Today, Bitwise and Exchange Traded Concepts rolled out the first ETF to actually reference “crypto” in its name, something that the SEC has been cagey about allowing.
The Bitwise Crypto Industry Innovators ETF (BITQ) does not invest directly in bitcoin or other cryptocurrencies but instead focuses on the companies that make the cryptocurrency space possible by providing support services and equipment.
BITQ comes with an expense ratio of 0.85% and lists on the NYSE Arca.
Importantly, this is not a bitcoin fund.
“Mostly this fund is designed for people who are excited about what’s happening in crypto but aren’t comfortable holding traditional crypto assets. This offers a way to get some exposure to the theme in a traditional ETF with companies you can value using DCF [discounted cash flow], etc.,” said Bitwise Chief Investment Officer Matt Hougan, noting correlations of individual companies in the portfolio with bitcoin itself can range from 0.2 to 0.8, or from “less correlated to very correlated.”
Hougan further points out that not only are these companies growing at exponential speed, they are also profitable, which is often not the case in a new and rapidly growing industry.
The fund tracks the Bitwise Crypto Innovators 30 Index, which covers companies that provide services and equipment to the cryptocurrency space, including crypto mining firms, crypto mining equipment suppliers and crypto financial services companies, according to the prospectus.
The index divides eligible companies into two tiers. The first represents pure-play companies that derive at least 75% of their revenue from cryptocurrency-related activities or at least 75% of their net assets from holdings in cryptocurrencies. Tier 1 companies are collectively weighted at 85% in the index.
Tier 2 companies are those with at least $10 billion in market capitalization that have significant business operations in the cryptocurrency space or significant assets held in cryptocurrencies. It’s weighted at 15% of the index, the fund document says.
The index selects the top 20 components from Tier 1 and the top 10 from Tier 2 to arrive at the final list of holdings. Individual holdings are capped at 10% of the index, while reconstitutions and rebalancings take place on a quarterly basis, the prospectus says.
Holdings & Competitors
In the pure-play bucket, Coinbase is the largest holding, but it’s joined by firms like MicroStrategy, Riot Blockchain, Canaan, Galaxy Digital and Silvergate Capital. The second tier holds firms like PayPal, Square and Nvidia.
“Each of these companies plays an important role in some aspect of allowing the crypto ecosystem to thrive, and because it’s so fast moving, they have to continually innovate or they’ll get passed by,” said Hougan.
The recently launched VanEck Vectors Digital Transformation ETF (DAPP) and the $1.3 billion Amplify Transformational Data Sharing ETF (BLOK) are BITQ’s closest competitors, Hougan says, though the former focuses on the entire digital assets space and the latter specifically targets blockchain technology.
DAPP and BLOK are both cheaper than their newest competitor, with respective expense ratios of 0.65% and 0.70%. But while Coinbase is BITQ’s largest holding at launch, neither of those other funds include it among their top 10 holdings.
Contact Heather Bell at [email protected]