Equities can be a Defensive Crypto Approach
Some investors still view crypto as a fad and too speculative for their risk tolerance, but as the industry continues to grow and innovate, new investment options could help to mitigate the risk profiles that spot exposure carries.
Bitwise Asset Management, the world’s biggest crypto index fund manager, offers one such opportunity in its fund that tracks the Bitwise Crypto Innovators 30 Index, an index that carries a diversity of securities within the crypto space. The Bitwise Crypto Industry Innovators ETF (BITQ) is a fund that invests in a diverse array of companies within crypto, from crypto miners and firms to exchanges and service providers.
Investing in crypto equities can be a “defensive play,” said Matt Hougan, CEO of Bitwise, in a recent webcast. The movement of crypto equities tends to be more muted than the extreme peaks and troughs of cryptocurrency price movement. By spreading leverage across a wider variety of exposures to cryptocurrencies, investors can help mitigate their risk profile and potentially reduce the volatility of their investment versus a singular spot exposure either to cryptocurrency or to one crypto equity.
It’s within this diversity that the fund is able to take a more defensive approach to crypto exposure, Hougan explained. Different companies that the fund invests in all have different exposures to cryptocurrencies, some more direct than others, and therefore their leverages versus cryptocurrency price actions are different.
Image source: Bitwise
Bitwise broke down the top 10 companies within the index statistically, as seen above, measuring their beta to crypto prices, and the range was fairly large. Coinbase, a popular crypto exchange, only carried a beta of 0.43 and was underleveraged, while Marathon Digital Holdings, a bitcoin miner, was overleveraged at 1.13.
“The reason for this is that different companies have different return characteristics,” Hougan explained. Most betas for the top 10 companies were fairly aligned, as a majority of them are crypto miners and therefore would be either leveraged very close to or somewhat above the price movements of cryptocurrencies, but Coinbase demonstrates the variability potential.
How leveraged a company is has to do with how it is gaining its cryptocurrency exposure; miners that are working to increase the available bitcoin and gain their revenue in bitcoin are more leveraged to that exposure than an exchange such as Coinbase, which derives returns from increased transactions. An increase in traffic and transactions can occur during cryptocurrency price peaks as well as crashes, making it much less leveraged to the price of cryptocurrency.
Spreading risk and diversifying the risk profile more broadly across the crypto space is something that just makes sense to Hougan.
“If you’re trying to get proxy exposure to the crypto space, you’re better off with a basket of these, a blended basket,” Hougan said, speaking about the securities within the index, “than any one company with idiosyncratic risk.”
BITQ tracks the Bitwise Crypto Innovators 30 Index, an index with at least 85% allocation into companies that are cryptocurrency exchanges carrying bitcoin and other cryptocurrencies, crypto miners, mining equipment companies, and service providers. The remaining 15% is allocated to large-cap support companies, with at least one major part of each of their businesses dedicated to crypto.
BITQ carries crypto companies such as Coinbase Global Inc (COIN) at 10.75%, Marathon Digital Holdings (MARA) at 4.87%, and Hut 8 Mining (HUT) at 4.34%.
The fund has an expense ratio of 0.85% and net assets of $118 million.
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