Description

BITW – rate poison at a discount

Disclaimer: this idea is illiquid, pink sheet and involves crypto so if any of these three are an issue for you should stop reading.

This idea is very simple and I don’t have much to add that is not painfully obvious to anyone who’s spent a few minutes looking at the name.

I hope my value-add comes from shining light on a situation that likely few people will have heard of as the opportunity does not really come up on the usual screens.

The Bitwise Crypto 10 Index Fund (BITW) is a closed-end-fund of various digital assets (i.e. crypto) that trades on the pink sheets. BITW currently has $882m AUM and a NAV of $43.6 vs. last close of $34 implying a ~22% discount to NAV.

Bitcoin and Ethereum account for 68% and 23% of the fund’s NAV, respectively, with the balance consisting of Solana (4%), XRP (2%) and a hodge podge of altcoins.

You could hedge the underlying by shorting BTC and ETH ETFs (they already exist ex US) and ‘arbitrate the discount’ away. I personally would not recommend that as I’d never even want to think about shorting any crypto but it’s at least theoretically an option.

I like this trade because a) I’m very bullish on BTC longer term and Bitwise is a way for me to get BTC below spot, and b) I see several ways by which this discount should narrow / close.

• ETF Conversion:
  • Spot BTC ETFs have already been approved and are trading
  • Spot ETH ETFs have already been approved and will start trading imminently
  • Van Eck recently filed for a Solana spot ETF
  • I have not heard anything about multi-crypto ETFs. However, if ~91 – 95% of the fund’s assets are ‘ETF-able’ I expect the pressure on Bitwise to convert this fund to an ETF or experience outflows will increase
• Activism:
  • Saba Capital which have been active in CEF activism owns 1.5%
  • Given the size of the fund & associated income stream (2.5% of ~$850m of AUM = ~$21m…before operating cost, so call it $15m net income?) I don’t think the fund will put up too much of a fight given the punitive scale of litigation cost. Bitwise also manages several other funds including ETFs
  • I believe it is a matter of time until there is some sort of event (ETF conversion or tender offer) to narrow/close the discount.

Risks:

• There is clearly a ton of risk associated with this investment. Crypto could conceivably all go to 0 overnight.
• The discount has actually narrowed materially over the last few months. I believe this is more than justified by the changing facts (i.e. ETH spot ETF approval) however if the spread goes back to the ~12 month average of ~38% that would result in drawdown even if NAV stays flat.

Supporting Charts:

Appendix: Power law for Bitcoin

I followed the discussion around Bitcoin in katana’s posts with some bemusement. Several VIC members asked for the value proposition behind Bitcoin.

My personal view is the value effectively derives from the network effect of BTC.

BTC does not have any intrinsic value or future cash flows. If that’s your bear case…well that’s really not much of a bear case. It’s like saying you don’t want to own real estate because houses don’t produce energy. That’s never been the use case.

Its value in my view derives from offering ‘unforgeable scarcity’ – however just because something’s scarce doesn’t mean it has value especially if it won’t produce cash flows in the future. It requires enough people to believe it has value. Some people will say this is a ponzi or a bubble, others will say this reminds them of gold. I think this call was really hard to make a few years ago – however, with BTC having been the best performing asset class for 8 out of the last 11 years (and quite likely again in 2024),  a market cap of 1.1 trillion, spot price doing well in all sorts of macro environments including reaching a new ATH with interest rates > 5%... I think it’d be wrong to dismiss it and not pay attention.

The chart that gave me personally a lot of conviction is below. It represents the price of bitcoin over time in log-log space – see below. To understand the intuition you may want to research the concept of power laws and where they appear in nature. There’s a book called ‘Scale’ by Geoffrey West which I think is worth a read.

It would appear that bitcoin prices follow a power law over time. I’d be lying if I said I could explain as to ‘why’ that’s the case however just because we can’t explain something doesn’t mean it doesn’t exist. If you roll this forward, you get to something like a 40-50% CAGR $1m / BTC around 2030 (though clearly Bitcoin has a tendency to overshoot and then correct so the peak could be significantly higher).

Catalyst

- Multi-crypto ETF approvals & ETF conversion

- Activism