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Federal Register / Vol. 86, No. 160 / Monday, August 23, 2021 / Notices
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premium of between roughly five and 40%, though it has seen premiums at times above 100%.41 Recently, however, it has traded at a discount. As of June 18, 2021, the discount was approximately 11%, representing around $4.1 billion in market value less than the bitcoin actually held by the fund. If premium/discount numbers move back to the middle of its historical range to a 20% premium which historically could occur at any time and overnight, it would represent a swing of approximately $11 billion in value unrelated to the value of bitcoin held by the fund. These numbers are only associated with a single OTC Bitcoin Fundas more and more OTC Bitcoin Funds come to market and more investor assets flood into them to get access to bitcoin exposure, the potential dollars at risk will only increase.
This raises significant investor protection issues in several ways. First, the most obvious issue is that investors are buying shares of a fund for a price that is not reflective of the per share value of the funds underlying assets.
Even operating within the normal premium range, its possible for an investor to buy shares of an OTC Bitcoin Fund only to have those shares quickly lose 10% or more in dollar value excluding any movement of the price of bitcoin. That is to saythe price of bitcoin could have stayed exactly the same from market close on one day to market open the next, yet the value of the shares held by the investor decreased only because of the fluctuation of the premium/discount. As more investment vehicles, including mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest option for a buy and hold strategy is often an OTC Bitcoin Fund, meaning that even investors that do not directly buy OTC
Bitcoin Funds can be disadvantaged by extreme premiums or discounts and premium volatility.
The second issue is related to the first and explains how the premium in OTC
Bitcoin Funds essentially creates a direct payment from retail investors to more sophisticated investors. Generally speaking, only accredited investors are able to create or redeem shares with the issuing trust, which means that they are able to buy or sell shares directly with Wilshire Phoenix Disapproval. While the price of one bitcoin has increased approximately 400%
in the intervening period, the total AUM has increased by approximately 1240%, indicating that the increase in AUM was created beyond just price appreciation in bitcoin.
41 See Traders Piling Into Overvalued Crypto Funds Risk a Painful Exit February 4, 2021
available at: https www.bloomberg.com/news/
articles/2021-02-04/bitcoin-one-big-risk-wheninvesting-in-crypto-funds.

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the trust at NAV in exchange for either cash or bitcoin without having to pay the premium or sell into the discount.
While there are often minimum holding periods for shares, an investor that is allowed to interact directly with the trust is able to hedge their bitcoin exposure as needed to satisfy the holding requirements and collect on the premium or discount opportunity.
As noted above, the existence of a premium or discount and the premium/
discount collection opportunity is not unique to OTC Bitcoin Funds and does not in itself warrant the approval of an ETP.42 What makes this situation unique is that such significant and persistent premiums and discounts can exist in a product with $30+ billion in assets under management,43 that billions of retail investor dollars are constantly under threat of premium/
discount volatility,44 and that premium/
discount volatility is generally captured by more sophisticated investors on a riskless basis. The Exchange understands the Commissions focus on potential manipulation of a bitcoin ETP
in prior disapproval orders, but now believes that current circumstances warrant that this direct, quantifiable investor protection issue should be the central consideration as the Commission determines whether to approve this proposal, particularly when the Trust as a bitcoin ETP is designed to reduce the likelihood of significant and prolonged premiums and discounts with its openended nature as well as the ability of market participants i.e., market makers and authorized participants to create and redeem on a daily basis.
ii Spot and Proxy Exposure Exposure to bitcoin through an ETP
also presents certain advantages for retail investors compared to buying spot bitcoin directly. The most notable advantage is the use of the Custodian to custody the Trusts bitcoin assets. The Sponsor has carefully selected the 42 The Exchange notes, for example, that similar premiums/discounts and premium/discount volatility exist for other non-bitcoin cryptocurrency related over-the-counter funds, but that the size and investor interest in those funds does not give rise to the same investor protection concerns that exist for OTC Bitcoin Funds.
43 At $35 billion in AUM, the largest OTC Bitcoin Fund would be the 32nd largest out of roughly 2,400 U.S. listed ETPs.
44 The Exchange notes that in two recent incidents, the premium dropped from 28.28% to 12.29% from the close on 3/19/20 to the close on 3/20/20 and from 38.40% to 21.05% from the close on 5/13/19 to the close on 5/14/19. Similarly, over the period of 12/21/20 to 1/21/20, the premium went from 40.18% to 2.79%. While the price of bitcoin appreciated significantly during this period and NAV per share increased by 41.25%, the price per share increased by only 3.58%.

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Custodian, a third party custodian that carries insurance covering both hot and cold storage and is chartered as a trust company and will custody the Trusts bitcoin assets in a manner so that it meets the definition of qualified custodian under the Investment Advisers Act of 1940, as amended. This includes, among others, the use of cold offline storage to hold private keys and the employment by the Custodian of a certain degree of cybersecurity measures and operational best practices. By contrast, an individual retail investor holding bitcoin through a cryptocurrency exchange lacks these protections.
Typically, retail exchanges hold most, if not all, retail investors bitcoin in hot internet-connected storage and do not make any commitments to indemnify retail investors or to observe any particular cybersecurity standard.
Meanwhile, a retail investor holding spot bitcoin directly in a self-hosted wallet may suffer from inexperience in private key management e.g., insufficient password protection, lost key, etc., which could cause them to lose some or all of their bitcoin holdings. In the Custodian, the Trust has engaged a regulated and licensed entity highly experienced in bitcoin custody, with dedicated, trained employees and procedures to manage the private keys to the Trusts bitcoin, and which is accountable for failures.
Thus, with respect to custody of the Trusts bitcoin assets, the Trust presents advantages from an investment protection standpoint for retail investors compared to owning spot bitcoin directly.
Finally, as described in the Background section above, recently a number of operating companies engaged in unrelated businessessuch as Tesla a car manufacturer and MicroStrategy an enterprise software companyhave announced investments as large as $1.5
billion in bitcoin.45 Without access to bitcoin exchange-traded products, retail investors seeking investment exposure to bitcoin may end up purchasing shares in these companies in order to gain the exposure to bitcoin that they seek.46 In 45 In addition to numerous debt offerings, MicroStrategy recently filed with the SEC to offer for sale up to $1 billion in additional common stock, the proceeds of which may at least be partially used to acquire more bitcoin. See Form S
3 submitted by MicroStrategy Incorporated on June 14, 2021: https www.sec.gov/Archives/edgar/data/
1050446/000119312521190150/
d159028ds3asr.htmtocb159028_8.
46 In August 2017, the Commissions Office of Investor Education and Advocacy warned investors about situations where companies were publicly announcing events relating to digital coins or tokens in an effort to affect the price of the
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