Summary Bitcoin and Ethereum have seen significant rallies this year, while many crypto-adjacent stocks have languished. Investors may be interested in the Bitwise Crypto Industry Innovators ETF as a way to gain long-term exposure to equities benefiting from crypto price increases. In my view, the fund may be too reliant on Bitcoin mining stocks - which I view as generally poor long-term investments. To this point, cryptocurrency returns in 2024 have been of the vertical variety. Year to date, Bitcoin ( BTC-USD ) and Ethereum ( ETH-USD ) have each rallied by 65%. Some of the altcoins have enjoyed even stronger rallies. When the coins move like this, speculators often try to get exposure through the equity market. Many companies tied to cryptocurrencies have indeed enjoyed magnificent returns in recent weeks and months. However, this year, we've seen a divergence in performance between Bitcoin and some of the more notable Bitcoin-proxy companies - the miners. Data by YCharts Expressed through the Valkyrie Bitcoin Miners ETF ( WGMI ), the miners are actually down over 3% year to date while BTC's surge higher has barely skipped a beat. This divergence perfectly shows the issue with longing miners as primary Bitcoin exposure vectors. I've been bullish some of the Bitcoin miners over the last 12-18 months and have expressed that view via Seeking Alpha through several dozen articles covering the leading names in the space. That said, miners have a fundamental long-term issue in their business model that I've detailed many times in the past and recently in my WGMI article from March 1st, 2024 . Every four years, the miner block reward subsidy is coded to decline by 50% virtually overnight: In the past, this shortfall in BTC-denominated rewards has generally been alleviated by the market repricing BTC much higher through the supply crunch that comes with less BTC available to be mined. However, when the mania for BTC wears off, prices fall back down and dollar-denominated miner revenue falls with it. Thus, it is possible for Bitcoin to rally while miners decline, and we've seen that exact scenario play out this year. Given this, investors may be wondering how they can get long-term exposure to the equities that benefit from Bitcoin price increases. In this article, we'll look at the Bitwise Crypto Industry Innovators ETF ( BITQ ), compare it to comps, and assess the ETF holdings. Fund Objective & Details In my view, the Crypto Industry Innovators Fund from Bitwise is a viable concept. Per Bitwise: BITQ offers exposure to the fast-growing crypto economy in a traditional ETF. The Fund holds a portfolio of “picks and shovels” companies that are building out the core infrastructure that lets crypto thrive, including bitcoin miners, crypto brokerages, and more. The way the company ascertains whether an equity should be included in the fund is straightforward. According to the Summary Prospectus , Bitwise breaks the index companies into two tiers. The first requires that companies included either derive 75% of their revenue directly from crypto activity or have more than 75% of their net assets made up of direct holdings in liquid cryptocurrencies. Given this, companies like Coinbase ( COIN ) and MicroStrategy ( MSTR ) would each be considered Tier 1 even though they have very different businesses. Tier 2 companies are ones that have at least a $10 billion market capitalization and either a significant dedicated crypto business segment or hold at least $100 million in digital assets on the balance sheet. Under this criteria, companies like PayPal ( PYPL ) and Block ( SQ ) can also be included in BITQ. Tier 1 companies make up 85% of the index, with the remaining 15% going to Tier 2. Details BITQ Fund Inception May 2021 AUM $130 million Number of Holdings 30 Expense Ratio 0.85% TTM Yield 1.44% Source: Bitwise Investments, Seeking Alpha Overall Performance Data by YCharts BITQ's performance has been poor. In addition to a negative total return of 45% since inception, the fund has lagged the S&P, the Qs, and both Bitcoin and Ethereum; most of which are up between 20-50% over the same time period. Compared to more similar products, BITQ's performance is slightly better: Data by YCharts Since inception, BITQ is ahead of The VanEck Digital Transformation ETF ( DAPP ). However, both of those funds are trailing the Fidelity Crypto Industry and Digital Payments ETF ( FDIG ) since the inception of FDIG in April 2022, which is represented by the chart above. BITQ DAPP FDIG Number of Holdings 30 22 47 Assets in Top 10 62.2% 62.6% 59.4% Turnover 63.0% 57.0% 55.0% Source: Bitwise Investments, Seeking Alpha Comparing holding figures and turnover ratios, the funds are fairly similar. BITQ and DAPP have nearly identical weighting to Top 10 holdings and fairly close turnover numbers though BITQ is slightly more actively managed. Given these figures and the relative proximity to FDIG, the holdings themselves require some comparison. Perhaps unsurprisingly, all three of these funds have exposure to mining companies like Marathon Digital ( MARA ) and CleanSpark ( CLSK ): BITQ DAPP FDIG Top Holding MicroStrategy MicroStrategy Coinbase Second Holding Coinbase Block Inc Marathon Digital Third Holding Marathon Digital Coinbase CleanSpark Top 3 Weight 34.7% 23.3% 33.8% Miner % of Top 3 8.1% 0.0% 18.3% Miner % of Top 10 28.5% 34.0% 44.1% Source: Seeking Alpha, Author's calculations My general read on this is that all of these funds have relatively high reliance on Bitcoin mining stocks and mining stocks have simply performed better since the inception of FDIG than they have since the inception of FDIG. Consider, the performance of top miners over the last year compared with how they've done over the last 3 years: Miner Comps (Seeking Alpha) As I alluded in the opening of this article, Bitcoin miners have the long-term headwind of declining block rewards over time. I won't belabor the point about transaction fees and their importance to the long term incentive structure of Bitcoin mining, but we're far away from viability, and I'll just leave it at that. Something else that crossed my mind when looking at the full list of BITQ holdings were some notable companies that aren't included in the index. For instance, Bakkt Holdings ( BKKT ), Bitcoin Depot ( BTM ), and Ether Capital ( ETHC:CA ) appear to qualify for fund inclusion as Tier 1 companies and none of them are in the fund as of May 21st, 2024. Furthermore, Robinhood ( HOOD ) seems to qualify as a Tier 2 company and is also notably missing from the fund's holdings at present time. I'm not saying that I'm convinced any of those companies I just mentioned are necessarily great long-term investments from where I sit, but they presumably aren't any less risky than Bitcoin mining stocks long term. Closing Summary I've covered some of the ETFs available from Bitwise Investments in the past. In my view, the Bitwise Bitcoin ETF ( BITB ) is one of the better US spot ETF offerings in the market and the Bitwise 10 Crypto Index Fund ETF ( OTC:BITW ) is superior as a long-term investment to a similar offering from Grayscale. On the other hand, I've been less enthusiastic with the way the Bitwise Web3 ETF ( BWEB ) has been constructed. Bitwise's breadth of crypto-adjacent ETF products is impressive. But I feel BITQ is a bit closer to BWEB from a construction standpoint. I like the idea of a broad crypto innovation ETF that focuses primarily on companies rather than the network assets themselves, but I think BITQ is a bit too reliant on Bitcoin mining stocks than would be otherwise expected. Frankly, there could be an uncomfortable signal there; that several companies that appear to quality for the fund inclusion aren't included because they may not be great long-term businesses. I've listed a few such companies in the prior section. The more charitable explanation is that we're simply too early in this industry to justify dozens of different holdings, and investors would do better picking individual names. I'm going to stick with the latter. But either way, I'm not going to call BITQ a buy.
