Asset Management Firm Bitwise Launches Two New Funds In Slumping Crypto Markets

Hunter Horsley, Bitwise CEO

Even as retail investors flee a crashing cryptocurrency market, institutional investors are loosening their purse strings.

Last month, digital asset manager Grayscale reported record institutional capital inflows into the firm. This month, San Francisco-based asset management firm Bitwise is announcing the addition of two new index funds to service increased demand for cryptocurrencies from institutional investors.

Since the start of this year, bitcoin, the world’s most valuable cryptocurrency, is down by 70%. Cryptocurrency markets have capsized in tandem, crashing by 85% from their highs during the first week of this year.

Bitwise’s index funds have mirrored the market’s gyrations. The Bitwise 10 Large Cap Crypto Index, which tracks returns for the 10 biggest cryptoassets, is down by approximately 79% since the start of this year. The Bitwise 20 Mid Cap Crypto Index, which tracks returns for 20 of the largest cryptoassets, is down by 91% from the beginning of January.   

For some, the drawdown is further proof of a bubble in cryptocurrency markets. For others, the crash is an opportunity to make an investment, says Bitwise CEO Hunter Horsley.  

The Bitwise Bitcoin Fund and Bitwise Ethereum Fund physically hold the world’s first- and third-most valuable cryptoassets and are aimed at capturing market returns for both. The funds are open to U.S. – based accredited investors and institutional investors.The latter will have to pony up a minimum investment amount of $1 million and accredited investors have to start with $25,000. 

Customer Demand and Dissatisfaction

Customer demand was one of the reasons for launching the new funds, according to Horsley. Most investors in the firm’s other index funds leave asset allocation to managers but some have a “strong view”, he explains. “They want exposure to a single cryptocurrency or they want to tilt their index fund exposure towards one coin,” he says.

Dissatisfaction with existing products in the market was another contributing factor to the decision. While the SEC has cited multiple concerns in its refusal to approve bitcoin ETFs, pent up demand from U.S. investors for exposure to cryptocurrencies has flowed into complex products with high premiums.

For example, shares for Grayscale’s Bitcoin Investment Trust (GBTC), the only direct bitcoin-related security in public markets currently, trade at double-digit premiums to the vehicle’s asset holdings. In simple words, this means that investors are paying extra, over and above the price of bitcoin at cryptocurrency exchanges, for GBTC’s shares. As of this writing, the trust’s share price has a 22% premium over its net asset value (NAV).

The run up in cryptocurrency prices last year widened the disparity between the fund’s holdings and its share price. On 18th December, investors were paying $37.98 for a single GBTC share to own 18.94 bitcoin, a 100% premium. That’s a significantly high number as compared to the average premiums for funds even from established firms, such as Blackrock. The premium also comes with significant riders and risks attached. To be sure, Bitwise’s funds are also not immune to the high spreads from underlying assets that plague cryptocurrency-related investment vehicles. 

In an interview with investors.com, Michael Sonnenshein, managing director at Grayscale, said several factors were responsible for the premium in GBTC’s price, from fewer shares in the market to being the only the U.S. – based provider of a security with direct exposure to bitcoin.  Investment in Bitcoin Investment Trust is further complicated by its structure, which straddles secondary and OTC markets. This means investors from secondary markets can sell the firm’s shares to retail traders at high markups in OTC markets.  

Bitwise is hoping that the simplified structure of its index funds will work in its favor. The structure has translated to reduced expense ratios that capture all costs without any hidden add-ons.  The firm touts its all-in-one expense ratio of 1% for institutional investors and 1.5% for accredited investors. “Investors and advisors like the fund format because it’s professionally managed and simplifies access to best-in-class custody, trading, reporting, tax preparation, and allows for the safe capture of events like hard forks and airdrops,” stated Horsley.

The new crop of Bitwise funds is aimed at institutional and not retail investors. Bitwise had tied up with cryptocurrency wallet company Abra to create a token of its index fund earlier this year. It does not have similar plans for the new funds. “With Abra, it was an opportunity to offer index investing to anyone,” says Horsley and adds that institutional investors like the fact that their most recent offerings are formulated as funds.