This article was written by Ann Hsu, the chief index analyst of Chain Hill Capital, and it is strictly forbidden to reprint without permission. For reprinting, please contact the official account of Chain Hill Capital. The following is the text of the article:

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New Encryption Index Fund BITW

On December 9, 2020 Eastern Time, the Bitwise 10 crypto index fund (Bitwise 10 crypto index fund) managed by the crypto index asset management product provider Bitwise was successfully listed on OTCQX, an over-the-counter market in the United States. The secondary market trading code of the fund is BITW.

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Source: Bitwise Official Twitter

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Bitwise10 Encryption Index Compilation Rules

The Bitwise10 Encryption Index Fund adopts a fully replicating index fund strategy, and the underlying index it tracks is the Bitwise 10 Large Cap Crypto Index (BITX), the Chinese full name is the Bitwise Encryption Large Cap 10 Index. The index is weighted by circulating market capitalization and adjusted for inflation (5 years) to construct the trend of the 10 largest cryptocurrencies by market capitalization in the cryptocurrency market. The base period of the index is January 1, 2017, and the base point is 964 points. The index covers more than 80% of the market value of the cryptocurrency market.

The compilation rules of the Bitwise Crypto Large Market Cap 10 Index in terms of sample space, sample selection method, index calculation, and sample adjustment are as follows:

(1) Sample space

Cryptocurrencies that meet the following criteria:

①Encrypted and anonymous digital assets.

② Non-stable currency, non-stable currency, combination of non-stable currency and legal currency, and non-hard assets.

③ Digital assets that can be traded and held freely.

④Trade on at least 2 or more platforms without delisting issues, and the trading volume of a single qualified platform shall not exceed 90% of the total trading volume denominated in US dollars in the last 30 days.

⑤ Digital assets that allow air-gap cold storage, including digital assets that can generate offline wallets and offline transaction signatures.

⑥ Digital assets without known security vulnerabilities. Security vulnerabilities include, but are not limited to: serious bugs, excessive exposure to 51% attack environments, or other security vulnerability factors identified by Bitwise.

⑦ Digital assets whose trading volume in the past 30 days exceeds 10% of the inflation-adjusted circulating market value.

⑧ Digital assets that can be kept by a regulated trust company in New York State or South Dakota as a third-party custodian, or digital assets that can be kept by other regulated custodians recognized by Bitwise.

⑨Other digital assets that do not violate current laws and regulations.

⑩Other.

(2) Sampling method

①The first step:

On the basis of the sample space, digital currencies that meet the following conditions are selected:

1) Digital currencies that are traded on at least 2 qualified platforms and are not subject to deposit and withdrawal capital controls.

2) In each of the past three months, at least one of the top 100 eligible crypto-assets is the largest crypto-trading pair based on the transaction volume denominated in USD in the last 30 days.

②The second step:

Summarize all fiat trading pairs (crypto-to-fiat) on qualified trading platforms, and exclude trading pairs with withdrawal problems.

③The third step:

Convert non-USD denominated trading pairs to USD denominated.

④ The fourth step:

Summarizes the total USD-denominated volume for each trading pair (crypto-to-fiat) over the past hour.

⑤The fifth step:

Each trading pair is assigned a weight based on its share of the total trading volume of all trading pairs in the past hour.

⑥ Step 6:

Multiply the price of each trading pair by its corresponding weight to get the composite price.

⑦The seventh step:

The free float and inflation-adjusted float of each trading pair are summed up, and then multiplied by the comprehensive price of the trade pair to obtain the inflation-adjusted float market value.

⑧The eighth step:

Ranked from high to low by inflation-adjusted circulating market capitalization, the top 10 cryptocurrencies are selected to form the index sample.

(3) Calculation method

(4) Sample adjustment

Bitwise regularly (every month) adjusts the composition and weight of the index sample, and the adjustment includes sample currency adjustment, free circulation adjustment and five-year inflation adjustment. This article will not expand.

Bitwise10 Crypto Index Fund Investment Process

According to the investment market, investors can invest in the Bitwise10 encryption index fund through the primary market and the secondary market.

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Graphics: Chain Hill Capital

Investors can also apply for the fund shares of the Biwise10 Encryption Index Fund by participating in a non-public offering in the primary market.

Bitwise provides subscription channels for investors in entities such as individuals, institutions, and retirement accounts. Investors need to meet the requirements of qualified investors in Section 506 of Regulation D of the Securities Act of 1933 in the United States to participate in the non-public offering in the primary market.

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Graphics: Chain Hill Capital

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High premium creates arbitrage opportunities

Bitwise10 Encryption Index Fund adopts the method of cross-market circulation and transfer, that is, the issuance market and circulation transfer are in the cryptocurrency market and the US stock market respectively, and then superimposed on the operation mode of not opening redemption and allowing Bitcoin in kind. This mode of operation is different from ours The grayscale model in the previously published article "Deep: Deconstructing Grayscale Bitcoin Trust" has the same purpose. Under this mode of operation, when the lock-up period of fund shares expires, the selling pressure in the cryptocurrency market will be transferred to the US stock market. Due to the huge price deviation from the net value, the phenomenon of loan arbitrage often occurs. Due to the existence of loan arbitrage, there is pressure to return the funds after the share expires. If the capital is invested in kind in bitcoin, the funds obtained after selling the share in the US stock market can be brought back to the cryptocurrency market, which constitutes an upward trend in buying cryptocurrency. Power, thus forming a perfect closed loop. After our research, we found that the Bitwise10 encryption index fund also adopted the same strategy as Grayscale, and arbitrage opportunities emerged as the times require.

Bitwise also provides two methods of cash investment and Bitcoin physical investment. Since the quotation in the secondary market is at a positive premium and redemption is not open, the direction of arbitrage is: purchase in the primary market and sell in the secondary market. There are three common arbitrage models: cash loan arbitrage model, physical loan arbitrage model and share loan arbitrage model. This article focuses on these three arbitrage models, and other extended arbitrage models will not be launched for the time being.

Cash lending arbitrage model:

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Graphics: Chain Hill Capital

Physical lending arbitrage model:

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Graphics: Chain Hill Capital

Share lending arbitrage model:

In the share lending arbitrage model, investors borrow available BITW fund shares, sell fund shares in the US stock OTCQX market, and obtain cash. Investors will have two options to obtain cash or purchase, one is to directly participate in the purchase in the primary market with cash, and the other is to buy Bitcoin in kind first and then participate in the purchase in the primary market.

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Graphics: Chain Hill Capital

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Graphics: Chain Hill Capital

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Similarities and differences with grayscale products

Bitwise10 Encryption Index Fund is very similar to Grayscale Digital Large Cap Fund under Grayscale, and has many similarities in terms of product design and market operation mode. This article will take Grayscale Digital Large Cap Fund as an example. Compared.

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Btwise10 Encryption Index Fund and Grayscale Large Cap Fund Targetimage description

Graphics: Chain Hill Capital

There are also similarities and differences in the design of the two funds in terms of subscription and redemption. The primary market purchases of the two funds are both non-public offerings (private placements), and both need to meet the requirements for qualified investors under Article 506 of Regulation D of the 1933 Securities Act. The purchase channel is also online on the official website. Both funds are currently not open for redemption.

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Graphics: Chain Hill Capital

The Bitwise10 Encryption Index Fund was established a little earlier than the Grayscale Large Cap Fund, but both currently support transfers on the OTCQX market. The lock-up period for the newly issued shares of the two funds is also 12 months. Both companies have chosen Coinbase Custody serves as the custodian of the fund's encrypted assets.

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Advantages of Index Funds

In recent years, the trend of indexed investment in the cryptocurrency market has become more and more obvious, and more and more asset management companies have launched passive index fund products based on market indexes. Index funds have been practiced in the traditional financial field for decades, with a strong theoretical foundation and excellent practical results, providing a good reference for the practice of indexed investment in the cryptocurrency market. Index funds have the following advantages:

①From the perspective of market efficiency

Starting from the EMH (Efficient Market Hypothesis) theory, the closer to a strong and efficient market, the higher the pricing efficiency of the market, and the more difficult it is for active fund managers to capture excess Alpha. The cryptocurrency market is a fully competitive, highly transparent, and highly liquid market. In the long run, its market pricing efficiency will become stronger and stronger. Given that index investing can capture the overall benefits of the market, passive index funds will outperform actively managed funds in the long run.

②High transparency

The highly transparent nature of index investing can offset the risk of opaque asset exposures in active portfolios.

③ Strong fluidity

The index represented by market value weighting, the index sample covers a wide range of market value and good liquidity, coupled with the characteristics of decentralized allocation of index investment, it can undertake the liquidity requirements of large funds.

④With the function of survival of the fittest

Index compilation has the function of regular resampling, which is regularly adjusted according to the market performance and fundamentals of the underlying assets. The resampling rules are implemented in accordance with the compilation plan, reducing the risk of uncertainty caused by artificial subjective rebalancing.

Qianfeng Capital has proactively deployed passive management products in the encrypted digital asset market, and is currently running two encrypted index funds. Different from the index funds of the same industry, the encryption index fund of Qianfeng Capital is more similar to the enhanced index fund. On the basis of tracking and replicating the index, some active management factors are added, especially in the aspects of risk control and income optimization. Differentiated adjustments to achieve the effect of revenue enhancement. The main advantages are twofold:

(1) Efficient position control scheme. The index fund of Qianfeng Capital has added the self-researched and developed "Qianfeng Multi-Factor Fixed Investment Strategy" in the position building link to control the position. This strategy belongs to the original among peers, which can effectively reduce the cost of holding positions/restrain the upward cost and increase the rate of return .

(2) Quantitative hedging risk control strategy. Qianfeng Capital's index fund introduces a quantitative hedging model, using a small amount of funds to slow down the large changes in the net worth curve.