GDLC - BITW: A Simpler Approach To Crypto Diversification

2023-10-11 10:30:39 ET

Summary

• The Bitwise 10 Crypto Index Fund aims to provide investors with exposure to 10 different cryptocurrencies in one fund.
• In my view, the allocation methodology is superior to Grayscale Digital Large Cap Fund, with more assets and a better diversified weighting.
• However, there are risks associated with investing in cryptocurrencies, and the fund trades at a larger discount to NAV than Grayscale's fund.

The Bitwise 10 Crypto Index Fund (BITW) is a diversified digital asset fund managed by Bitwise Investments. The fund aims to provide investors with exposure to 10 different cryptocurrencies in one fund. It's a competing product to Grayscale Digital Large Cap Fund (GDLC) that I've covered for Seeking Alpha in the past. In this article, we'll get into how Bitwise's fund is different from Grayscale's large cap crypto fund and we'll assess if it's a fund that investors who want simple and easy exposure to a bucket of digital assets should consider.

What Is In The Fund?

BITW aims to track the top assets in the crypto market. The fund is rebalanced monthly and I view it as sort of a blended fund that skews to passive over a more active strategy. You're not going to find smaller cap coins in BITW that could help the fund beat the larger cap coins but there is some element of discernment regarding which coins go in and which coins come out.

In the table below, I've added a column called cap dominance that takes the total market cap of the 10 coins included in BITW and then divides the individual coin market cap by the sum of the ten coins. This is to show how closely the weight of each asset correlates to the total market cap dominance of the asset. Bitwise's weighting is done well if you're looking for an allocation that is true to market:

Source: Bitwise, as of 10/10/23

If you're looking for a fund that will go a bit more out on a limb regarding weightings, BITW may not be it. However, one thing I actually like about the Bitwise fund is there does appear to be some discretion on asset choice. It would be easy for Bitwise to take the top 10 coins ranked by market cap and put them in the fund - however, that's not what is happening here.

Even though the 10 coins in the fund are all among the top 20 coins by market cap, Bitwise opted to not include stablecoins or some of the more dubious meme coins like Dogecoin ( DOGE-USD ) and Shiba Inu ( SHIB-USD ). Additionally, Binance Coin ( BNB-USD ), Toncoin ( TON-USD ) and Tron ( TRX-USD ) are also excluded from the fund despite each having total market cap ranks near or in the top 10. I happen to completely agree with those exclusions personally and the decision to not include those assets likely comes from the rules-based methodology that Bitwise uses for fund allocations.

Among a handful of other eligibility rules, coins in the fund can't have known security issues like bugs or 51% attack vulnerability, they must not be in violation of US securities law, and must not have withdrawal issues that are specific to that crypto asset. There is an element of subjectivity to these rules and they're at the discretion of Bitwise Crypto Index Committee. But again, in my personal view I think the committee largely has it right on which coins are in and which ones aren't.

Fund Details & GDLC Comparison

As of article submission, the Bitwise 10 Crypto Index fund has over $450 million in assets under management. This actually makes it twice the size of Grayscale Digital Large Cap fund.

Sources: Grayscale, Bitwise

In my view, Bitwise's asset allocation methodology is superior to Grayscale's. I take that view because of Bitwise's inclusion of 5 additional crypto assets and because of the fund's greater allocation to alt-coins. I've not made my issues with Grayscale's GDLC methodology a secret and have actually called the shares a buy entirely because the fund's methodology is so bad.

Something else to consider is the discount to net asset value of the Bitwise shares relative to Grayscale's discount. At 49.5%, BITW also trades at a larger discount to NAV than GDLC currently does. All this said, none of this means longing BITW shares doesn't come without considerable risk.

Risks

First and foremost, the cryptocurrency market is inherently risky. While I personally believe many of these digital assets will actually stand the test of time, the overwhelming majority of them are likely completely worthless. Depending on where each individual investor is in their retirement journey, I'd caution getting overly exposed to cryptocurrencies outside of Bitcoin. Another risk to consider is BITW shares aren't redeemable. In my view, this is largely why the fund trades at such a massive discount to NAV.

Finally, the underlying assets are under custody with Coinbase ( COIN ) and are not actively staked for yield. This is potentially problematic when it comes to assets like SOL and DOT as they have annual inflation rates of over 7%. Additionally, there is an opportunity cost in not staking the ETH held in the fund as well due to the 3.6% staking yield.

Investor Takeaways

I think the Bitwise 10 Crypto Index fund is probably the better fund of the two when compared with Grayscale Digital Large Cap Fund purely on the investment merits. Bitwise has more assets and a better diversified weighting among those assets than GDLC. Bitwise also happens to trade at a larger discount to NAV than GDLC and has the same 2.5% management fee. In my view, the Bitwise committee has done a nice job curating the asset list. I don't take any real issue with the assets in the fund and actually hold 6 of the 10 personally.

However, I do think there's an opportunity cost with a fund like this. For a 2.5% management fee, I don't think staking the more inflationary assets in the fund is a large ask. For investors who want a very simple way to get exposure to a variety of cryptocurrencies in something like a self-directed IRA, I think BITW is fine and is probably the better pick versus GDLC. But it's important to mention that crypto IRAs exist. Many of these products offer self-direction by the individual asset in a tax-advantaged account. For investors who have a better handle on crypto and aren't opposed to opening a new account, those kinds of products may be a better fit.

At this point, I don't personally hold BITW or plan to hold it. I also take the view that GDLC is probably the better arbitrage play because it is so heavily allocated to Bitcoin and Ethereum rather than altcoins. But that's really more of an opportunistic trade than it is a commentary on GDLC as an investment vehicle. But again, for those looking for a really simple way to get exposed to crypto in a diversified manner, BITW probably does the job the best in the public markets.

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