Trading at 369% Premium, New Crypto Fund Astounds Even Bulls

While Bitcoin was clinching an almost 200% rally that took it above $20,000 for the first time on Wednesday, a more eye-popping manifestation of the crypto craze emerged this week.

A small digital-asset fund saw its share price balloon 369% higher than the value of the Bitcoin and Ether tokens that it holds. The dislocation means large investors such as hedge funds and family offices along with mom-and-pop investors are paying up for access to the fund, instead of buying its underlying holdings outright for far cheaper.

Trading at 369% Premium, New Crypto Fund Astounds Even Bulls

As with everything in Bitcoin, the latest episode of maniacal buying comes down to investors snapping up anything with the crypto wrapper for fear of missing out on a rocket-fueled rally. In this case, a shiny new fund that indexes the top 10 digital coins and is easily accessible through online brokerages provided a recipe for a mind-boggling distortion.

“The people who are buying into crypto are saying I don’t understand Bitcoin, just give me a reasonably constructed index,” said Kyle Samani, co-founder and managing partner at Multicoin Capital. “I don’t think they can justify the premium, I just think they don’t know what they’re buying. That’s not justifiable, that’s just ignorance.”

The Bitwise 10 Crypto Index Fund has soared 340% since its debut on Dec. 9, far outstripping the advances in Bitcoin and Ether over that same time frame and creating the gap between its price and the net value of its underlying assets.

Premiums to NAVs sometimes crop up in the world of exchange traded funds, but rarely do they exceed moves of 3% or so. There, specialized traders exist whose job is to arbitrage any dislocation away by creating or redeeming shares in the ETF.

Securities regulators have not approved the ETF format for cryptocurrencies, so no such intermediaries exist for Bitwise’s fund. The crypto fund doesn’t allow for redemptions, which has resulted a structure similar to a closed-end mutual fund, where a fixed number of shares are issued, sometimes creating a situation where they trade at a sizable discount or premium to the holdings.

“It’s a mania because there’s only so many shares to go around,” said James Seyffart, analyst at Bloomberg Intelligence. “It doesn’t make sense. There’s no reason somebody should be paying this premium.”

Bitcoin has almost tripled in 2020, driving FOMO-fueled demand for a piece of the action not seen since the frenzy three years ago. But paying a 300% premium stands out even in the crypto world where speculative fever has birthed bubbles time and again, especially when professional investors are among those taking the plunge. Only accredited investors can create or redeem shares of BITW, though retail traders can buy or sell the fund through brokerages.

“I just think a lot of people lack knowledge about it or even know that’s its at such a large premium,” Seyffart said.

A more favorable explanation could be that there’s an arbitrage opportunity that some hedge funds take advantage of in a similar fund called the Grayscale Bitcoin Trust, where the dislocation also exists. In that trade, the investor buys Bitcoin and deposits it at Grayscale, fulfilling the fund’s need for tangible assets. In return, the investor gets the opportunity to redeem their investment at the share price after a set period, pocketing the NAV premium.

But demand for the Bitwise fund, which has attracted $148 million, need not be limited to that trade. Anyone who bought on Dec. 9 has seen shares more than quadruple in value. Those sort of returns can feed on themselves, attracting the next bettor hoping to ride the rally.

©2020 Bloomberg L.P.

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