Bitwise 10 Crypto Index Fund - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-56270

Bitwise 10 Crypto Index Fund

(Exact Name of Registrant as Specified in Its Charter)

400 Montgomery Street,

Suite 600

San Francisco, CA 94111

(Address of Principal Executive Offices) (Zip Code)

(415) 968-1843

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Bitwise 10 Crypto Index Fund (BITW) Shares

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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 non-accelerated 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 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of the registrant’s common stock outstanding as of June 30, 2022: 20,241,947

Table of Contents

Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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. Factors which could have a material adverse effect on the Trust's business, financial condition or results of operations and future prospects or which could cause actual results to differ materially from the Trust's expectations include, but are not limited to:
 

• the extreme volatility of trading prices that many crypto assets, including Bitcoin, have experienced in recent periods and may continue to experience, which could have a material adverse effect on the value of the shares of the Trust;
 

• the recentness of the development of crypto assets and the uncertain medium-to-long term value of the shares of the Trust due to a number of factors relating to the capabilities and development of Blockchain technologies and to the fundamental investment characteristics of crypto assets;
 

• the value of the shares of the Trust depending on the acceptance of crypto assets and Blockchain technology, a new and rapidly evolving industry;
 

• the unregulated nature and lack of transparency surrounding the operations of Blockchain technologies, cryptocurrencies, and digital assets, which may adversely affect the value of the group of selected cryptocurrencies that are held by the Trust ("Portfolio Crypto Assets") and the shares of the Trust;
 

• the limited history of the Index (as defined herein);
 

• risks related to the COVID-19 pandemic, which could negatively impact the value of the Trust’s holdings and significantly disrupt its operations;
 

• the possibility that the shares of the Trust may trade at a price that is at, above or below the Trust’s NAV Per Share as a result of the non-current trading hours between OTCQX and markets for the Portfolio Crypto Assets;
 

• regulatory changes or actions by the U.S. Congress or any U.S. federal or state agencies that may affect the value of the Shares or restrict the use of one or more crypto assets, mining activity or the operation of their networks or the markets for the Portfolio Crypto Assets in a manner that adversely affects the value of the shares of the Trust;
 

• changes in the policies of the U.S. Securities and Exchange Commission (the “SEC”) that could adversely impact the value of the shares of the Trust;
 

• the possibility that the Trust or the Sponsor could be subject to regulation as a money service business or money transmitter, which could result in extraordinary expenses to the Trust or the Sponsor and also result in decreased liquidity for the Shares;
 

• regulatory changes or interpretations that could obligate the Trust or the Sponsor to register and comply with new regulations, resulting in potentially extraordinary, nonrecurring expenses to the Trust;
 

• potential delays in mail reaching the Sponsor when sent to the Trust at its registered office;
 

• possible requirements for the Trust to disclose information, including information relating to investors, to regulators;
 

i

• potential conflicts of interest that may arise among the Sponsor or its affiliates and the Trust;
 

• the potential discontinuance of the Sponsor’s continued services, which could be detrimental to the Trust;
 

• the possible resignation or removal of the Custodian (as defined herein) by the Sponsor; and
 

• additional risk factors discussed in Part II, Item 1A. Risk Factors and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q, as well as those described from time to time in our future reports filed with the SEC.

Unless otherwise stated or the context otherwise requires, the terms “we,” “our” and “us” in this Quarterly Report on Form 10-Q refer to the Sponsor acting on behalf of the Trust.

ii

Industry and Market Data

Although we are responsible for all disclosure contained in this Quarterly Report on Form 10-Q, 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.”

iii

PART I – FINANCIAL INFORMATION:

Item 1. Financial Statements (Unaudited)

Bitwise 10 Crypto Index Fund

(formerly known as Bitwise 10 Private Index Fund, LLC)

Financial Statements (Unaudited)

June 30, 2022 and June 30, 2021

1

Bitwise 10 Crypto Index Fund

Table of Contents

2

Bitwise 10 Crypto Index Fund

Statements of Financial Condition

June 30, 2022 (unaudited) and December 31, 2021

See accompanying notes to financial statements (unaudited).

3

Bitwise 10 Crypto Index Fund

Schedules of Investments

June 30, 2022 (unaudited)

December 31, 2021

See accompanying notes to financial statements (unaudited).

4

Bitwise 10 Crypto Index Fund

Statements of Operations (Unaudited)

For the three and six months ended June 30, 2022 and June 30, 2021

See accompanying notes to financial statements (unaudited).

5

Bitwise 10 Crypto Index Fund

Statement of Changes in Net Assets (Unaudited)

For the three and six months ended June 30, 2022 and 2021

See accompanying notes to financial statements (unaudited).

6

Bitwise 10 Crypto Index Fund

Notes to Comparative Financial Statements (unaudited)

7

Bitwise 10 Crypto Index Fund

Notes to Comparative Financial Statements (unaudited)

9

Bitwise 10 Crypto Index Fund

Notes to Comparative Financial Statements (unaudited)

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with U.S. GAAP. The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under Part II, Item 1A. Risk Factors in this Quarterly Report.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Form 10-Q, which have been prepared in accordance with U.S. GAAP. The following discussion may contain forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of various factors, including those set forth under “Part II. Item 1A. Risk Factors,” “Statement Regarding Forward-Looking Statements” or in other sections of this Form 10-Q.

Trust Overview

The Trust is a Delaware Statutory Trust that issues units of fractional undivided beneficial interest in the form of shares, which represent ownership in the Trust ("Shares").

The purpose of the Trust is to make it easier for an investor to invest in the cryptocurrency market as a whole, without having to pick specific tokens, manage a portfolio, and constantly monitor ongoing news and developments. Although the Shares are not the exact equivalent of a direct investment in cryptocurrencies, they provide investors with an alternative that constitutes a relatively cost-effective, professionally managed way to participate in cryptocurrency markets. The Trust holds a portfolio of cryptocurrencies, referred to as the Portfolio Crypto Assets.

In furtherance of this objective, the activities of the Trust include (i) issuing Shares in exchange for subscriptions, (ii) selling or buying Portfolio Crypto Assets in connection with monthly rebalancing, (iii) selling Portfolio Crypto Assets as necessary to cover the Management Fee (as defined below) and/or any Organizational Expenses (as defined below), (iv) causing the Sponsor to sell Portfolio Crypto Assets upon any potential future termination of the Trust, and (v) engaging in all administrative and security procedures necessary to accomplish such activities in accordance with the provisions of the Trust Agreement, and the Custodian Agreement (as defined below).

The Trust’s principal investment objective is to invest in a Portfolio of cryptocurrencies that tracks the Bitwise 10 Large Cap Crypto Index (the "Index") 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, 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. For the period ending June 30, 2022, there was a correlation of 99.99% 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 (“NAV”) of the shares, and the market price may at times be significantly above or below the shares’ NAV. The NAV of the Trust is calculated by summing the assets and liabilities and the NAV Per Share is calculated by dividing the total NAV by the shares outstanding. However, the Trust believes that any such deviation does not affect the Trust’s principal investment objective, as the Trust does not maintain or promote any business objectives related to the market trading price of its shares. Furthermore, under Regulation M, the Trust as issuer of the Shares is not permitted to take any actions that would seek to reconcile the NAV of the Shares and the market price of the Shares, and the Trust would not undertake business objectives that it was legally restricted from achieving.

The Trust and the Sponsor have entered into a limited, non-exclusive, revocable license agreement with Bitwise Index Services, LLC (the “Index Provider”), an affiliate of the Trust that is controlled by the same parent entity as the Sponsor, at no cost to the Trust or the Sponsor allowing the Trust to use the Index as the benchmark index for the Trust (the “License Agreement”).

15

Results of Operations

Financial Information for the Three and Six Months ended June 30, 2022 and 2021

The following table sets forth statements of operations data for the three and six months ended June 30, 2022 and 2021.

Statement of Operations (Unaudited)

Comparison of the three month periods ended June 30, 2022 and 2021

The following provides a discussion of the material items that impacted the Trust’s financial condition during the applicable period:

Management fees

The Sponsor charges the Trust a Management Fee payable monthly, in arrears, in an amount equal to 2.5% per annum (1/12th of 2.5% per month) of the net asset value of the Trust’s assets at the end of each month. Management fees for the three months ended June 30, 2022 were $3,477,008 compared to management fees for the three months ended June 30, 2021 of $5,276,830. These changes were due to a decrease in the Trust’s net asset value due to an decrease in the value of the Portfolio Crypto Assets held by the Trust as a result of the fair market value of the Assets (see “Schedules of Investments” below) and new Shareholder subscriptions.

Net realized gain (loss) from digital assets

Net realized loss from digital assets for the three months ended June 30, 2022 was $3,690,837 compared to net realized loss from digital assets for the three months ended June 30, 2021 of $1,574,741. These changes were due to fluctuations in the value of the Portfolio Crypto Assets.

For the three month period ended June 30, 2022, the Trust recorded net realized loss from sales of Cosmos and net realized gain of Ethereum of approximately $3,499,281 and $722,643, respectively, among the gains and losses realized in smaller amounts from the sale of other portfolio crypto assets. These sales were made as a result of rebalancing activity, sales of portfolio crypto assets to raise money to pay the management fee, and general fund management.

For the three month period ended June 30, 2021 the Trust recorded net realized losses from sales of Bitcoin of approximately $3,277,642 and recorded net realized gains of approximately $810,086 and $724,433 from sales of EOS and ATOM respectively, among gains and losses realized in smaller amounts from the sale of other portfolio crypto assets. These sales were made as a result of rebalancing activity, sales of portfolio crypto assets to raise money to pay the management fee, and general fund management.

Net change in unrealized appreciation (depreciation) from digital assets

Net change in unrealized depreciation from digital assets for the three months ended June 30, 2022 was $567,558,878 compared to net change in unrealized depreciation from digital assets for three months ended June 30, 2021 of $315,129,557. The primary factor for the change was related to a decrease in the fair value of the Portfolio Crypto Assets held by the Trust (see “Schedules of Investments” below).

For the three month period ended June 30, 2022 the Trust recorded net unrealized depreciation from digital assets of Bitcoin and Ethereum of approximately $322,858,500 and $174,648,091, respectively, among the unrealized gains and losses in smaller amounts of other portfolio crypto assets.

16

For the three month period ended June 30, 2021 the Trust recorded net unrealized depreciation from digital asset Bitcoin and net unrealized appreciation from digital asset Ethereum of approximately $321,029,213 and $28,592,022, respectively, among the unrealized gains and losses in smaller amounts of other portfolio crypto assets.

Net increase (decrease) in net assets resulting from operations

For the three month period ended June 30, 2022, the Trust recorded net decrease in net assets resulting from operations of $574,726,723, compared to a net decrease in net assets resulting from operations of $321,981,447 for the period ended June 30, 2021. The primary factor that impacted 2022 net increase (decrease) in net assets resulting from operations compared to 2021 net increase (decrease) in net assets resulting from operations was a large decrease in net realized and change in unrealized gain on investments with a net loss of $571,249,715 in 2022 compared to a net loss of $316,704,298 in 2021. The primary factors for the change were a decrease in the value of the Portfolio Crypto Assets held by the Trust as a result of the fair market value of the Assets (see “Schedules of Investments” below) and new Shareholder subscriptions.

Comparison of the six month periods ended June 30, 2022 and 2021

The following provides a discussion of the material items that impacted the Trust’s financial condition during the applicable periods:

Management fees

The Sponsor charges the Trust a Management Fee payable monthly, in arrears, in an amount equal to 2.5% per annum (1/12th of 2.5% per month) of the net asset value of the Trust’s assets at the end of each month. Management fees for the six months ended June 30, 2022 were $8,695,406 compared to management fees for the six months ended June 30, 2021 of $10,186,274. These changes were due to a decrease in the Trust’s net asset value due to an decrease in the value of the Portfolio Crypto Assets held by the Trust as a result of the fair market value of the Assets (see “Schedules of Investments” below) and new Shareholder subscriptions.

Net realized gain (loss) from digital assets

Net realized loss from digital assets for the six months ended June 30, 2022 was $8,741,954 compared to net realized loss from digital assets for the six months ended June 30, 2021 of $1,702,915. These changes were due to fluctuations in the value of the Portfolio Crypto Assets.

For the six month period ended June 30, 2022, the Trust recorded net realized losses from sales of Algorand and Bitcoin Cash of approximately $4,116,639 and $1,354,758, respectively, among the gains and losses realized in smaller amounts from the sale of other portfolio crypto assets. These sales were made as a result of rebalancing activity, sales of portfolio crypto assets to raise money to pay the management fee, and general fund management.

For the six month period ended June 30, 2021 the Trust recorded net realized losses from sales of Bitcoin of approximately $4,273,419 and recorded net realized gains of approximately $810,085 and $940,834 from sales of Eos and Cosmos, respectively. These sales were made as a result of rebalancing activity, sales of portfolio crypto assets to raise money to pay the management fee, and general fund management.

Net change in unrealized appreciation (depreciation) from digital assets

Net change in unrealized depreciation from digital assets for the six months ended June 30, 2022 was $620,334,767 compared to net change in unrealized appreciation from digital assets for six months ended June 30, 2021 of $158,026,721. The primary factor for the change was related to a decrease in the fair value of the Portfolio Crypto Assets held by the Trust (see “Schedules of Investments” below).

For the six month period ended June 30, 2022 the Trust recorded net unrealized depreciation from digital assets of Bitcoin and Ethereum of approximately $328,999,223 and $204,810,079, respectively, among the unrealized gains and losses in smaller amounts of other portfolio crypto assets.

For the six month period ended June 30, 2021 the Trust recorded net unrealized appreciation from digital assets of Bitcoin and Ethereum of approximately $52,440,293 and $111,042,290, respectively, among the unrealized gains and losses in smaller amounts of other portfolio crypto assets.

17

Net increase (decrease) in net assets resulting from operations

The Trust’s net decrease in net assets resulting from operations for the six month period ended June 30, 2022 was $637,772,947 compared to a net increase in net assets resulting from operations of $146,136,396 for the six month period ended June 30, 2021. The primary factor that impacted 2022 net increase (decrease) in net assets resulting from operations compared to 2021 net increase (decrease) in net assets resulting from operations was a large decrease in net realized and change in unrealized gain on investments with a net loss of $629,076,721 in 2022 compared to a net gain of $156,323,806 in 2021. The primary factors for the change were a decrease in the value of the Portfolio Crypto Assets held by the Trust as a result of the fair market value of the Assets (see “Schedules of Investments” below) and new Shareholder subscriptions.

Management Fee

The Sponsor charges the Trust a Management Fee payable monthly, in arrears, in an amount equal to 2.5% per annum (1/12th of 2.5% per month) of the net asset value of the Trust’s assets at the end of each month.

The Sponsor is responsible for paying for all ordinary administrative and overhead expenses of managing the Trust, including payment of rent, custody charges or flat rate fees for holding the Trust’s assets charged by the Custodian and customary fees and expenses of the Trustee, Administrator and Auditor (including costs incurred for appraisal or valuation expenses associated with the preparation of the Trust’s financial statements, tax returns and other similar reports and excluding indemnification and extraordinary costs). The Sponsor also pays for all expenses associated with the operation of the Trust, including for example, fees associated with quotation of the Shares on the OTCQX, registration with the SEC, and fees associated with retaining and maintaining the Transfer Agent. “Trading commissions” or trading fees paid to trading venues (also known as exchanges) or intermediaries (such as trading technology or digital asset brokerage firms) that assist in trade execution for accessing digital asset liquidity are charged to the Trust and may either be included in the cost of the digital assets acquired by or disposed of by the Trust or may appear as explicit costs in addition to the price of the digital asset. Trading fees and commissions are charged to the Trust and may appear in the financial statements as “Transaction and other fees” in the Financial Statements’ Statement of Operations in the Expenses category or may be included in the cost of the digital assets acquired by the Trust.

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 non-customary costs and expenses including extraordinary costs of the Administrator and Auditor, costs of any litigation or investigation involving Trust activities, and workout and restructuring and indemnification expenses.

Shareholder Subscriptions

As of November 18, 2021, the Sponsor to the Trust has closed the acceptance of all subscriptions to the Bitwise 10 Crypto Index Fund, pursuant to its rights under Sections 5 and 6 of the Trust Agreement. At this time, the Sponsor has no plans to reopen subscriptions to the Bitwise 10 Crypto Index Fund. There were no shareholder subscriptions during the quarter ended June 30, 2022.

Capital Resources and Liquidity

The Trust generally holds only a very small cash balance, and is otherwise fully invested in order to maintain its investment objective of tracking the Index. When selling Portfolio Crypto Assets to pay the Management Fee, the Sponsor endeavors to sell an exact amount of Portfolio Crypto Assets needed in order to pay such expenses in order to minimize the Trust’s holdings of assets other than Portfolio Crypto Assets. As a consequence, the Sponsor expects the Trust will typically have a very small cash balance at each reporting period. Cash may also be held in the Trust after a subscription from Shareholder is funded (or sent to the Trust’s bank account) but not yet invested in Portfolio Crypto Assets, or after a redemption from a redeeming Shareholder has been processed (e.g., by raising cash through the sale of Portfolio Crypto Assets) but not yet paid to the redeeming Shareholder.

As described above, in exchange for the Management Fee, the Sponsor is responsible for payment of almost all of the expenses incurred by the Trust. As a result, the only material ordinary expense of the Trust during the periods covered by this Registration Statement was the Management Fee. The Trust is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity needs.

Value of Portfolio Crypto Assets

As described in the Risk Factors set out in our Form 10-K filed with the SEC on March 11, 2022, 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

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Crypto Assets for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 and the year ended December 31, 2021.

As shown below in the “Schedules of Investments,” the decrease in total investments in digital assets from January 1, 2022 to June 30, 2022 was due primarily to a decrease in the value of the Portfolio Crypto Assets and to a lesser extent, by the sale of various Portfolio Crypto Assets to pay the Management Fee.

Shareholder Subscriptions and Redemptions

During the period from January 1, 2022 to June 30, 2022, there were no subscriptions or redemptions of Shares. There were 20,241,947 Shares outstanding as of June 30, 2022.

Schedules of Investments

The following provides details on the Portfolio Crypto Assets that comprise the Trust’s assets.

Six Months Ended June 30, 2022 and the Twelve Months Ended December 31, 2021