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

Bitwise is seeking SEC approval for its Ethereum ETF, aiming to provide investors with exposure to ether through a regulated investment vehicle.

Summary

• Bitwise has filed a Form S-1 registration statement with the SEC for the Bitwise Ethereum ETF.
• The ETF aims to provide exposure to the value of ether, less expenses, by holding ether directly.
• The ETF's net asset value (NAV) will be determined by reference to the CME CF Ether Dollar Reference Rate.
• Bitwise Investment Advisers, LLC will serve as the sponsor and manager of the ETF.
• The ETF plans to list its shares on the NYSE Arca under a yet-to-be-determined ticker symbol.
• The Sponsor Fee is a unitary management fee of 0.__% per annum of the Trusts ether holdings.
• The Seed Capital Investor agreed to purchase $_____ in Shares on _______________, and on _______________ took delivery of __ Shares at a per-Share price of $______ (the Seed Shares).
• Bitwise Investment Manager, LLC, an affiliate of the Sponsor, is expected to purchase the initial Baskets of Shares for $___________, at a per-Share price of $___ for these ___________ Shares (the Seed Baskets).

Sentiment

Score: 6

Explanation: The document is a neutral regulatory filing. While it presents opportunities for investors, it also highlights significant risks associated with investing in an Ethereum ETF.

Positives

• The ETF offers investors a regulated and potentially cost-effective way to gain exposure to ether.
• The ETF will be passively managed, tracking the Pricing Index.
• The Trust will not use derivatives that could subject the Trust to additional counterparty and credit risks.

Negatives

• Investing in the Trust involves risks similar to those involved with an investment directly in ether and other significant risks.
• 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 for a number of reasons, including price volatility, trading activity, normal trading hours for the Trust, the calculation methodology of the NAV, and/or the closing of digital asset trading platforms due to fraud, failure, security breaches or otherwise.

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.
• Many digital assets, including ether, were only introduced within the past decade, and the medium-to-long term value of the Shares is subject to a number of factors relating to the capabilities and development of blockchain technologies and to the fundamental investment characteristics of digital assets.
• Recent developments in the digital asset economy have led to extreme volatility and disruption in digital asset markets, a loss of confidence in participants of the digital asset ecosystem, significant negative publicity surrounding digital assets broadly and market-wide declines in liquidity.
• Digital assets may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect on the market price of such digital assets.
• Ether is a relatively new technological innovation with a limited operating history.
• Changes in the governance of a digital asset network may not receive sufficient support from users and validators, which may negatively affect that digital asset networks ability to grow and respond to challenges.
• Digital asset networks face significant scaling challenges and efforts to increase the volume and speed of transactions may not be successful.
• Any name change and any associated rebranding initiative by the core developers of ether may not be favorably received by the digital asset community, which could negatively impact the value of ether and the value of the Shares.
• Smart contracts, including those relating to DeFi applications, are a new technology and their ongoing development and operation may result in problems, which could reduce the demand for ether or cause a wider loss of confidence in the Ethereum network, either of which could have an adverse impact on the value of ether.
• Validators may suffer losses due to staking, which could make the Ethereum network less attractive.
• Proof-of-stake blockchains are a relatively recent innovation, and have not been subject to as widespread use or adoption over as long of a period of time as traditional proof-of-work blockchains.
• The loss or destruction of a private key required to access ether may be irreversible.
• New competing digital assets may pose a challenge to ethers current market dominance, resulting in a reduction in demand for ether, which could have a negative impact on the price of ether and may have a negative impact on the performance of the Trust.
• 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.
• Prices 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, or if certain jurisdictions continue to limit or otherwise regulate validating activities, 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.
• Anonymity and illicit financing risk.
• A temporary or permanent fork of the Ethereum blockchain could adversely affect the value of the Shares.
• Shareholders may not receive the benefits of any forks or airdrops.
• The prevailing level of transaction fees may adversely affect the usage of the Ethereum network.
• 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.
• The digital asset trading platforms on which ether trades are relatively new and largely unregulated.
• Negative perception, a lack of stability in the digital asset trading platforms, manipulation of ether trading platforms by customers and/or the closure or temporary shutdown of such trading platforms due to fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in ether generally and result in greater volatility in the market price of ether and the Shares of the Trust.
• Digital asset trading platforms may be exposed to security breaches.
• Digital asset trading platforms may be exposed to fraud and market manipulation.
• Digital asset trading platforms may be exposed to wash trading.
• Digital asset trading platforms may be exposed to front-running.
• Momentum pricing.
• Political or economic crises may motivate large-scale sales of ether, which could result in a reduction in the prices of ether and adversely affect an investment in the Shares.
• Ownership of ether is pseudonymous, and the supply of accessible ether is unknown.
• Irrevocable nature of blockchain-recorded transactions.
• 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.
• Double-spending risks.
• Flaws in source code.
• Competition from the emergence or growth of other digital assets or methods of investing in ether could have a negative impact on the price of ether and adversely affect the value of the Shares.
• Congestion or delay in the Ethereum network may delay purchases or sales of ether by 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 sources (Constituent Platforms) used by the Pricing Index are digital asset trading venues that facilitate the buying and selling of ether and other digital assets.
• The Pricing Index is based on various inputs which may include price data from various third-party digital asset trading platforms.
• The Pricing Index is the reference price for calculating 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 Sponsor can discontinue using the Pricing Index and use a different pricing or valuation methodology instead.
• The Pricing Index price used to calculate the value of the Trusts ether may be volatile, adversely affecting the value of the Shares.
• The Pricing Index price being used to determine the NAV of the Trust may not be consistent with GAAP.
• The Trusts portfolio will be priced, including for purposes of determining the NAV, based upon the Pricing Index.
• The NAV of the Trust will change as fluctuations occur in the market price of the Trusts ether holdings as reflected in the Pricing Index.
• Investing in ether and, consequently, the Trust, is speculative.
• Different from directly owning ether.
• 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.
• The Shares may trade at a discount or premium in the trading price relative to the NAV as a result of non-concurrent trading hours between the Exchange and digital asset trading platforms.
• 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 Trusts risk management processes and policies may prove to not be adequate to prevent any loss of the Trusts ether.
• The development and commercialization of the Trust is subject to competitive pressures.
• The lack of active trading markets for the Shares may result in losses on investors investments at the time of disposition of Shares.
• Possible illiquid markets may exacerbate losses or increase the variability between the Trusts NAV and its market price.
• The Trusts ether may be subject to loss, damage, theft or restriction on access.
• Several factors may affect the Trusts ability to achieve its investment objective on a consistent basis.
• The amount of ether represented by a Share will decline over time.
• Extraordinary expenses resulting from unanticipated events may become payable by the Trust, adversely affecting an investment in the Shares.
• 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, Prime Execution Agent or the Cash Custodian.
• Unforeseeable risks.
• 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 U.S. 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.
• 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 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.
• The Sponsor may discontinue its services, 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 or the Sponsor.
• 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. If the Trade Credits are not available or become exhausted, the Trust may face delays in buying or selling ether that may adversely impact Shareholders; if the Trust does not repay the Trade Credits on time, its assets may be liquidated by the Trade Credit Lender and its affiliates.
• 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 loss or failure of any such Connected Trading Venues may adversely affect the Prime Execution Agents business and cause losses for the Trust.
• A loss of confidence or breach of the Ether Custodian may adversely affect the Trust and the value of an investment in the Shares.
• The Trust is dependent on the Ether Custodian, which is Coinbase Custody, and to a lesser extent, the Prime Execution Agent, Coinbase Inc. to operate.
• Coinbase Custody serves as the ether custodian and Coinbase Inc. serves as the prime broker for several competing exchange-traded ether products, which could adversely affect the Trusts operations and ultimately the value of the Shares.
• The Sponsor may need to find and appoint a replacement Ether Custodian or Cash Custodian quickly, which could pose a challenge to the safekeeping of the Trusts ether and cash.
• The Ether Custodian could become insolvent.
• Third parties may infringe upon or otherwise violate intellectual property rights or assert that the Sponsor has infringed or otherwise violated their intellectual property rights, which may result in significant costs and diverted attention.
• Due to the increased use of technologies, intentional and unintentional cyber-attacks pose operational and information security risks.
• 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 Outlook

The Trust intends to issue Shares on a continuous basis and is registering an indeterminate number of Shares, with the offering expected to continue for three years unless extended.

Industry Context

The filing comes amid growing interest in cryptocurrency ETFs, with several firms vying for approval to launch similar products.

Comparison to Industry Standards

• The document does not contain enough information to make a comparison to industry standards.
• The document does not contain enough information to make a comparison to global benchmarks.
• The document does not contain enough information to list specific comparible companies, projects, and results.

Related Party Transactions

• 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.

Stakeholder Impact

• Shareholders will gain a regulated investment vehicle for ether exposure.
• Authorized Participants will have the opportunity to create and redeem Baskets.
• The broader market may see increased liquidity and price discovery for ether.

Next Steps

• The SEC will review the registration statement.
• If approved, the ETF will list on the NYSE Arca and begin trading.

Key Dates

Keywords

Ethereum ETF, Ether, ETF, Bitwise, Digital Assets, Cryptocurrency, Investment