrency exchanges act as an intermediary between a buyer and a seller and make money through commissions and transaction fees. You can imagine a CEX to be similar to a stock exchange but for digital assets. Popular Crypto Exchanges are Binance, Coinbase Exchange, Kraken and KuCoin. Much like stock trading websites or apps, these exchanges allow cryptocurrency investors to buy and sell digital assets at the prevailing price, called spot, or to leave orders that get executed when the asset gets to the investor’s desired price target, called limit orders. Unlike established capital markets exchanges though, crypto exchanges are most of the time unregulated, thus subject to a plethora of risk factors, including operational risk factors and outright fraud. As the FTX bankruptcy taught us, even the most recognized names in crypto can turn out to have fraudulent aspects to them. Traditional capital markets exchanges, on the other hand, have been around for almost a century, and are heavily regulated by their respective oversight bodies. Take the New York Stock Exchange as an example: As a registered securities exchange, NYSE National is subject to the regulatory oversight of the SEC and all rules and amendments must be filed with and approved by the SEC pursuant to Section 19(b) of the Securities and Exchange Act of 1934 and Rule 19b-4 thereunder. From this section, a retail investor needs to understand that trading crypto via an unregulated exchange is fraught with risks, in addition to the usual market risks faced when purchasing a security. For that very reason, we are much more inclined to invest in crypto via ETFs or CEFs, instruments traded on regulated exchanges. Via this method of investing, an investor only takes market risk. What does BITW hold? A mixed portfolio of cryptos, but overweight Bitcoin and Ether. Let us start with the fund definition first: The Fund seeks to track an Index comprised of the 10 most highly valued cryptocurrencies, screened and monitored for certain risks, weighted by market capitalization, and rebalanced monthly. The fund provides the security and simplicity of a traditional investment vehicle. Currently, the fund is overweight Bitcoin and Ether: Holdings (Fund Website) Via the current market weighted composition, the fund has over 90% of its holdings in Bitcoin and Ether. The other significant fund components are Solana and XRP. Given its market capitalization build, do expect the two largest players to always have a meaningful weighting here. Nonetheless, a retail investor also gets access to higher beta plays. Unlike crypto exchanges where an investor can choose outright the individual currencies they want to trade, BITW provides for a third-party methodology based way to access the 10 most highly valued cryptos (as per the BITW methodology, which can be downloaded here ). What a retail investor should take away from this section is that BITW is an easy way to access a universe of 10 large liquid cryptos, with a market capitalization approach to the fund build. BITW is a higher beta play when compared to bitcoin outright When looking at returns, BITW shakes-out to be a high beta play in crypto when compared to Bitcoin outright: Performance (Seeking Alpha) Given its composition, the fund tends to have larger moves both to the downside and to the upside. While its correlation to bitcoin outright is very high, we can notice how BITW overshoots during sell-offs and also outperforms during rallies. In the past month, BITW is up +56% while BITO is up 'only' +30% from a total return perspective. Investors expecting the crypto rally to continue into year-end should expect high beta plays to outperform. Retail investors, however, need to be warned that BITW is truly a 'high beta' name. Suffice to look at the Seeking Alpha Risk page: Risk Metrics (Seeking Alpha) The one year standard deviation is 61% and the annualized volatility is 64%. Keep in mind the same figures for the S&P 500 are around 12%. The risks are tremendous here, but also the rewards, with BITW being up over +130% in the past twelve months. A building block for an emergent asset class We would like to think of BITW as a building block for the emergent crypto asset class. While we now have Bitcoin and Ether ETFs, more will follow (we believe). However, many cryptos will have issues around liquidity, build and tradability which will prevent them from ever being packaged via ETFs. To that end, a retail investor wanting to consolidate all investing in a brokerage account will need to use building blocks such as BITW. As highlighted above, we consider BITW as a high beta play in the crypto space, and we would go long only when wanting to increase the risk/reward ratio in the crypto space. While being more of a blunt instrument via the low amount of cryptocurrencies that can be introduced in its build, the fund does serve the purpose of diversification and layering in of beta during bull markets. Risk factors There are numerous risk factors in the crypto world, starting with operational risk (i.e. including hacking here) and ending with fundamental valuation concerns. Cryptos do not generate cash flows or earnings, and in our view are a momentum play for bull markets. However, investors have taken a liking in the asset class, and with more cash being allocated to the sector it is not an investment instrument that can be ignored. In our opinion trying to eliminate operational and regulatory risk and only focusing on market risk is the correct approach here, which is largely achieved via ETF investing. Conclusion BITW is an exchange-traded fund focused on the largest ten cryptocurrencies. The name is overweight bitcoin and ether, currencies which make up over 90% of the fund. The ETF is up over +56% in the past month, representing a high beta play in the crypto space, and outperforming bitcoin outright. The ETF circumvents many of the risk factors associated with investing via a crypto exchange, but at the same time provides for no flexibility in choosing what cryptos are introduces in the holdings. We view the name as a high beta building block in the crypto space, and investors looking for the crypto rally to continue into the year-end would be well served to look at BITW in addition to bitcoin outright.
