The Bitwise Crypto Industry Innovators ETF has performed well since the beginning of the year, as investors regain confidence in cryptocurrencies. Top holdings MicroStrategy and Coinbase have also gained this year, but growing stability concerns may increase regulation and harm the outlook for both the broader industry and the fund.
- The Bitwise Crypto Industry Innovators ETF has gained 57.8% year-to-date.
- Top holdings MicroStrategy and Coinbase are up 81% and 92%.
- Crypto industry benefits from low bank confidence but future regulation weakens outlook.
The Bitwise Crypto Industry Innovators ETF [BITQ] aims to invest in companies that are leading the blockchain race.
The fund has had a mixed 12 months. Last year it struggled as investors turned away from growth and crypto equities in a high interest rate environment.
Its performance has improved in recent times, however, as investors move away from traditional banking shares amid hopes that interest rates are reaching their peak. The fund is down 69.8% over the last 12 months, but it has gained 57.8% year-to-date.
The fund provides exposure to companies that operate within the crypto sector, such as bitcoin miners and crypto brokerages, rather than directly investing in cryptocurrencies.
Nevertheless, the fund’s performance is closely correlated to that of digital currencies. Bitwise has noted that during 2022 the fund had a correlation of 0.8 to the value of bitcoin, where a correlation of one would signal perfect correlation, and zero no correlation. The S&P 500 had a correlation of 0.75 and gold a correlation of 0.07 during the same period.
The fund currently has 27 different holdings with 85% of total assets being allocated to pure-play crypto companies, which have direct exposure to the industry. The remaining 15% is allocated to diversified businesses that have plans to engage in crypto.
Top holdings soar
As of 23 March, the fund’s current largest holding is MicroStrategy [MSTR], a global software and intelligence company which is the world’s “largest publicly traded holder of bitcoin”, as well as the first “to adopt bitcoin as [a] primary treasury reserve asset”, according to its website.
MicroStrategy makes up 9.74% of the total fund and is up 81.3% year-to-date, despite being down 45.7% in the last 12 months.
MicroStrategy held 132,500 bitcoins by the end of the fourth quarter of 2022. Alongside this substantial investment in the digital currency, the company is also launching its Bitcoin Lighting Network, a payment protocol based in blockchain that could speed up transactions and increase their security.
The fund’s second largest holding is cryptocurrency exchange platform Coinbase [COIN], with a weighting of 9.39% of assets under management. Coinbase’s recent performance mirrors that of MicroStrategy and the rest of the blockchain industry, with strong gains in 2023 after big falls in the last 12 months.
Shares are up 91.7% year-to-date after falling 63.7% in the past 12 months. The shares have dropped 12.1% since 22 March, when the Securities and Exchange Commission announced it was filing charges against Coinbase, as part of its efforts to increase regulation in the crypto industry.
Outlook remains mixed
The short- to medium-term prospects of the fund and the crypto industry in general have strengthened in recent months. Low confidence in the banking sector has led some investors to look for alternative ways to store value, and many are turning to bitcoin.
Despite the strong performance of digital coins that the latest banking crisis has stimulated, concerns over the stability of cryptocurrencies have led banks such as NatWest [NWG.L] to limit how much money can flow into crypto exchanges. If these concerns intensify, they could put downward pressure on the industry and the Bitwise Crypto Industry Innovators ETF.
Only two analysts provided forecasts for MicroStrategy to Refinitiv, and their views are split, with one rating shares a ‘buy’ and the other a ‘sell’. Their median 12-month price target comes to $280.00, presenting a potential 9.1% upside from the most recent closing price of $256.67.
Out of the 30 analysts polled by Refinitiv regarding Coinbase shares, four rated them ‘buy’, five ‘outperform’, 14 ‘hold’ and the remaining 7 ‘underperform’. Out of 23 analysts providing 12-month price targets, a median estimate of $63.00 would see shares falling 7.1% from the recent closing price of $67.83.