Summary BITQ ETF's top holdings primarily burn cash and face risks of dilution or insolvency. Recent changes in holdings haven't mitigated these risks; new additions like TeraWulf, Core Scientific, and Cipher Mining still struggle with negative cash flows. Incumbent miners continue to burn cash, while Coinbase and Galaxy remain the strongest players with positive free cash flows. As this is a very volatile issue, I've re-rated to hold to discourage short positions. Bitwise Crypto Industry Innovators ETF ( BITQ ) is a fund that I've covered before . In that piece, I went over the Top Ten holdings, which accounted for a majority of the fund, and noted that they primarily burn cash and regularly need to issue more shares to remain operational, presenting long-term risks of loss through dilution or insolvency. While there have been changes, I continue to worry about those risks, but I have re-rated to a Hold, preferring to discourage a short position for long-term investors. Since Last Coverage Since I last published on March 5th, total return has been very volatile and currently sits just over 16%. BITQ 6M Total Returns (Seeking Alpha) Many things have influenced this, such as the halving of Bitcoin ( BTC-USD ) in April and the possibility of a favorable Presidency, after Trump named crypto-investor J.D. Vance as his running mate and announced plans to form an American BTC reserve. At the same time, some of the holdings have continued to struggle, amid disappointing financial results. CleanSpark ( CLSK ), Canaan ( CAN ), and Hive ( HIVE ) have fallen out of the Top Ten. Seeking Alpha They were replaced by TeraWulf ( WULF ), Core Scientific ( CORZ ), and Cipher Mining ( CIFR ). Overall, the weight of the Top Ten fell from two-thirds to 60.7% of the funds, but they still represent a solid majority of the fund, and I believe looking at them gives enough insight into BITQ as a whole. Observing the New Stocks TeraWulf, a miner, does not have many years of operating results, but so far, its annual cash flows have been negative. WULF Cash Flow Statement (2023 Form 10K) While operating cash flows turned positive in 2023 have continued to grow in 2024, capex still exceeds what they can generate from operations. WULF Cash Flow Statement (Q2 2024 Form 10Q) Core Scientific, another BTC miner, boasts a year 2023 with free cash flow! CORZ Cash Flow Statement (2023 Form 10K) One would almost be impressed, had the company not been under Debtor-in-Possession status during that time. As their 2023 Form 10K (pg. 87) noted: As of December 31, 2023, we were debtors-in-possession under the Bankruptcy Code. As such, we were authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Their latest Form 10Q (pg. 13) notes that new terms were reached and the restrictions of the bankruptcy were lifted. CORZ Cash Flow Statement (Q2 2024 Form 10Q) Unsurprisingly, their free cash flow has returned to being net-negative. CIFR Cash Flow Statement (2023 Form 10K) Cipher, also a miner, has failed to generate even positive cash flows from operations each year. CIFR Cash Flow Statement (Q2 2024 Form 10Q) This trend of outflow has continued for 2024 as well. Overall, their problem is the same that I outlined in my initial coverage. Miners (as a business) struggle to generate more cash than they spend on capex. This capex is primarily spent on the purchase and acquisition of miners (the machines) to solve blocks and earn new units of BTC. All of them primarily buy and utilize machines produced by Bitmain, which are specifically made to be useful for mining BTC and likely have no other application. Another element that I mentioned last time is that this cost is unlikely to stabilize or go down, as hash rate needed to solve a block and earn BTC increases as more participants attempt to mine BTC. This creates an arms race of ever-increasing costs, and to date BTC has not traded at a high enough market price for miners to be reliably cash-generative. In other words, the rotation of some of Top Ten's constituents did nothing to change this risk in my view. Incumbents Since my last coverage, the miners have continued to burn cash, and this includes Riot ( RIOT ), Bitfarms ( BITF ), Northern Data AG (NDTAF) and Marathon ( MARA ). I actually covered Bitfarms again recently, and I find them to be one of the better miners operationally. I also praised their budding designs to expand into HPC/AI, leveraging their expertise in developing and maintaining electrical infrastructure. Screenshot (ABetterBitfarms.com) Their main problem has been their conflict with Riot, which has resulted in leadership changes as they try to take over BITF. Riot launched ABetterBitfarms.com as part of their activist campaign. A complete takeover by what I consider to be a lesser operator could ruin the one most redeeming miner of the bunch, and so I could only rate that one a Hold, too. MicroStrategy ( MSTR ), as a trader of BTC and provider of BTC-related software, services continues to generate positive cash flows. MSTR Cash Flow Statement (Q2 2024 Form 10Q) It should be noted, however, that it is down somewhat from 2023's levels, suggesting it could be exposed to cyclical trends or competitive pressures. MSTR Cash Flow Statement (Q2 2024 Form 10Q) This benefit is also voided by the dilution resulting from its stock-based compensation, which dwarfs the value of its free cash flow, which was a historical I had noted previously. Coinbase ( COIN ) and Galaxy ( GLXY:CA ) continued to be the strongest players of the Top Ten, with positive free cash flows and levels of stock-based compensation that don't overwhelm it either. I covered Coinbase last month, discussing its Q1 results and rating it a Hold. Its core segment as a crypto trading platform shows signs of cyclicality, while hinting long-term growth potential with its Stablecoin service. Conclusion I continue to view BITQ as an example of an ETF that exists because it's easy to make any idea into an ETF, such as one for crypto companies. Based on the Bitwise Crypto Innovators 30 Index, it lacks active or mindful selection, and this has led to much of the AUM being invested in companies that burn cash. The bankruptcy of Core Scientific, now one of its Top Ten holdings, shows what a precarious situation this is for the miners especially. Should folks want to invest in equities exposed to cryptocurrencies (as opposed to buying crypto itself), BITQ is better as a short list to narrow down until two or three contenders stand out. In this case, I would think COIN, GLXY:CA, and MSTR are the best places to start because they at least generate cash. I've re-rated to hold largely because I want to discourage anyone taking a short position on these long-term weaknesses in the portfolio, especially since the underlying asset, BTC, is very sensitive to news events. Overall, however, the portfolio companies still bear too much risk to make this ETF a Buy.
