10-K: Bitwise 10 Crypto Index Fund Reports 2023 Annual Results, Cites Significant Market Volatility

Bitwise 10 Crypto Index Fund's 2023 annual report highlights substantial fluctuations in crypto asset values and a shift in valuation methodology.

Summary

• The Bitwise 10 Crypto Index Fund is a Delaware Statutory Trust that aims to track the performance of the top 10 crypto assets by market capitalization.
• The fund experienced significant volatility in its portfolio due to fluctuations in crypto asset prices throughout 2023.
• The fund's management fee is 2.5% per annum of the net asset value, paid monthly in arrears.
• The fund does not operate a redemption program, and shares may trade at a premium or discount to the net asset value.
• The fund changed its valuation policy, moving from a blended average price to a principal market approach, effective August 31, 2021, and further refined this process using a third-party vendor, Lukka, Inc., effective February 13, 2023.
• The fund's portfolio is rebalanced monthly to align with the Bitwise 10 Large Cap Crypto Index.
• The fund may engage in staking activities if deemed beneficial to shareholders, but has not significantly expanded such activity.
• The fund's portfolio had a 99.99% correlation with the assets included in the Index as of December 31, 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture, with significant volatility and losses in 2022, followed by a recovery in 2023. The lack of a redemption program and the high management fee are also negative factors. The document is factual and does not attempt to hide the risks.

Positives

• The fund's portfolio had a 99.99% correlation with the assets included in the Index as of December 31, 2023.
• The fund experienced a significant turnaround in net assets, moving from a substantial loss in 2022 to a significant gain in 2023.
• The fund has implemented a robust valuation process using a third-party vendor to identify principal markets for its assets.

Negatives

• The fund's shares have historically traded at a significant premium or discount to the net asset value.
• The fund does not have a redemption program, which can lead to price discrepancies.
• The fund is subject to the risks of the volatile crypto asset market, including potential cyberattacks and security breaches.
• The fund's management fee is 2.5% per annum of the net asset value, which can be a significant expense.

Risks

• The fund is subject to the extreme volatility of crypto asset prices.
• The long-term viability of crypto assets is unknown.
• The unregulated nature of blockchain technologies and crypto assets poses risks.
• The fund's value is dependent on prices established by crypto asset exchanges, which are often unregulated.
• The fund's assets are vulnerable to cyberattacks and security breaches.
• Transactions in crypto assets may be irreversible.
• The market for crypto assets is characterized by shallow trade volumes and low liquidity.
• Geopolitical events may negatively impact the supply and demand for crypto assets.
• The fund's shares may trade at a substantial premium or discount to the net asset value due to the lack of an arbitrage mechanism.
• The fund's index has a limited history and its methodology is relatively new.

Future Outlook

The Trust does not provide specific forward-looking statements, but notes that the crypto asset market is rapidly evolving and subject to significant uncertainties.

Management Comments

• The Sponsor expects the market price of the Shares to fluctuate over time in response to the market prices of Portfolio Crypto Assets.
• The Sponsor strives to minimize tracking error by managing costs and price slippage during trade execution, and holding the assets in the Index.
• The Sponsor has the discretion, when possible and prudent, to take advantage of incidental opportunities to generate additional returns in excess of the Index that arise from the Portfolio Crypto Assets held by the Trust.

Industry Context

The announcement reflects the ongoing volatility and regulatory uncertainty in the crypto asset industry, highlighting the challenges and risks associated with investing in this emerging market.

Comparison to Industry Standards

• The fund's approach of tracking a broad index of crypto assets is similar to other index funds in traditional markets, but the lack of a redemption program and the volatility of the underlying assets create unique challenges.
• The fund's management fee of 2.5% is relatively high compared to traditional index funds, but may be justified by the complexity and risks associated with managing a crypto asset portfolio.
• The fund's reliance on a single custodian and the lack of insurance on the underlying assets are common practices in the crypto asset industry, but may expose investors to additional risks.
• The fund's use of a third-party vendor for valuation is a step towards greater transparency and accuracy, but the reliance on exchange data still carries risks.

Related Party Transactions

• The Sponsor charges the Trust a management fee of 2.5% per annum of the net asset value.
• The Sponsor is responsible for all ordinary operating expenses of the Trust.
• The Trust has a license agreement with Bitwise Index Services, LLC, an affiliate of the Sponsor, to use the Index.

Stakeholder Impact

• Shareholders are exposed to the volatility of the crypto asset market and may experience significant gains or losses.
• Shareholders do not have voting rights and rely on the Sponsor for management of the Trust.
• Shareholders may not be able to sell their shares at a price that reflects the net asset value of the Trust.
• Shareholders may be subject to tax liabilities based on their allocable share of the Trust's income or loss.

Next Steps

• The Trust will continue to rebalance its portfolio monthly to track the Bitwise 10 Large Cap Crypto Index.
• The Sponsor will continue to monitor the crypto asset market and make adjustments to the Trust's operations as needed.
• The Trust may engage in staking activities if deemed beneficial to shareholders.

Key Dates

Keywords

crypto assets, bitcoin, ethereum, blockchain, index fund, investment, volatility, OTCQX, valuation, custody