Understanding Premiums and Discounts with BITW
San Francisco • January 26, 2021
Updated as of November 29, 2021. This document is an informational primer about premiums and discounts.
This document is an informational primer that describes what premiums and discounts are; why they are significantly more prominent in Shares of BITW traded on the secondary market, and other similar securities, as opposed to many other financial products (like Exchange-Traded Funds, or “ETFs”); and why we think they will be an enduring feature of Shares of BITW priced on the OTCQX® Best Market.
Our goal is to provide transparency and understanding so investors can be better equipped to evaluate this important aspect of BITW Shares and associated risks.
This primer is meant to be read in conjunction with the Fund’s Form 10 and related SEC reporting-company documents.* It does not describe all of the risks associated with the Fund or the Shares, including the potential for loss of your entire investment.
All investors should consult their own advisors and should not place undue reliance on this primer.
* The Trust filed its registration statement on Form 10 on April 23, 2021, and the registration statement became effective on June 22, 2021, making the Trust subject to the reporting requirements of Section 13 under the Exchange Act. As of September 20, 2021, 90 days after the effective date, the applicable minimum holding period for the shares of the Trust changed from a 1-year minimum holding period to a 6-month minimum holding period.
What Are “Premiums” and “Discounts”?
To understand premiums and discounts, an investor must first have an understanding of the difference between share price (often just called “price”) and the Net Asset Value (often called “NAV”) per share.
Share Price: The share price is simply the dollar value per share at which Shares most recently traded on the OTCQX® Best Market. It’s what you see when you type “BITW” into the search bar in a brokerage account or on www.OTCmarkets.com.
Net Asset Value Per Share (“NAV”): The Net Asset Value Per Share (“NAV”) is the total net value of the assets held by the Fund divided by the Fund’s total number of shares outstanding. In the case of the Bitwise 10 Crypto Index Fund, NAV is a metric that represents the dollar value of the underlying crypto assets backing each share of the Fund, after accounting for liabilities (such as accrued management fees).
With those two defined, let’s talk about premiums and discounts.
“Premium” is the term used when the share price is higher than the NAV. Conversely, “discount” is the term used when the share price is lower than the NAV.
In part because of how BITW Shares come to the public market, and in part due to the lack of a redemption program for Shares, we anticipate that the Shares will trade at either a premium or discount to NAV, which we will discuss more later in this memo.
To illustrate premiums and discounts with an example, a hypothetical fund with a share price of $100 and a NAV per share of $50 is said to be trading at a 100% premium to its NAV. Conversely, a fund that is trading at a share price of $25 and with an NAV of $50 is said to be trading at a 50% discount to NAV.
Hypothetical example of a share trading at a premium or discount, with a NAV of $50
Investors should not assume that, if they buy shares of BITW at a share price of $100, that share will be backed by $100 worth of net assets in the Fund (i.e., that it will have a NAV of $100). There can be a meaningful disparity between the share price and NAV — a premium or a discount — for any fund that has shares traded on a secondary market. This discrepancy can be small, as it typically is for exchange-traded funds (“ETFs”), or large, as it can be for some closed-end funds (“CEFs”) and for certain trusts that trade publicly like BITW.
(Note that BITW is neither a CEF nor an ETF.)
Bitwise displays both the share price and an estimated NAV of BITW on its website: http://bitwiseinvestments.com/crypto-funds/bitw/
(Note that the NAV of the Fund is calculated by the Fund’s Administrator once per day at 4pm ET. To help investors evaluate the premium or discount of BITW, Bitwise publishes an “estimated NAV” each hour reflecting the value-per-share of the crypto assets held by the fund. BITW has its financial statements audited annually by a PCAOB-registered public accounting firm. Financial statement audits are available at www.sec.gov.)
Why “Premiums” and “Discounts” Occur
Premiums and discounts may develop when there is an imbalance between the market’s demand for shares and the amount of shares available for sale. When there is demand for shares and limited supply, shares may rise in price to a premium, with sellers asking for a higher price to trade. Conversely, when there is limited or no demand for shares and significant “supply” (or many shareholders seeking to sell), those shares may decline in price and trade at a discount.
The above is a simple model that illustrates a very basic premium/discount dynamic, without other factors considered. There are, of course, many reasons an investor might pay a premium to buy shares or offer a discount to sell shares of a fund, and those reasons are not contemplated here. Public markets are complex and dynamic. The market for BITW shares is such a market, and Bitwise does not control how Shares trade or what investors or prospective investors choose to do with their Shares.
We urge investors, however, to understand what premiums and discounts are, that they exist, the dynamics that may cause them to arise, and how they relate to BITW shares.
Now, let’s look at the mechanics of how BITW Shares reach the public market and explore some of the other factors that make premiums and discounts in the BITW share price likely.
BITW’s Shares and the Lack of an Arbitrage Mechanism
The Bitwise 10 Crypto Index Fund is neither an ETF nor a Closed-End Fund (“CEF”), two fund structures with which many investors are familiar. To date, U.S. regulators have only approved bitcoin futures ETFs and have not yet approved any other crypto ETFs or CEFs, although Bitwise and other asset managers continue to pursue such approval.
The Fund is also not a “Mutual Fund.” Mutual Funds are SEC-registered open-end investment companies that pool money from many investors, calculate an NAV daily, and are registered under the Investment Company Act of 1940.
Nor is the fund a Unit Investment Trust (UIT). UITs make a one-time public offering of redeemable securities.
Rather, the Fund is a Delaware Statutory Trust whose publicly traded class of shares is registered with the SEC, a more esoteric structure.
New BITW shares can only be created by Accredited Investors (as defined by the SEC here) via a “private placement” directly with the Fund. However, BITW is now closed to new subscriptions. Shares cannot be traded in the public market until after a minimum 6-month holding period from when they were initially created (per Rule 144 of the Securities Act of 1933).
After a minimum 6-month holding period, shares may become “unrestricted” and thereafter those Shares may be freely transferred to brokerage accounts and traded with ticker BITW via the OTCQX Best Market. Purchasers of these “unrestricted” publicly tradeable shares on the OTCQX are not required to be Accredited Investors, and such shares are no longer subject to any minimum holding period requirements.
What does that have to do with premiums and discounts? Well, in practice, it means that if demand for shares in the public market increases, the supply cannot increase quickly in response. As a result, the fastest new Shares can reach the market is after a 6-month holding period, as described above. One possible result is that, given the supply/demand dynamic, a premium may emerge.
Closed-end funds may face a similar dynamic, as with a CEF no new shares can be created (there is no private placement). ETFs, however, notably have the capability for new shares to be created daily and immediately sold in response to market demand, which allows for a daily “arbitrage mechanism” that prevents large premiums.
Now let’s look at the flip side of the coin, discounts.
Significant discounts, instead of premiums, may arise with BITW as well. Unlike mutual funds or ETFs, another feature of the Fund structure is that once these shares begin publicly trading the Fund is not permitted to offer “redemptions” or to operate a redemption program.
A redemption is where an investor returns their shares to the fund in exchange for a payout of their share’s portion of the fund’s NAV. In simpler terms, a redemption is when a Shareholder sells their Shares back to the Fund at NAV.
Here again, CEFs can similarly face this dynamic, as they too do not offer redemptions and therefore may trade at significant discounts to NAV. ETFs, however, offer the ability to redeem shares daily, which tends to prevent large discounts from emerging.
These and other risks are described in more formal terms in the Fund’s Form 10 (link), a public disclosure document required by the SEC reporting company requirements of Section 12 of the Exchange Act, which all prospective BITW investors are encouraged to read. For example, you will find the following sentence:
“Because of the holding period under Rule 144 and the lack of an ongoing redemption program, there is no arbitrage mechanism to keep the price of the Shares closely linked to the value of the underlying Portfolio Crypto Assets and the Shares may trade at a substantial premium over, or substantial discount to, the value of the Portfolio Crypto Assets per Share.”
We’ve attempted to unpack the above sentence in this piece, which hopefully builds your understanding of the Bitwise 10 Crypto Index Fund and the publicly traded Shares of the Fund under ticker BITW, the first publicly traded crypto index fund in the U.S.
What Does This All Mean for an Investor?
The above describes what premiums and discounts are and why they may occur, especially with a structure like the Bitwise 10 Crypto Index Fund.
Knowing all of this, what does it mean for an investor?
First, all investors should consider the important risks described in the Fund’s annual report and private placement memorandum as necessary, and they should pay particularly close attention to the fact that we anticipate Shares will trade at a significant premium or discount to NAV.
Second, investors should understand that these premiums and discounts can change rapidly, adding risks and volatility to the investment, which is already very risky. There is no mechanism to keep the price of the shares in line with its underlying assets.
Third, investors are encouraged to consult their own advisors prior to making any decisions regarding the Shares of the Bitwise 10 Crypto Index Fund and should not place undue reliance on this informational primer.
Examples of Historical Premiums and Discounts
Since trading began on December 9, 2020, through November 26, 2021, BITW has traded with closing values ranging from a discount of 34.5% to a premium of 649%, according to data from Bitwise Asset Management. The fact that BITW has traded at these ranges in the past does not predict whether or not it will trade at a premium or discount in the future.
Other similarly structured publicly traded trusts holding crypto assets have also seen wide ranges of discounts and premiums.
The largest similarly offered fund, the Grayscale Bitcoin Trust (ticker: GBTC; $35.7B AUM as of November 26, 2021), began trading in 2015. Over the five years ending November 26, 2021, it has seen share prices trade in a range from a discount of 21.2% to a premium of 132.6%, according to YCharts. The second-largest fund, the Grayscale Ethereum Trust (ticker: ETHE), launched in January 2019 and has seen a range from a discount of 14.3% to a premium of 3,550%. A third fund, the Grayscale Ethereum Classic Trust (ticker: ETCG), launched in April 2017 and has seen a range from a discount of 58.6% to a premium of 621.8%.
Over the past 12 months as of November 26, 2021, GBTC has traded at an average discount of 5.06%, according to Bloomberg; since inception, ETHE has traded at an average premium of 12.2%; and ETCG has traded at an average discount of 9.6%. It is possible that Shares of BITW may trade at a material premium or discount for a sustained period of time.
Looking at closed-end funds, which are not the same structure but similarly lack redemptions and have no ability to issue new shares, you can also find examples of large premiums and discounts.
As of November 26, 2021, National Trust Company United Corporations Ltd had a discount of 40%, according to the Closed-End Fund Center; the Goldman Sachs MLP and Energy Renaissance Fund had a discount of 17.4%; the Gabelli Utility Trust had a premium of 97.1%; and the PIMCO California Municipal Income Fund had a premium of 33.7%. (Note: These specific closed-end funds were arbitrarily chosen as examples of large discounts and premiums.)
Understanding the supply/demand dynamics and relationship between the price per share and the NAV of the underlying holdings is an important part of investing in all publicly traded funds, and particularly for the less-familiar structure of BITW. These dynamics are out of Bitwise’s control and present significant risks. We encourage all investors to evaluate those factors before deciding to buy or sell, and we expect that this investment will not be appropriate for many investors.
We strive to do everything we can to help investors be informed and hope that this piece, which serves in addition to the Bitwise 10 Crypto Index Fund’s Form 10 and related reporting documents containing important disclosures, is an aid in building understanding.
Risk Disclosures and Important Information
Carefully consider the risk factors, investment objectives, fees, expenses, and other information associated with each of the following: Bitwise 10 Crypto Index Fund, Bitwise 10 ex Bitcoin Crypto Index Fund, Bitwise 10 Crypto Index Fund (non-OTC Trust), Bitwise DeFi Crypto Index Fund, Bitwise 10 Index Offshore Fund, Ltd., Digital Asset Index Fund, LLC, Bitwise Bitcoin Fund, Bitwise Ethereum Fund, LLC, Bitwise Uniswap (UNI) Fund, Bitwise Aave (AAVE) Fund, Bitwise Compound (COMP) Fund, and Bitwise Polygon (MATIC) Fund, (collectively the “Funds”) or the units or shares of said Funds (the “Shares”) before making an investment decision regarding any of the Funds. Such risk factors, investment objectives, fees, expenses and other important information can be found in each Fund’s Private Placement Memorandum, which can be obtained from Bitwise Asset Management, Inc. and its affiliates (collectively “Bitwise”). Such documents may not contain all of the information necessary for a prospective investor to make a fully informed investment decision, and all investors are encouraged to read all available documents prior to making an investment decision.
All Funds are speculative investments that involve a high degree of risk and uncertainty, and are only available to accredited investors who can afford loss of the entire investment. For the Bitwise 10 Crypto Index Fund (Symbol: BITW), which has Shares available for trading on the OTCQX Best Market, there can be no assurance that the value of the Shares, if traded on this secondary market, will reflect the value of the Trust’s net assets. Such Shares may trade at a substantial premium over, or a substantial discount to, the value of the Trust’s net assets, because, among other factors, such Funds do not currently operate a redemption program, and because, among other factors, such Funds’ Shares when initially issued are subject to the holding period under Rule 144 of the Securities Act. As a result of these factors, there is no arbitrage mechanism to keep the price of the Shares closely linked to the value of the Trust’s net assets, and therefore the performance of the Funds’ Shares may deviate significantly from the performance of the Funds’ Net Asset Value per share (“NAV”). There is no guarantee that any Fund will meet its investment objective. For the Bitwise 10 Crypto Index Fund (Symbol: BITW), the shares of which are registered with the Securities and Exchange Commission pursuant to Section12(g) of the Securities and Exchange Act of 1934, as amended, and are quoted on the OTCQX, the public filings and disclosures can be located on the website of the Securities and Exchange Commission at www.sec.gov.
Certain of the Bitwise investment products may be subject to the risks associated with investing in crypto assets, including cryptocurrencies and crypto tokens. Because crypto assets are a new technological innovation with a limited history, they are a highly speculative asset. Future regulatory actions or policies may limit the ability to sell, exchange or use a crypto asset. The price of a crypto asset may be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may decline in popularity, acceptance or use, which may impact their price.
Prior to making any investment decision in respect of any Fund or Shares of any Fund, each investor must undertake its own independent examination and investigation of the Fund, including the merits and risks involved in an investment in the Fund or Shares, and must base its investment decision, including a determination of whether the Fund would be a suitable investment for the investor, on such examination and investigation and must not rely on Bitwise or the Funds in making such investment decision. Prospective investors must not construe the contents of this website as legal, tax, investment, or other advice. Each prospective investor is urged to consult with its own advisors with respect to legal, tax, regulatory, financial, accounting and similar consequences of investing in any Fund, the suitability of the investment for such investor and other relevant matters concerning an investment in any Fund.
This website contains an overview summary of the terms of each Fund. This website is neither an offer to sell nor a solicitation to buy units or shares in any Fund. Any such offer or solicitation will be made solely through definitive offering documents, identified as such, which will contain information about each Fund’s investment objectives and terms and conditions of an investment and may also describe risks and tax information related to an investment therein, and which will qualify in their entirety the information set forth on this website. The summary set forth on this website does not purport to be complete, and is qualified in its entirety by reference to the definitive offering documents relating to each Fund. Do not place undue reliance on this website.
The Shares of any Fund have not been approved or disapproved by the Securities and Exchange Commission, are not registered under the Securities Act of 1933 (the “Securities Act”), the Investment Company Act of 1940 (the “Investment Company Act”), or any state securities commission or other regulatory body. Bitwise is not registered as an Investment Adviser under the Investment Advisers Act of 1940 (the “Advisers Act”), and is not registered as a Commodity Pool Operator or Commodity Trading Adviser under the Commodity Exchange Act (the “Commodity Exchange Act”).
Shares of each Fund are offered in private placements pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder and other exemptions of similar import in the laws of the states and jurisdictions where the offering will be made and are only issued and sold directly by the Fund to accredited investors. As a result, the Shares of each Fund when initially sold are restricted and subject to significant limitations on transfer and resale.
Prospective investors in any Fund should very carefully consider such risks prior to making any investment decision, including the fact that certain Funds may not offer a redemption program if the shares of the Fund are traded on a secondary market. The Shares of Funds that are publicly quoted on the OTCQX Best Market are Shares that have become “unrestricted” under Rule 144 of the Securities Act (although Shares held by affiliates and insiders will be subject to additional restrictions on resales, including restrictions on the number of Shares that may be resold within any three-month period). Shares that have become unrestricted after the statutory holding period may be quoted on the OTCQX Best Market and may be purchased and sold throughout the trading day through any brokerage account with access to such markets.
Based in San Francisco, Bitwise is one of the largest and fastest-growing crypto asset managers, offering both index and active strategies across a wide array of investment vehicles. The firm is known for creating the world’s largest crypto index fund (OTCQX: BITW), a suite of crypto-focused equity and futures ETFs, and investment products that span Bitcoin, Ethereum, DeFi, NFTs, and the Metaverse. Bitwise focuses on partnering with financial advisors and investment professionals to provide quality education and research. The team at Bitwise combines expertise in technology with decades of experience in traditional asset management and indexing, coming from firms including BlackRock, Blackstone, Meta, and Google, as well as the U.S. Attorney’s Office. Bitwise is backed by leading institutional investors and asset management executives, and has been profiled in Institutional Investor, CNBC, Barron’s, Bloomberg, and The Wall Street Journal.