BITQ - BITQ: Significant Returns In The Crypto ETF

2023-07-20 17:43:11 ET

Summary

• The Bitwise Crypto Innovators ETF (BITQ) provides exposure to Bitcoin and other cryptocurrencies without the need for crypto wallets or trading platforms. It has seen significant gains since May 2023.
• Despite volatility and regulatory challenges, factors such as inflation data and past performance suggest potential for higher crypto prices in the coming months.
• However, cryptocurrencies remain a high-risk asset class due to potential legislation, opposition from traditional financial institutions, and market cap fluctuations.

On May 18, 2023, in a Seeking Alpha article on the Bitwise Crypto Innovators ETF product ( BITQ ), I wrote,

BITQ is an ETF that provides exposure to Bitcoin and the cryptocurrency asset class without the need for crypto wallets or accounts at Coinbase ( COIN ) or other crypto trading platforms. At under $7 per share, BITQ is an inexpensive product for those looking to dip a toe into the cryptocurrency arena. Like any crypto, only invest funds that you are willing to lose as the risks of loss are commensurate with the significant profit potential.

BITQ was trading at $6.90 per share on May 18. Since then, Bitcoin (BTC-USD) moved to higher highs, and BITQ followed on the upside.

Crypto volatility will likely continue, and the price swings could be hair-raising. BITQ rose 116% from the December 2022 low to the May 18 price level. Since then, BITQ has made higher highs, with the ETF above the $10 per share level on July 20.

Consolidation continues in Bitcoin and cryptos with an upward bias

Bitcoin's bearish plunge ended in November 2022 at $15,516.53 per token.

As the chart highlights, Bitcoin recovered to its most recent $31,765.71 high on July 13. While the leading cryptocurrency has made higher highs since the November 2022 bottom, it has been consolidating around the $30,000 level. Bitcoin has not broken above its critical technical resistance at the mid-2022 $32,329.54 high. Bitcoin has traded with an upward bias, but the $30,000 level has become a pivot point.

Ethereum (ETH-USD) reached its $883.159 low before Bitcoin in June 2022. While the second-leading crypto has also displayed a bullish bias, the $2,000 level has developed into Ethereum's pivot point.

The case for higher crypto prices

Since Bitcoin burst on the scene in 2010 at five cents per token, boom-and-bust price action has been the norm. After the November 2021 through November 2022 Bitcoin bust, another boom period that leads to an eventual new high would not be a surprise. The following factors favor higher crypto prices over the coming months:

• The track record supports a continuation of higher highs. Bitcoin and Ethereum reached significant technical bottoms in 2022.
• The latest inflation data suggests the Fed will curb its enthusiasm for interest rate hikes. In a stable or even falling rate environment, cryptocurrencies could attract more investment interest as the yields on fixed-income assets stabilize. The cost of carrying Bitcoin, Ethereum, or other tokens is a function of the interest rate environment.
• Given past performance, investors could flock to cryptocurrencies seeking significant capital appreciation as prices consolidate.
• In a win for cryptos and a loss for regulators, a judge recently ruled that Ripple (XRP-USD), the fourth-leading cryptocurrency by market cap worth over $41.6 billion, was not itself necessarily a security. However, the victory was partial as the judge ruled that institutional buyers count as unregistered sales of securities. The ruling went against the U.S. Securities and Exchange Commission.

Cryptos remain uncharted territory for regulators and legislators, and the ruling put a roadblock in front of the SEC and other regulatory bodies.

The case for failure

Cryptos continue to have many high-profile and influential detractors. The case for failure includes:

• The potential for legislation that bans the assets remains high. Cryptos threaten the government's control of the money supply. As purse string control is a significant power, expect Congress, the administration, and other governments to fight the asset class tooth and nail.
• Crypto ideology is the asset class that operates globally and without government intervention. Therefore, any regulations run contrary to crypto's philosophical basis. Regulators are not likely to surrender their crusade after the recent XRP ruling.
• The asset class's market cap dropped from over $3 trillion in late 2021 to $1.2 trillion in July 2023. The higher the market cap climbs, the more regulators and legislators will sound the systemic risk alarm, prompting curbs on the burgeoning asset class.
• Traditional bankers and financial institutions may offer some crypto products to customers, but the asset class is contrary to the institutions' best interests and future profitability.

Opposition from government and private sector institutions creates significant roadblocks for the cryptocurrency asset class. Meanwhile, the high-profile failure of FTX and the case against Sam Bankman-Fried may only increase opposition later this year when the case goes to trial.

BITQ owns Bitcoin and crypto-related companies

On May 18, the Bitwise Crypto Innovators ETF product was at the $6.90 per share level. One of the benefits of the ETF, aside from owning a Bitcoin-correlated product without needing a crypto wallet or holding the assets on an exchange platform, is the ETF and its holdings are SEC regulated. On July 20, BITQ's holdings included:

As the chart shows, the mix of holdings has changed since May, with Coinbase and Riot ( RIOT ) investments reflecting 21.99% of the assets under management. In May, BITQ had 13.08% of its assets invested in the platform and miner. On May 18, COIN was at the $60.26 per share level. At $101.20 on July 20, it was 67.9% higher. On the same day, RIOT traded at $11.07 per share and rallied 66.3% to $18.41 on July 20.

The chart illustrates BITQ's appreciation from $6.90 on May 18 to $10.02 on July 20, a 45.2% gain. At the most recent $11.34 July 14 high, the BITQ ETF moved 64.3% higher.

Bitcoin settled at $26,726.45 on May 18. At $29,698.05 on July 20, it was 11.1% higher. Ethereum at $1,797.292 on May 18 rallied 4.9% to $1,885.12 on July 20. COIN, RIOT, and BITQ outperformed the leading cryptos since mi-May. While there are never any guarantees in markets, the ETF, platform, and mining company provided significant upside leverage over the past months.

At $10.02 on July 20, BITQ had $113.53 million in assets under management. The liquid ETF trades an average of 174,576 shares daily and charges an 0.85% management fee.

Only invest capital you are willing to lose

The significant price variance, uncertain regulatory and legislative futures, and track record of cryptocurrencies make them some of the riskiest assets in history. The potential for substantial returns comes with significant and commensurate risks. As the downside potential is zero, only invest funds that you are willing to lose in Bitcoin, Ethereum, any crypto token, or crypto-related companies or ETF products.

While the recent trends are bullish, and the potential is for higher highs, a total loss remains the asset class's overwhelming risk.

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