S-1/A: Bitwise Files Amendment for Ethereum ETF, Eyes NYSE Arca Listing

Bitwise aims to launch its Ethereum ETF, seeking listing on NYSE Arca under the ticker ETHW, as detailed in its latest S-1/A filing.

Summary

• Bitwise has filed Amendment No. 2 to its Form S-1 registration statement for the Bitwise Ethereum ETF.
• The ETF intends to list its shares on NYSE Arca under the ticker symbol ETHW.
• The ETF's investment objective is to provide exposure to the value of ether, less expenses.
• The Trust will hold ether and value its holdings based on the CME CF Ether Dollar Reference Rate New York Variant (Pricing Benchmark).
• Bitwise Investment Advisers, LLC serves as the Sponsor and will charge a unitary management fee of 0.__% per annum.
• The Trust will create and redeem shares in blocks of 10,000 (Baskets) with Authorized Participants.
• Pantera Capital Management LP has expressed interest in purchasing up to $100 million of shares.
• The Trust will not engage in Ethereum proof-of-stake validation or earn additional ether.
• The offering is registered with the SEC and intended to be continuous for three years, unless extended.
• The Trust is an emerging growth company and not a registered investment company or commodity pool.

Sentiment

Score: 6

Explanation: The document is neutral in tone, as it is a regulatory filing. It presents both the potential benefits and risks associated with the proposed ETF. The sentiment is moderately positive due to the potential for a new investment product, but tempered by the inherent risks of cryptocurrency investments.

Positives

• The ETF provides investors with exposure to ether through a traditional brokerage account.
• The ETF will not use derivatives, limiting counterparty and credit risks.
• The Sponsor believes the ETF's design will enable certain investors to more effectively implement strategic and tactical asset allocation strategies.
• The Ether Custodian's policies, procedures, and controls for safekeeping are consistent with industry best practices.
• The Trust Ether Account and Sponsor Ether Account are segregated accounts and are therefore not commingled with corporate or other customer assets.

Negatives

• Investing in the Trust involves risks similar to those involved with an investment directly in ether and other significant risks.
• The Shares are speculative securities and their purchase involves a high degree of risk.
• Shareholders do not have any voting rights and take no part in the management or control of, and have no voice in, the Trusts operations or business.
• The Trusts return may not match the performance of the Pricing Index because the Trust incurs operating expenses.
• The NAV of the Trust may not always correspond to the market price of its Shares.

Risks

• The trading prices of many digital assets, including ether, have experienced extreme volatility in recent periods and may continue to do so.
• A decline in the adoption of ether could negatively impact the Trust.
• The loss or destruction of private keys could prevent the Trust from accessing its ether.
• New competing digital assets may pose a challenge to ethers current market dominance.
• Competition from central bank digital currencies (CBDCs) and emerging payments initiatives involving financial institutions could adversely affect the value of ether and other digital assets.
• The price of ether may be affected due to stablecoins (including Tether and USDC), the activities of stablecoin issuers and their regulatory treatment.
• If the digital asset award or transaction fees for recording transactions on the Ethereum network are not sufficiently high to incentivize validators, validators may cease expanding validating power or demand high transaction fees, which could negatively impact the value of ether and the value of the Shares.
• If a malicious actor obtains control of more than 50% of the validating stake on the Ethereum network, or otherwise obtains control over the Ethereum network through its influence over core developers or otherwise, such actor could manipulate the Ethereum blockchain, which could adversely affect the value of the Shares or the ability of the Trust to operate.
• Digital asset trading platforms may be exposed to security breaches, fraud and market manipulation.
• Political or economic crises may motivate large-scale sales of ether, which could result in a reduction in the price of ether and adversely affect an investment in the Shares.
• A disruption of the internet may affect Ethereum network operations, which may adversely affect the ether industry and an investment in the Trust.
• Potential amendments to the Ethereum networks protocols and software could, if accepted and authorized by the Ethereum network community, adversely affect an investment in the Trust.
• The open-source structure of the Ethereum network protocol means that the core developers and other contributors are generally not directly compensated for their contributions in maintaining and developing the Ethereum network protocol.
• Decentralized governance of the Ethereum network could have a negative impact on the performance of the Trust.
• The Pricing Index, ERR and CME Ether Real Time Price each have a limited history.
• The Benchmark Provider has substantial discretion at any time to change the methodology used to calculate the Pricing Index, including the Constituent Platforms that contribute prices to the Trusts NAV.
• The Pricing Index could fail to track the global ether price, and a failure of the Pricing Index could adversely affect the value of the Shares.
• The Pricing Index price used to calculate the value of the Trusts ether may be volatile, adversely affecting the value of the Shares.
• The Trusts portfolio will be priced, including for purposes of determining the NAV, based upon the Pricing Index.
• Investing in ether and, consequently, the Trust, is speculative.
• The Trust is a passive investment vehicle.
• The value of the Shares may be influenced by a variety of factors unrelated to the value of ether.
• The NAV may not always correspond to the market price of ether and, as a result, Baskets may be created or redeemed at a value that is different from the market price of the Shares.
• Buying and selling activity associated with the purchase and redemption of Baskets may adversely affect an investment in the Shares.
• The inability of Authorized Participants and market makers to hedge their ether exposure may adversely affect the liquidity of Shares and the value of an investment in the Shares.
• Arbitrage transactions intended to keep the price of Shares closely linked to the price of ether may be problematic if the process for the purchase and redemption of Baskets encounters difficulties, which may adversely affect an investment in the Shares.
• Investors may be adversely affected by purchase or redemption orders that are subject to postponement, suspension or rejection under certain circumstances.
• Investors may be adversely affected by an overstatement or understatement of the NAV calculation of the Trust due to the valuation method employed on the date of the NAV calculation.
• As an owner of Shares, you will not have the rights normally associated with ownership of other types of shares.
• The Sponsor and the Trustee may agree to amend the Trust Agreement or Sponsor Agreement without the consent of the Shareholders.
• The Trust is subject to risks due to its concentration of investments in a single asset class.
• A possible short squeeze due to a sudden increase in demand for the Shares that largely exceeds supply may lead to price volatility in the Shares.
• As the Sponsor and its management have a limited history of operating an investment vehicle like the Trust, their experience may be inadequate or unsuitable to manage the Trust.
• Security threats and cyber-attacks could result in the halting of Trust operations and a loss of Trust assets or damage to the reputation of the Trust, each of which could result in a reduction in the price of the Shares.
• The development and commercialization of the Trust is subject to competitive pressures.
• The Trust may be required to terminate and liquidate at a time that is disadvantageous to Shareholders.
• The Exchange on which the Shares are listed may halt trading in the Shares, which would adversely impact an investors ability to sell Shares.
• The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the market price of the Shares.
• The market infrastructure of the ether spot market could result in the absence of active Authorized Participants able to support the trading activity of the Trust.
• Digital asset trading platforms are not subject to the same regulatory oversight as traditional equity exchanges, which could negatively impact the ability of Authorized Participants to implement arbitrage mechanisms.
• The Authorized Participants serve in such capacity for several competing exchange-traded ether products, which could adversely affect the market for the Shares.
• Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect investors investment in the Shares.
• The Sponsor is leanly staffed and relies heavily on key personnel to manage its activities.
• Conducting creations and redemptions for cash has drawbacks.
• Potential conflicts of interest may arise among the Sponsor or its affiliates and the Trust.
• The Trust is new, and if it is not profitable, the Trust may terminate and liquidate at a time that is disadvantageous to Shareholders.
• Investors cannot be assured of the Sponsors continued services, the discontinuance of which may be detrimental to the Trust.
• The liability of the Sponsor and the Trustee is limited, and the value of the Shares will be adversely affected if the Trust is required to indemnify the Trustee, the Administrator, the Transfer Agent, the Ether Custodian, the Prime Execution Agent or the Cash Custodian.
• Shareholders limited rights of legal recourse against the Trust, Sponsor, Administrator, Transfer Agent, Cash Custodian, Prime Execution Agent and Ether Custodian and the Trusts lack of direct insurance protection expose the Trust and its Shareholders to the risk of loss of the Trusts ether for which no person is liable.
• During the rare and limited circumstances when the Trust utilizes the Agent Execution Model, it may utilize Trade Credits.
• Loss of a critical banking relationship for, or the failure of a bank used by, the Prime Execution Agent could adversely impact the Trusts ability to create or redeem Baskets, or could cause losses to the Trust, in the limited circumstances when the Trust utilizes the Agent Execution Model.
• The Prime Execution Agent routes orders through Connected Trading Venues in connection with trading services under the Prime Execution Agreement.
• The Trust faces risks related to the novel coronavirus (COVID-19) outbreak, which could negatively impact the value of the Trusts holdings and significantly disrupt its operations.
• Future and current regulations by a U.S. or foreign government or quasi-governmental agency could have an adverse effect on an investment in the Trust.
• The Trust is not a registered investment company and is not subject to the Commodity Exchange Act.
• Trading on digital asset trading platforms outside the United States is not subject to U.S. regulation and may be less reliable than U.S. trading platforms.
• The IRS may disagree with or seek to challenge the Trusts treatment as a grantor trust.
• Shareholders could incur a tax liability without an associated distribution of the Trust.
• The tax treatment of ether and transactions involving ether for U.S. federal income tax purposes may change.
• A fork of the Ethereum blockchain or an airdrop could result in Shareholders incurring a tax liability.
• As a new fund, there is no guarantee that an active trading market for the Shares will develop.

Future Outlook

The Trust intends to issue Shares on a continuous basis and is registering an indeterminate number of Shares. The offering is intended to be a continuous offering and is not expected to terminate until three years from the date of the original offering, unless extended as permitted by applicable rules under the 1933 Act.

Industry Context

The filing reflects the ongoing interest in offering cryptocurrency-based investment products to traditional investors, following the approval of Bitcoin ETFs. The success of this ETF will depend on regulatory approvals, market demand for Ethereum exposure, and competition from similar products.

Comparison to Industry Standards

• The ETF structure is similar to existing commodity ETFs, such as gold or silver ETFs, providing a regulated investment vehicle for exposure to a digital asset.
• The management fee will be a key factor in attracting investors, with lower fees potentially leading to greater adoption.
• The choice of custodian and the security measures implemented are critical for investor confidence, with Coinbase Custody being a prominent player in the digital asset custody space.
• The reliance on the CME CF Ether Dollar Reference Rate New York Variant for NAV calculation aligns with industry practices for pricing digital asset investment products.

Related Party Transactions

• Bitwise Investment Advisers, LLC serves as the Sponsor.
• Bitwise Asset Management, Inc., the parent of the Sponsor, served as seed capital investor to the Trust.
• Bitwise Investment Manager, LLC, an affiliate of the Sponsor, is expected to purchase the initial Baskets of Shares.
• JSCT, LLC is an affiliate of Jane Street Capital, LLC, which is an Authorized Participant to the Trust.
• Coinbase, Inc. (Coinbase Inc. or the Prime Execution Agent, which is an affiliate of the Ether Custodian).
• Coinbase Credit, Inc. (the Trade Credit Lender) on a short-term basis pursuant to the Coinbase Credit Committed Trade Financing Agreement (the Trade Financing Agreement).

Stakeholder Impact

• Shareholders will gain exposure to ether through a regulated investment vehicle.
• Authorized Participants will have the opportunity to create and redeem Baskets.
• The Sponsor will earn fees for managing the Trust.
• Service providers will benefit from providing services to the Trust.

Next Steps

• The SEC must approve the registration statement.
• NYSE Arca must approve the listing of the Shares.
• The Sponsor will then proceed with the launch of the ETF.

Key Dates

Keywords

Ethereum ETF, Bitwise, ETHW, Ether, ETF, Digital Assets, NYSE Arca, Investment