Bitwise Crypto Industry Innovators ETF: Late To The Party (NYSEARCA:BITQ)
Tevarak
Introduction
With the inception date of May 11, 2021, the Bitwise Crypto Industry Innovators ETF (NYSEARCA:BITQ) (from now on “Fund“or”BITQ“) enjoyed a few months of (late innings) growth in the crypto bull market before returns fell from a cliff beginning in November 2021 (down over 60% in the past year).
Despite the great downturn, I am BEARISH on BITQ and crypto in general. My macro view, summarized in a previous article on a competitor ETF, is and remains as follows:
Based on proprietary indicators I follow (ie paid research subscription), I currently expect crypto bearishness to extend through the 3rd and 4th quarters of 2022. The space experienced an epic bubble and it will take time (and probably more pain) before space is investable again (despite the bear market rally), especially with the Fed raising interest rates and engaging in quantitative easing, not to mention the recession that will come with the bubble hangover.
When my crypto bearishness changes to bullishness, BITQ is not the investment vehicle I would choose to gain exposure to the crypto industry because (1) the expense ratio is too high, especially for a passive index; (2) the exposure to the crypto miners is not as robust as I would like; (3) the fund faces strong competition from more established asset managers such as Fidelity and BlackRock, not to mention future competitors that will enter the space (such as Charles Schwab); (4) The fund is overbought with a gain of 50+% in the last month (at the time of writing); and (5) the crypto space is still not particularly transparent and remains subject to fraud, which was highlighted in Matt Taibbi’s recent article on Circle Internet Financial, maker of the USDC (USDC-USD) stablecoin.
In summary, while BITQ’s performance will likely be tied to the performance of the crypto market in general, I am bearish on this fund for the reasons stated above.
Basics about the fund
According to the fund’s recent fact sheet, the fund’s primary strategy is to invest in a portfolio of companies that track Bitwise Crypto Innovators 30 Index, a proprietary index designed by the fund’s manager to measure the performance of leading companies in a growing crypto industry. In this regard, at least 85% of the index is claimed to be focused on so-called “pure-play” crypto companies, including (without limitation) Bitcoin (BTC-USD) and crypto trading venues, crypto mining and mining equipment companies and service providers. According to the summary prospectus, such “pure-play” companies derive more than 75% of their revenue from the crypto ecosystem.
The fund’s assets under management are currently under $50 million, at least according to the Sieking Alpha quote page. The manager of the fund, Bitwise, is based in San Francisco, California.
Bitwise is one of the earlier players in the crypto asset management space. By the end of 2021, Bitwise highlights assets under management (“AUM”), including BITQ, in excess of $1.3 billion. Nevertheless, I’m sure the total AUM for Bitwise is now well below $1 billion due to the bear market.
Expenditure and competition
The cost percentage for the fund is 0.85%. This is among the highest expense ratios I’ve seen in the space, and that includes active managers like the Amplify Transformational Data Sharing ETF (BLOK), which by comparison costs 0.71%. The other passive ETFs in the range all come in at 50 basis points (0.50%) or less, including Fidelity’s Passive Offering (FDIG) at 0.39%, BlackRock’s Passive Offering (IBLC) at 0.47%, and VanEck’s Passive offer at 0.50%. In short, BITQ’s high management fee is highly problematic and the fund is likely to find it difficult to attract funds in the longer term! I think the fund will also have trouble competing with Fidelity, BlackRock, VanEck and, once the offering comes on board, Charles Schwab.
Inventory
As of 4 August 2022, the fund’s largest holdings included:
- MicroStrategy (MSTR) 12.45%
- Silvergate Capital (SI) 12.21%
- Coin Base (COIN) 12.20%
- Marathon Digital Holdings (MARA) 6.28%
- Riot Blockchain (RIOT) 5.43%
- Bakkt Holdings Inc (BKKT) 4.59%
- Canaan (CAN) 4.40%
- Galaxy Digital Holdings (GLXY:CA) 4.32%
- Nuclear Science Class A (CORZ) 3.90%
- Bit Digital (BTBT) 3.58%
As for these stocks, I’m looking for more exposure to the crypto miners. In this regard, I stated in a recent article that:
As the tide turns and crypto winter ends, I’ve been thinking a lot about how I want to add portfolio exposure. In this process of discernment, I have decided that the best way [FOR ME] doing so will be via the crypto miners. I’m done with wallets (it’s an age thing, being in my 50s), I’m done with the exorbitant fees of Coinbase (COIN), the regulatory issues of BlockFi, the bankruptcy of Voyager, and so on and so forth re. the centralized crypto exchanges. The miners, on the other hand, are leveraged into crypto, Bitcoin in particular, and I can trade them via my brokerage account with no fees and no administrative and tax headaches.”
This interview also helped me better understand the mining industry.
According to the fund’s fact sheet (linked above), crypto miners make up 31.31% of the fund (as of June 30, 2022). While this is ok relative to other diversified crypto funds, I will look for more concentrated exposure to the miners when my overall view of crypto becomes bullish. [Notably, I do recognize that there are others who do not have a favorable view of the crypto mining industry.]
I am also concerned about some of the fund’s crypto holdings. For example, Canaan Inc. I wrote a bearish article on the company back in March 2021 and the company is now down about 90% since then. I’m still skeptical about Chinese crypto companies.
Likewise, I am skeptical of companies like Galaxy Digital due to their CEO’s promotion of the Luna (LUNA-USD) Ponzi scam. With operating losses as far as the eye can see, Bakkt Holdings (another BITQ top ten holding) also appears to have been a venture capital pump and dump stock; revenues continue to decline and guide downward.
Ultimately, I don’t see what’s so special about the Bitwise index being passively followed by the fund, especially with its emphasis on the source of income (rather than profit). Also, if the fund’s manager (or an affiliate of the fund’s manager) creates the index, is it really passive?
Conclusion
Being overbought (up more than 50% in the last month and above $10 at the time of writing), coupled with my bearish macro views of crypto over the next 4-6 months, make me rate BITQ a SELL. Also, given how expensive the fund is relative to other active and passive crypto ETF offerings, I don’t see why an investor would choose BITQ. Of course, do your own due diligence and remember that scams in the area are probably not completely sanitized.
