CRPT: While Bitcoin Leads, Operators Lag

Summary First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT) offers concentrated exposure to crypto-related companies and bitcoin ￰0￱ has underperformed both bitcoin and its core holdings since inception, raising concerns about the effectiveness of its ￰1￱ ETF's high concentration and correlation to bitcoin expose investors to significant volatility and operational risks from underlying ￰2￱ historical underperformance and risk profile, I recommend a Sell rating for CRPT, favoring direct investment in bitcoin or bitcoin ETFs ￰3￱ First Trust SkyBridge Crypto Industry and Digital Economy ETF ( CRPT ) is an actively managed exchange-traded fund designed to provide investors with exposure to the cryptocurrency ￰4￱ strategy invests in companies that participate in the development of cryptocurrencies, digital technology companies, and exchange-traded products that may provide exposure to the cryptocurrency ￰5￱ First Trust SkyBridge Crypto Industry and Digital Economy ETF CRPT was launched by First Trust Advisors on September 20, 2021 on the NYSE Arca ￰6￱ strategy has $144mm in net assets with an average of $1.90mm in share value changing hands on a daily ￰7￱ strategy may periodically pay out an annual distribution; however, I do not believe distributions are guaranteed as part of the investment ￰8￱ has paid out a distribution in 3 of the 4 years since ￰9￱ is an actively managed strategy that was designed to provide investors with exposure to the cryptocurrency ￰10￱ strategy primarily invests in crypto industry companies, both domestic and international, exchange-traded products, and digital economy ￰11￱ is highly concentrated across 20 holdings with the top 10 holdings making up 88% of the portfolio ￰12￱ contrast, the bottom 10 holdings make up roughly 11.63% of the portfolio ￰13￱ top holdings include Strategy ( MSTR ) formerly MicroStrategy at 19.27%, Coinbase Global ( COIN ) at 16.33%, and Metaplanet ( OTC:MTPLF ) at 11.21%.

Roughly 23% of assets are invested in bitcoin ETFs, including iShares Bitcoin Trust ( IBIT ), Fidelity Wise Origin Bitcoin Fund ( FBTC ), and Bitwise Bitcoin ETF ( BITB ). Taking into consideration the portfolio concentrations, CRPT is heavily correlated with bitcoin, exhibiting similar pricing patterns to ￰14￱ What’s most interesting about CRPT is that despite the significant concentration in MSTR shares and bitcoin ETFs, the strategy has significantly underperformed these two core holdings since inception, suggesting that the ETF may be held back by certain equity ￰15￱ Disaggregating the portfolio, only 4 of its current holdings have underperformed CRPT since inception, including Cipher Mining ( CIFR ), Riot Platforms ( RIOT ), MARA Holdings ( MARA ), and TeraWulf ( WULF ).

In aggregate, these 4 holdings make up 5.51% of the portfolio ￰16￱ CRPT shares’ performance may suggest that manager risk may be a more prominent factor in deriving value from the ￰17￱ the long-term growth of the holdings, many of the leading investments like COIN and MSTR have faced significant declines in recent months, which may have been a defining factor in the performance of the ￰18￱ Though I have historically been bearish on MSTR shares , investors have extracted significant value in MSTR shares in the last year with shares trading as high as $543/share before declining to $309/share. TradingView In terms of the future of bitcoin pricing, leadership at MARA Holdings has suggested that we may be in the midst of a bitcoin bear ￰19￱ a major pullback in the price of bitcoin were to occur, companies and ETFs held in CRPT may be heavily exposed, potentially resulting in significant share price decline for ￰20￱ I cannot speak to the price direction of bitcoin, the price remains near all-time highs with a bullish technical ￰21￱ CRPT charges a fee in line with peer strategies with an 85bps expense ￰22￱ the strong correlation to bitcoin pricing, investors may consider investing in a bitcoin ETF as an alternative for ￰23￱ Alpha Relative to peer performance, CRPT has experienced relatively moderate returns, though I do not believe historical performance may be used as an indicator given that many of the strategies do not have a lengthy track record to ￰24￱ Alpha Comparing the performance of bitcoin to CRPT since inception, bitcoin has largely outperformed the ETF by a margin of nearly 150%, giving me reason to believe that diversification across bitcoin miners, trading platforms, and developers may not be ideal for the average ￰25￱ core differentiator between investing in a bitcoin ETF and the companies engaging in the development of bitcoin is that operational performance may be weighed when valuing these ￰26￱ addition to this factor, companies’ shares may be impacted by the price of bitcoin, potentially setting the direction for momentum traders in this higher risk market.

Overall, I believe the safest alternative when considering an investment in the digital economy is directly in bitcoin or in bitcoin ￰27￱ the record, this is not advice to invest in the cryptocurrency; I am merely stating an observation with respect to the broader ￰28￱ Risks Related to CRPT CRPT is an actively managed investment strategy designed to provide investors exposure to companies that participate in the digital and crypto economy, bearing certain risks that investors should be aware of prior to making an investment ￰29￱ is heavily concentrated across 20 holdings with the top 10 holdings making up 88% of the total portfolio ￰30￱ level of concentration may not be suitable for every investor and may bear significant risk that may result in adverse ￰31￱ has historically exhibited significant volatility; companies that participate in the development of bitcoin have historically shown a certain degree of correlation to the price of ￰32￱ performance of bitcoin development companies may be heavily impacted by the price of bitcoin as accounting rules have allowed these companies to present the fair value of digital assets from ￰33￱ can potentially create some uncertainty as it relates to operational performance from period to ￰34￱ Thoughts CRPT is an actively managed ETF designed to provide investors with concentrated exposure to companies and bitcoin ETFs that participate in the development of ￰35￱ the historical performance of the strategy and the intricacies related to the companies held in the portfolio, I believe investors should consider an investment in bitcoin or bitcoin ETFs over the operating companies; I am recommending CRPT with a Sell rating.