Cracking crypto with a clever ETF

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We've all heard about Bitcoin and Ethereum. We've all seen the massive returns. We've seen institutional investors moving into the space. We've seen all the excitement and volatility and hype. 

However, there's more to it - more ways to gain access to the opportunity cryptos provide - than just the headline acts.

Underneath the surface, there's an array of high-quality publicly traded companies that are the picks and shovels of this ecosystem, that are building the "bridges, roadways, and tunnels" that allow crypto to thrive. 

This includes well-known crypto brokerages like Coinbase, which went public in April of this year with a valuation of around US$70 billion. It includes Bitcoin-mining companies that secure the Bitcoin blockchain and process the transactions on the Bitcoin network.

It includes semiconductor companies that supply the hardware and infrastructure that allows that mining activity to occur. It includes asset managers like Galaxy Digital that help institutional investors access the space. And it includes other trading firms, banks that service the space, and even companies like Micro Strategy that hold crypto on their balance sheet as a core allocation. 

These companies can be grouped together as 'crypto equities': companies serving crypto asset markets and whose performance is influenced by the performance of crypto itself. 

This ecosystem of crypto equities is of special interest to that large number of investors excited about Bitcoin and Ethereum, but who don't know how to value them or don't feel comfortable accessing them directly. By buying into a basket of crypto equities - in a crypto-equities ETF, for example - you can get exposure to the crypto sector.

In this Fund in Focus, Betashares' Cameron Gleeson and Bitwise's Matt Hougan talk BetaShares Crypto Innovators ETF (ASX:CRYP), an exchange-traded fund bringing investors a basket of crypto equities, and listing on the ASX today.


Transcript 

Cameron Gleason: Welcome everyone to today's Fund in Focus at Livewire. My name's Cameron Gleeson and I am a senior investment specialist at BetaShares.

Matt Hougan: And I'm Matt Hougan. I'm the chief investment officer for Bitwise Asset Management.

Cameron Gleason: Today, we're excited to bring you BetaShares' Crypto Innovators, ETF. This is a new ETF that we are listing on the ASX this Thursday, 4 November.

Matt Hougan: Yeah, really excited to be here with you, Cameron. Bitwise is excited to partner with BetaShares. We designed the index that underlies the ETF. It's called the Bitwise Crypto Innovators Index, and it's designed to capture the publicly traded companies around the world that are building the infrastructure that allows the crypto economy to hum.

I know we've all heard about Bitcoin and Ethereum. We've all seen the massive returns. We've seen institutional investors moving into the space. We've seen all the excitement and volatility and hype.

Underneath the surface, there's an array of high quality, publicly traded companies that are the picks and shovels of this ecosystem, that are building the bridges, roadways, and tunnels that allow crypto to thrive. 

This includes well-known crypto brokerages like Coinbase, which went public in April of this year with a $60 or $70 billion valuation. It includes Bitcoin mining companies that literally secure the Bitcoin blockchain and process the transactions on the Bitcoin network.

It includes semiconductor companies that supply the hardware and infrastructure that allows that mining activity to occur. It includes asset managers like Galaxy Digital that help institutional investors access the space. It includes other trading firms, banks that service the space, and even companies like Micro Strategy that hold crypto on their balance sheet as a core allocation. It's a complete crypto ecosystem index capturing the pure players in the market.

Now I've spent a lot of time over the last six months, talking to people about what's special about the crypto equity space. And the first question people always ask me is by buying crypto equities, do I get proxy exposure to crypto-assets like Bitcoin and Ethereum? 

A lot of people are excited about Bitcoin and Ethereum, but don't know how to value them or don't feel comfortable accessing them directly. And what we're showing on this slide is that there is pretty extensive data that suggests that crypto equities have what's called a moderate to high correlation to crypto.

In other words, when crypto prices go up, these equities tend to go up as well.

From a maths perspective, the correlation ranges between 0.5 and 0.75, which is pretty high for a comparison between stocks and commodities. 

So it is the case that by buying into a basket of crypto equities, you're getting proxy exposure to crypto asset prices themselves. But as we show on this next slide, the relationship isn't one for one. I know a lot of people look at the crypto equity market, look at things like Bitcoin or Ethereum and see the volatility and are frightened by that.

And it's certainly the case that these publicly traded stocks are a high risk, high reward segment that has significant volatility. But what we're showing on this slide is that the beta or relationship between the prices of these equities and the prices of these assets themselves vary. And what we've seen since we've been tracking this index live in the market, is that historically it doesn't necessarily capture all of the volatility that you see in the crypto space.

I'll give you an example. You take a stock like Coinbase. It's one of the leading crypto brokerages in the world. It helps investors access the crypto market, buy and sell different crypto assets, and track their crypto portfolios.

Now it's absolutely true that Coinbase tends to do well when the price of Bitcoin and other crypto assets are going up. That attracts new investors, brings new activity to the brokerage. But it's also true that when volatility spikes, those same investors tend to trade a lot. And that trading creates a revenue stream for Coinbase that provides it some cushion against some of the volatility that you might see in a direct crypto asset exposure.

So crypto equities provides some level of proxy exposure to crypto asset prices themselves, but have a slightly different relationship between brokerage and mining stocks and banks like Silvergate. 

But my favourite thing about this market is what we're showing on this next slide, which is that this is one of the fastest growing segments of the public equity markets altogether.

What we've compared here is the 2021 revenue growth for pure play crypto companies in the Bitwise Crypto Innovators Index versus the estimated revenue growth for the 11 major sectors of the S&P 500. And what you see is that the crypto equities are just growing extremely rapidly.

The median revenue growth for pure play crypto equities in 2021 is estimated to come in at 430%. That compares to 12.2% for the S&P 500 as a whole. The next closest segment of the S&P 500 is energy stocks. But even those are not growing at more than about a tenth of the pace of crypto assets equities.

The other interesting thing, despite this extremely high growth, these companies are extremely profitable. In fact, the median profit margin for pure play crypto equities is 38%. That's more than 2x the median profit margin of a broad based equities market.

It's very rare to see stocks that are both growing revenues very quickly and extremely profitable. One of our theses is that the reason crypto equities are able to combine these two things is that large competitors have been afraid to enter the market.

They've been worried about regulation and other issues. So they've let companies like Coinbase grow significantly in size without the natural competition you would see. So high profits, high revenue growth. And, at least currently based on forecast PEs, relatively constrained valuations.

The last thing I would say before I turn this over to Cameron, is that we built this index specifically for this market. It's not that easy to comb through the list of all publicly traded companies available in the world and find companies that are true pure plays on the crypto market.

There are lots of large cap companies that like to say that they're crypto focused, or like to say that they're blockchain focused. But when you dig into the accounting, they don't actually have significant revenues derived from crypto specific activities. 

In our index, 85% of the companies are what we deem to be pure plays. That means that at least 75% of their revenue is derived explicitly from crypto activity, or alternatively 75% of their treasury is invested directly in crypto assets.

This ensures that 85% of the index at every rebalance is fine tuned to participate specifically in this space. What do we do with the other 15%? Well, we buy companies like Square and PayPal, which are diversified financial services companies, but have at least one major revenue stream focused on the crypto market.

That way we capture the entirety of the ecosystem. One last rule. This is an area of the market that's changing very rapidly, so we have a special rule called a "fast entry" rule, which says that anytime there is a new IPO for a crypto equity with at least a market cap of $10 billion US dollars, it enters the index one day after the listing. This allows the index to adapt rapidly as new companies like Coinbase come to the market. 

What do you get? You get a purpose-built crypto equity index that captures some of the most exciting, fastest growing, and most profitable companies in the public markets today. 

And here to tell you a little bit more about the fund is Cameron.

Cameron Gleason: Thank you, Matt. Look, I can't say how excited we are to launch this fund. We've been really pleased to be able to partner with Bitwise. The fund itself, the BetaShares Crypto Innovators ETF, will trade under the ticket code ASX:CRYP. And it'll start trading on 4 November, so this Thursday. It's investing in a portfolio of up to 50 of these crypto innovators. So, these are publicly listed companies, exposure to that crypto infrastructure. And if we see the slide there, you can see some of the big names in this market, really exciting index for us.

In terms of the benefits of this from an investor's perspective, we certainly look at this as exposure to that growth potential. And I think Matt really brought that to life, how these companies are leveraging those markets. 

One of the key attributes that I like, is that rather than investing directly in an off market unregulated exchange, you've got the protection of investing through an ETF. 

Plus, these companies will naturally pivot to new digital assets that evolve and have momentum as opposed to trying to pick individual digital assets themselves.

So these very dynamic companies, they're engaged in the ecosystem and they'll essentially chase profit where that profit is available across the ecosystem. A lot of people ask us how we should think about positioning this in a portfolio.

I'll point out that the growth potential is enormous. It also comes with a high degree of volatility in our target market determination. We talk about the need to think about this, not as a core portfolio, but as a satellite exposure.

And Matt and the team at Bitwise have done some really interesting research as to how crypto assets can be used in even very small allocations to enhance your overall portfolio outcomes because of the fact that historically, they've been very lowly correlated to other assets.

So an excellent growth exposure used as a satellite diversifying your portfolio. Just a really great story for Australian investors to get that global crypto exposure. You can find out more about crypto and all of our other funds by going to our website or connecting on any of our social channels shown there or through Livewire.

We've just launched a new weekly newsletter called Off the Chain, specifically covering digital assets and this entire space. It's a really exciting initiative. We've had thousands of people sign up to that, a lot of interest in that. So jump on board, have a look. Thank you very much for joining us today.

Matt Hougan: Yeah, thanks for having me as well. And thanks everyone for listening.


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