Bitwise 10 Crypto Index Fund - Quarter Report: 2021 September (Form 10-Q)

Commission File Number 000-56270

400 Montgomery Street,

Suite 600

San Francisco, CA 94111

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule of the Exchange Act).    Yes  ☐    No  ☒

This Quarterly Report on Form contains “forward-looking statements” with respect to the financial conditions, results of operations, plans, objectives, future performance and business of Bitwise 10 Crypto Index Fund (BITW) (the “Trust”). Statements preceded by, followed by or that include words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other similar expressions are intended to identify some of the forward-looking statements. All statements (other than statements of historical fact) included in this Quarterly Report that address activities, events or developments that will or may occur in the future, including such matters as changes in market prices and conditions, the Trust’s operations, the plans of Bitwise Investment Advisers, LLC (the “Sponsor”) and references to the Trust’s future success and other similar matters are forward-looking statements. These statements are only predictions. Actual events or results may differ materially from such statements. These statements are based upon certain assumptions and analyses the Sponsor made based on its perception of historical trends, current conditions and expected future developments, as well as other factors appropriate in the circumstances. Whether or not actual results and developments will conform to the Sponsor’s expectations and predictions, however, is subject to a number of risks and uncertainties, including, but not limited to, those described in Part II, Item 1A. Risk Factors. Forward-looking statements are made based on the Sponsor’s beliefs, estimates and opinions on the date the statements are made and neither the Trust nor the Sponsor is under a duty or undertakes an obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change, other than as required by applicable laws. Investors are therefore cautioned against relying on forward-looking statements.

Although we are responsible for all disclosure contained in this Quarterly Report on Form in some cases we have relied on certain market and industry data obtained from third-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications in conjunction with our assumptions regarding the digital asset industry and market. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Statement Regarding Forward-Looking Statements.”

On April 22, 2021, the Trust filed a Registration Statement on Form 10 pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“the Act”) with the U.S. Securities and Exchange Commission (“SEC”). A registration statement on Form 10 becomes automatically effective 60 days after the date of the filing, which was June 22, 2021, and designates the Trust as an SEC reporting company under the Act. As a result, the Trust will publish financial statements as and with the SEC, along with current reports on Form in addition to complying with all other obligations under the Exchange Act.

The Trust’s investments in digital assets are stated at fair value. For a further discussion of the Trust’s calculations of valuation, please see “Fair Value Calculations” in the footnote below. Digital assets are generally valued using prices as reported on reputable and liquid exchanges and may involve utilizing an average of bid and ask quotes using closing prices provided by such exchanges as of the date and time of determination (described below). Factors such as the recent stability of the exchange, current liquidity of the exchange, and recent price activity of an exchange will be considered as to the determination of which exchanges to utilize. The time used is 16:00 ET which corresponds to 20:00 UTC during Daylight Savings Time and 21:00 UTC during Savings Time. The Sponsor’s Valuation Policy provides a listing of preferred exchanges. While some digital assets are valued based on prices reported in the public markets, other digital assets may be more thinly-traded or subject to irregular trading activity. Determinations on the value of certain digital assets, and how to value such assets as to which limited prices or quotations are available, are based on the Sponsor’s recommendations or instructions.

The process that the Sponsor has developed for identifying a principal market, as described in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) which outlines the application of fair value accounting, was to begin by identifying publicly available, well-established and reputable cryptocurrency exchanges selected by the Sponsor and its affiliates in their sole discretion, currently including BitFlyer, Binance, Bitstamp, Bittrex, Coinbase, itBit, Kraken, Gemini and Poloniex, and thn calculating, on each valuation period, the highest volume exchange during the 60 minutes prior to 16:00 ET for each asset. In evaluating the markets that could be considered principal markets, the Trust considered whether or not the specific markets were accessible to the Trust, either directly or through an intermediary, at the end of each period.

Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access.

Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. These inputs may include (a) quoted prices for similar assets in active markets, (b) quoted prices for identical or similar assets in markets that are not active, (c) inputs other than quoted prices that are observable for the asset, or (d) inputs derived principally from or corroborated by observable market data by correlation or other means.

Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Some of the markets in which the Trust may execute its transactions are or “interdealer” markets. The participants in such markets are typically not subject to credit evaluation and regulatory oversight as are members of “exchange-based” markets. This exposes the Trust to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Trust to suffer a loss. Such “counterparty risk” is accentuated for digital assets where the Trust has concentrated its transactions with a single or small group of counterparties. The Trust is not restricted from dealing with any particular counterparty or from concentrating any or all of its transactions with one counterparty. Moreover, the Trust has no internal credit function that evaluates the creditworthiness of its counterparties. The ability of the Trust to transact business with any one or number of counterparties, the lack of any meaningful and independent evaluation of such counterparty’s financial capabilities and the absence of a regulated market to facilitate settlement may increase the potential for losses by the Trust.

The future impact of the outbreak on the financial performance and operations of the Trust will depend on future developments, including the duration and spread of the virus and related advisories and restrictions. These developments and the impact of on blockchain markets and the overall economy, as well as on the financial performance and operations of the Trust, are highly uncertain and cannot be predicted.

The Sponsor may, at its sole discretion, accept digital assets Investments”) in lieu of, or in addition to, cash as payment for investment in the Trust. Such Investments are valued using the same digital asset prices as per the Trust’s valuation policy at any given valuation date as of 16:00 ET on the date of the subscription. For the periods January 1, 2021 to September 30, 2021 and January 1, 2020 to September 30, 2020, the Trust accepted Investments from the Shareholders of $95,459,698 and $15,708,466

The Sponsor paid all expenses related to the initial offering, organization and of the Trust and will not seek reimbursement for such amounts. The Sponsor is responsible for all ordinary operating expenses of the Trust, including administrative, custody, legal, audit, insurance, and other operating expenses.

The Trustis a Delaware Statutory Trust that issues units of fractional undivided beneficial interest in the form of Shares, which represent ownership in the Trust. The Trust was initially formed as a Delaware limited liability company on September 18, 2017 and commenced operations on November 22, 2017. On May 1, 2020, the Trust converted from a limited liability company to a Delaware statutory trust. In connection with the corporate action, units in the limited liability company were converted into Shares of the Trust. All shareholders of “investor class” units received 10 Shares for each unit owned prior to the corporate action date, and all shareholders of “institutional class” units received 10.12602229 Shares for each unit owned prior to the corporate action date.

The Trust’s principal investment objective is to invest in a portfolio (“”) of cryptocurrencies (each, a “” and collectively, “”) that tracks the Bitwise 10 Large Cap Crypto Index (the “”) as closely as possible with certain exceptions determined by the Sponsor in its sole discretion. In addition, in the event the Portfolio Crypto Assets being held by the Trust present opportunities to generate returns in excess of the Index (for example, airdrops, staking, emissions, forks, or similar network events) the Sponsor may also pursue these incidental opportunities on behalf of the Trust as part of the investment objective if in its sole discretion the Sponsor deems such activities to be possible and prudent.

The Trust believes that it has met its principal investment objective. As of September 30, 2021, there was a correlation of 99.84% between the Portfolio Crypto Assets and the assets included in the Index. The Trust is aware that the market price of the Trust’s shares may deviate from the net asset value (“”) of the Shares, that to date the Shares traded on the secondary market have not closely tracked the NAV of the Shares, and that the market price of the Shares has been and may continue to be significantly above or below the NAV per share. However, the Trust does not have control over an investor’s ability to achieve a return on investment that tracks the performance of the Index. The trading price of the Shares is determined by the market, and at times the Shares will trade at a premium or a discount to the net asset value per share (“”). Regardless of the Trust or Sponsor’s methods of managing the underlying portfolio, the price an investor will pay on the secondary market could differ significantly from the NAV per Share. The Trust does not seek to track the performance of the trading of Shares on the secondary market and the trading price of Shares an investor will pay on the secondary market may be significantly different from the NAV per Share. Furthermore, under Regulation M, the Trust, as the issuer of the Shares, is not legally permitted to take the types of actions that might help to reconcile the NAV per Share and the market price per Share.

There is no ceiling to the Trust’s expenses that the Sponsor will pay. However, the Sponsor retains the right to cause the Trust to pay indemnification and extraordinary expenses, and these Trust expenses are not covered by the Management Fee. The Trust may incur certain extraordinary expenses including, but not limited to, any costs and expenses including indemnification and extraordinary costs of the Administrator and Auditor, costs of any litigation or investigation involving Trust activities, and workout and restructuring and indemnification expenses.

The minimum initial subscription amount is $25,000 and an existing Shareholder may make additional subscriptions in a minimum amount of $10,000, subject in all cases to increase, decrease and waiver of such requirements by the Sponsor in its sole discretion. All subscriptions are made directly to the Trust with processing assistance from the Fund Administrator. Subscriptions may be funded through payment in US dollars or through contributions of Portfolio Crypto Assets Investments”), or both at the sole discretion of the Sponsor. The Sponsor may accept stablecoins on a basis as determined in the discretion of the Sponsor. Investments are valued using the same digital asset prices as per the Trust’s valuation policy at any given valuation date as of 16:00 ET on the date of the subscription. Once an Investment has been delivered to the Trust in connection with a subscription funding requirement, an investor cannot cancel its subscription regardless of the valuation established for the contribution. For the period January 1, 2021 to September 30, 2021, the Trust accepted Investments from Shareholders of $95,459,698. For the quarter ended September 30, 2021, the Trust issued 4,445 Shares in exchange for Investments of 4 BTC and 8 ETH.

The Trust values contributions to the Trust using the same valuation methodology that it uses to calculate the Trust’s NAV on the day of the subscription. A contribution will be valued, in dollar terms, using the same prices for each digital asset that are used to value the assets in the Trust on that day, and that value is divided by the Trust’s NAV as calculated on that day in order to calculate the number of Shares purchased by the Subscriber in the transaction. The Trust has not made any distributions or liquidated a Shareholder’s distribution in order to reduce additional regulatory costs of the Shareholders for any period presented. The goal of the conversion of either dollars (cash) or digital assets accepted to the Trust is to leave the portfolio in a position where its holdings and weightings are closely representative of the constituents and weightings of the Trust’s benchmark index. This process requires the use of quantitative portfolio management techniques to compare the Trust’s existing holdings and weightings, plus the new net assets of the Trust after accounting for the incoming dollars (cash) and /or digital assets received to the constituents and weightings of the index in order to calculate the amounts and quantities of each digital asset to purchase (or sell) in order to bring the Trust’s portfolio into a position that its holdings and weightings are closely representative of the holdings and weightings of the Trust’s benchmark index The Trust then has at its disposal multiple venues to acquire and dispose of digital assets, including trading venues (known as exchanges), direct trading counterparties (known as “OTC desks”), and trading technology solutions that aggregate liquidity from multiple trading venues. Trade execution and portfolio management is dynamic and complex. The Sponsor must exercise judgement, take into account recent experience and market conditions, as well as the size of the trades being executed, settlement procedures at each venue, types of assets and their availability on such platforms prior to determining on which venue to execute each trade. The Sponsor attempts to purchase or sell each asset in each instance at a price that is close to the price used for calculating the Trust’s NAV (and the Index’s daily price for which the time used is 16:00 ET), while also minimizing market impact and reducing operational and settlement risk. There is no guarantee that the Sponsor will be able to trade digital assets at or near the benchmark price, and there are a number of other factors aside from price slippage that inform best practices in trade execution.

other reasons). The Sponsor will make such announcement on its website. Digital assets are valued on the day the subscription is processed at the same price that the Trust uses to value the rest of its assets and strike its NAV. Investors cannot withdraw subscriptions after the digital assets are valued. Each investor who seeks to subscribe for Shares is required to execute a subscription agreement pursuant to which the investor will agree to be bound by the Trust Agreement and other Trust documentation.

As described in the Risk Factors set out in the Form 10 filed with the SEC on April 23, 2021, the prices of the various Portfolio Crypto Assets held by the Trust are subject to extreme volatility. This volatility had a significant impact on the value of the Portfolio Crypto Assets as of the nine months ended September 30, 2021 compared to September 30, 2020 and 2020.

As shown below in the “,” aside from the change in value of Portfolio Crypto Assets, the increase in total investments in digital assets from January 1, 2021 to September 30, 2021 was due primarily to an increase of 2,041.8853 units of Bitcoin and an increase of 19,948.0277 units of Ethereum, in addition to the number of units invested in the additional cryptocurrencies that comprise the Portfolio Crypto Assets, purchased in connection with Shareholder subscriptions for Shares, partially offset by the sale of various Portfolio Crypto Assets to pay the Management Fee.

Effective August 31, 2021, the Trust identifies publicly available, well-established and reputable cryptocurrency exchanges selected by the Sponsor and its affiliates in their sole discretion, currently including BitFlyer, Binance, Bitstamp, Bittrex, Coinbase, itBit, Kraken, Gemini and Poloniex, and then calculating, on each valuation period, the highest volume exchange during the 60 minutes prior to 16:00 ET for each asset. For valuation purposes, the Trust then utilizes the 16:00 ET price from the highest volume exchange for each asset. Prior to August 31, 2021, the Trust calculated a composite reference price daily by averaging across all prices from select trading venues weighted by their trade volume. The list of exchanges which were used in order to calculate the daily reference prices included Poloniex, Binance, Bittrex, Kraken, Bitstamp, itBit, Gemini, Coinbase and BitFlyer.

The Trust is not a party to any sheet arrangements.