Summary The Bitwise 10 Crypto Index Fund holds a market capitalization-weighted portfolio of cryptocurrencies, with Bitcoin and Ethereum currently making up approximately 90% of the portfolio. The Fund's management fees are very high and its K-1 tax treatment is a material drawback to ownership. Investors in the Fund should consider swapping out of the Fund into less expensive and more tax-friendly crypto offerings. Introduction In light of all the exchange-traded funds (" ETFs ") that the Securities and Exchange Commission (" SEC ") finally approved for Bitcoin USD ( BTC-USD ), and with Ethereum USD ( ETH-USD ) ETFs in the offing, the Bitwise 10 Crypto Index Fund ETF ( BITW ) (the " Fund ") is an investment product that lacks a clear investment purpose. Couple the lack of purpose with K-1 tax treatment and a high management fee (2.50%), and you have a lousy investment cocktail, at least on a relative basis. With the foregoing in mind, it will not be a surprise that I view the Fund as a SELL and recommend that investors swap out of the Fund and into one of the newly approved Bitcoin ETFs and an Ethereum futures fund (and later an Ethereum ETF if and when one or more of them are approved by the SEC). Of course, such a swap should NOT be entertained if the tax consequences are punitive; indeed, some investors may have large unrealized gains built into their ownership of shares of the Fund. Consequently, investors in the Fund should consult their tax advisors whenever engaging in a material sale transaction. Notably, the Fund's sponsor, Bitwise Investments (" Bitwise "), offers the tools to do such a recommended swap and, putting tax consequences aside, the savings of such a move should be obvious: Investment Product Bitcoin/Ethereum Allocation Management Fee The Fund 67.7% Bitcoin; 22.3% Ethereum 2.50%* Bitwise Bitcoin ETF ( BITB ) 100% Bitcoin 0.20% Bitwise Ethereum Strategy ETF ( AETH ) 100% Ether Futures/Derivatives 0.85% * Due to the very high discount to Net Asset Value (" NAV ") (currently above 40%), the effect of the very high management fee is somewhat diminished, but still very high on a relative basis. Fund Basics With an odd legal structure (particularly post-Bitcoin ETFs approval), the Fund is a Delaware statutory trust that tracks an Index comprised of the 10 most highly valued cryptocurrencies (the " Index Components "); however, the Fund is non-diversified with Bitcoin and Ethereum currently making up approximately 90% of the portfolio (see table above). The Index Components are "screened and monitored by Bitwise for certain risks, weighted by market capitalization, and rebalanced monthly" to reflect market changes, which can be volatile. The Fund's rules-based methodology provides rules-based exposure to the crypto market. The Fund owns assets representing a large portion of the total crypto market, while as shown and noted above, it is heavily weighted toward Bitcoin and Ethereum. The Fund's website contains general information about the Fund and certain of its affiliates. Custody is a critical component of crypto asset management and the Fund's assets are held securely ("in cold storage") with Coinbase Custody Trust Company, LLC. Moreover, the Fund strives to keep up with industry best practices, including best practices for storing and securing crypto assets. Certain basic data concerning the Fund is found below: Inception Date: November 22, 2017. Market Price as of 2/16/24: $23.97. NAV as of 2/16/24: $41.47. Net Assets: $839 million (per the Fund's Website ). Fund Discount to NAV: (42.12%). The Fund's 52-week high is $26.20 and its 52-week low is $8.30. The discount to NAV is material as of the time of writing. The Portfolio As noted above, the Fund holds a market capitalization-weighted portfolio of cryptocurrencies. Per the Fund's website (linked above), the (unofficial) holdings as of February 16, 2024, are shown below. NAME WEIGHT MARKET CAP PRICE Bitcoin USD 67.7% $1,010,340,725,316 $51,528 Ethereum USD 22.3% $334,097,937,476 $2,780 Solana USD ( SOL-USD ) 3.2% $46,957,961,660 $108 Ripple USD ( XRP-USD ) 2.0% $29,919,514,543 $0.55 Cardano USD ( ADA-USD ) 1.40% $21,037,012,257 $0.60 Avalanche ( AVAX-USD ) 1.0% 14,574,568,560 $39.73 ChainLink USD ( LINK-USD ) 0.70% $11,438,124,822 $20.13 Polkadot ( DOT-USD ) 0.70 $10,149,505,645 $7.67 Polygon USD ( MATIC-USD ) 0.6% $8,871,254,512 $0.92 Litecoin USD ( LTC-USD ) 0.3% $5,182,393,483 $69.61 Given all the changes in the competitive landscape (i.e., all the new ETF offerings), the Fund's low level of exposure to alt-coins is disappointing. If the Fund wanted to differentiate itself and make itself marketable again, I think it would change its portfolio allocation rules to institute a max weighting for any holding. Specifically, I would not allow any single holding to exceed 50% of the Fund. Such a rule would cause investors in the Fund to gain greater exposure to alt-coins relative to the portfolio's Bitcoin position. Such a rule would provide value for investors who want alt-coin exposure in a traditional investment wrapper. On the flip side, the alt-coins are so volatile that I understand why the Fund might not be interested in implementing such a change. Moreover, implementing such a change might be difficult from a governance perspective (I haven't researched whether existing holders would have to approve such a change). As it stands, however, the allocation to the alt-coins is too small to make a material difference in fund performance in my view, and that is a drawback of the Fund, in addition to the high fees and K-1 tax treatment. On the other hand, however limited, the Fund is still one of the few traditional investment vehicles that offers exposure to alt-coins (Grayscale Digital Large Cap Fund LLC (GDLC) being the other one of which I am most familiar ). Notable Risks Risks of investing in the Fund, among others listed in the Fund's most recent Annual Report, include the following: Income Taxes : The Fund is classified as a partnership for U.S. federal income tax purposes. As such, investors receive K-1s at the end of the year. K-1s can complicate tax reporting and will likely add to the cost of an investor's annual income tax accounting. Investors should be sure to understand the tax implications of an investment in the Fund. Volatility : The Fund's investment in cryptocurrencies involves a high degree of risk and comes with a lot of volatility. The high expense ratio of 2.50% also adds to the downside risks. Regulatory Risks : Uncertainties in government regulation are an ever-present risk in the crypto space and may result in significant price fluctuations. The Fund, which is a trust, is not a banking institution or otherwise a member of the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Discount/Premium: As a trust, the Fund does not necessarily trade at or near its net asset value (" NAV "). Currently, the Fund trades at a significant discount to its NAV. There is no guarantee that the NAV discount will shrink or that it will not grow even wider. Non-Diversified : 90% of the Fund consists of Bitcoin and Ethereum. By virtue of this large-cap crypto focus, the Fund necessarily misses some of the massive returns that occur in the smaller-cap token space. As noted earlier, even large moves in small fund holdings will not necessarily move the needle in terms of Fund performance. Concluding Thoughts While I am mildly bullish on crypto, I am not particularly excited about the Fund given the more affordable options available. The K-1 partnership tax treatment is a material, if not fatal, drawback too (for me at least). If taxes are not an issue, I would SELL the Fund and gain exposure to the underlying cryptocurrencies utilizing more reasonably priced (i.e., lower management fee) options. Because of the Fund's material discount, however, I could get interested in the Fund if it were to allocate a greater portion of its assets to alt-coins, but with more than $800 million in assets under management, I do not expect the Fund to make such an imaginative marketing move for my benefit (or anyone else's) any time soon.
