🚀BITW: The Crypto Index Fund Reshaping Portfolio Diversification

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Welcome to the Crypto Index Revolution! Hello, ETF UNO community! Today, we are diving into an exciting area that has been making headlines in the investment world: cryptocurrency index investing. Let’s take a closer look at the Bitwise 10 Crypto Index Fund $BITW ( ▲ 1.42% ) . This fund aims to track an index made up of the 10 most highly valued cryptocurrencies. These cryptocurrencies are carefully screened and monitored for specific risks, weighted by market capitalisation, and rebalanced every month.

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What is BITW?

What makes BITW particularly compelling is its status as one of the biggest crypto index ETFs, providing exposure to multiple cryptos and managing $1.66 billion in assets. This isn't some speculative startup product – it's a substantial investment vehicle that has captured significant investor interest.

BITW stands out from the other ETFs we've discussed in ETF UNO because its shares can be traded in brokerage accounts on the OTCQX. The OTCQX, or Over the Counter Quotation Exchange, is a marketplace for securities that are not listed on traditional exchanges like the NYSE or NASDAQ. Operated by the OTC Markets Group, the OTCQX represents the highest tier among three marketplaces. Think of it as the premium level of alternative trading venues. The OTCQX upholds the highest financial standards and regulatory compliance, offering more transparency and better information for investors compared to the other tiers. In fact, BITW stands as one of the largest products trading on the entire OTCQX marketplace.

Bitwise Asset Management, the company behind BITW, is a specialist firm that has focused exclusively on cryptocurrency since its inception. Unlike traditional asset managers who may only dabble in crypto, Bitwise is a dedicated investment firm in this space, boasting a team of over 100 top professionals from technology, asset management, and law.

Investment Strategy🪙

Integrating BITW into an ETF-focused portfolio requires thoughtful consideration of its unique characteristics. Unlike traditional ETFs that might serve as core holdings, BITW functions best as a satellite position due to its high volatility and specialised exposure.

• 📏Allocation Sizing Strategy: Research suggests investors should carefully calibrate crypto allocations. For moderate risk tolerance investors, consider a 1-3% allocation to BITW as part of your alternative investments sleeve. More aggressive investors might extend this to 5%.

• 🔄Rebalancing Considerations: BITW's inherent volatility demands disciplined rebalancing. Quarterly rebalancing works well, allowing you to capture crypto's momentum while preventing it from overwhelming your portfolio during bull runs.

• ⚖️Complement with Traditional ETFs: Use BITW alongside defensive ETFs like Treasury bonds or gold to balance its risk profile. The negative correlation between crypto and traditional safe havens can create natural hedging opportunities during market stress.

BITW at a glance

ETF Issuer: Bitwise Asset Management

Inception: 2020-12-09

Asset Class: Crypto

Underlying Index: Bitwise 10 Large Cap Crypto Index

Geographical Focus: N/A 

Expense Ratio: 2.50% (as of last data point)

Dividend Yield: N/A

Distribution Frequency: N/A

Historical Performance

BITW's performance journey highlights both the explosive potential and inherent volatility of the cryptocurrency markets.

Recent data shows that BITW delivered a return of 94% over the past year. This outperformance is attributed to BITW's focus on the largest and most established cryptocurrencies, rather than on speculative, smaller tokens.

However, this strong performance comes with significant volatility. The fund reached its annual low during the crypto winter of late 2024 but has since experienced a robust recovery alongside the broader digital asset market.

Volume patterns indicate a growing acceptance among institutional investors. Additionally, the fund maintains sufficient liquidity for most retail and smaller institutional investors.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Diversified Crypto Exposure Without Direct Management: Rather than trying to pick individual cryptocurrencies or manage private keys and wallets, BITW provides instant diversification across the crypto market's blue chips. BITW holds more than 90% of its assets in bitcoin and ether, with the remaining allocation spread across eight other major altcoins. This allocation mirrors the actual crypto market structure while reducing single-token risk.

2. Professional Custody and Security: Cryptocurrency custody poses a significant challenge for individual investors, with numerous horror stories of lost private keys and exchange hacks. BITW eliminates this concern by providing institutional-grade custody through traditional brokerage accounts. You get crypto exposure with the same security framework as your other ETF holdings.

3. Tax Efficiency and Traditional Investment Infrastructure: Unlike direct crypto ownership, which creates taxable events with every transaction, BITW operates within traditional investment taxation frameworks. This set-up simplifies record-keeping and improves tax efficiency, especially for frequent rebalancers. Additionally, it's accessible through IRAs and other tax-advantaged accounts where direct crypto ownership isn't permitted.

Top 3 Reasons Not to Invest

1. High Expense Ratio: BITW carries a 2.5% annual expense ratio, which is steep even by crypto fund standards. For context, traditional equity ETFs often charge 0.03-0.20%. This high fee will eat into returns significantly over time, especially during periods of modest performance. The expense ratio alone could consume 25% of a 10% annual return.

2. Extreme Volatility and Risk: Crypto's volatility makes traditional equity volatility look tame. In 2022, for example, Bitcoin fell 65%, and investors with heavy allocations to Bitcoin took a beating. BITW magnifies this through its concentrated exposure to digital assets, making it unsuitable for conservative investors or those nearing retirement.

3. OTCQX Trading Limitations: While OTCQX is reputable, it lacks the liquidity and trading infrastructure of major exchanges. Some brokerages charge higher fees for OTC trades, and bid-ask spreads can be wider than those of traditional ETFs.

⚖️BITW: High Rewards Meet Higher Risks

BITW represents a sophisticated approach to cryptocurrency investing for ETF-minded investors. It solves many practical problems of direct crypto ownership while providing exposure to the sector's growth potential. The fund's substantial asset base, experienced management team, and track record distinguish it from speculative crypto products.

However, BITW isn't for everyone. The high expense ratio, extreme volatility, and regulatory uncertainty make it appropriate only as a small satellite position for investors comfortable with significant risk. Those seeking crypto exposure should limit allocations to amounts they can afford to lose entirely.

For investors who see cryptocurrency as a valuable addition to their portfolio, BITW offers a more professional and accessible alternative to direct ownership. However, be aware that these products carry risks that are significantly higher than those in traditional markets.

Are you ready to dive deeper into the ever-evolving ETF universe? Join the ETF UNO community for thorough analysis of some of the most innovative and engaging ETFs across various market sectors. From traditional blue-chip stocks to emerging technologies, the next great investment opportunity is just one newsletter away.

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.