Melanion Capital’s Bitcoin Stocks ETF

The Philosophy Behind Melanion Capital’s Bitcoin Stocks ETF

Bitcoin (BTC) appears to many as a revolution in global financebut access to it is also considered by some to be complex: technical complexity, risk of wallet hacking, access via offshore platforms.

From this statement, Melanion Capital sought to build a product allowing exposure to the Bitcoin theme through a regulated product.

The goal was therefore to find an investment solution able to bridge the gap between traditional finance and digital assets while reconciling them.

Melanion then turned for the traditional finance part to the framework of UCITS funds, a strict regulatory framework and reference for funds in Europe. Indeed, this framework, by its requirement, allows eligibility for all traditional regulated envelopes such as life insurance, securities account, retirement savings plans.

What is a Bitcoin (BTC) ETF?

Melanion also wanted to be able to offer an easy-to-access product and the ETF seemed to him to be the most appropriate product.

Offering a UCITS ETF around Bitcoin therefore had the advantage of allowing ordinary investors to be exposed to this theme by placing the product in the traditional envelopes they are used to handling.

On the other hand, creating such a product is a major challenge to be met, because, Bitcoin not being a regulated asset, Melanion ETFto be UCITS, cannot invest in Bitcoin directly.

After several years of research and development and many exchanges with the various regulators, Melanion Capital created and launched at the end of 2021, the Melanion Bitcoin Equities UCITS ETF (ex. Melanion BTC Equities Universe UCITS ETF), the world’s first UCITS ETF on the Bitcoin theme.

How did she do it? What is the product made of?

Methodology

What is its general principle?

An ETF, to be UCITS, must invest in regulated assets. However, Bitcoin is not a regulated asset in Europe. Melanion therefore turned to “proxy” assets that could allow it to approach the behavior of Bitcoin while being regulated assets and the choice fell on shares of the Bitcoin ecosystem. Indeed, this ever-growing ecosystem also offers an interesting diversity of companies linked to it, thus making it possible to respond to another constraint of the UCITS framework: diversification.

In parallel, Melanion Capital has developed a quantitative model to build a diversified portfolio designed to maximize exposure to any given benchmark from given traditional assets. This model called ” Maximum Benchmark Exposure Portfolio applied to the case that interests us consists in finding the stock portfolio (of the crypto ecosystem) whose behavior comes closest to the behavior of Bitcoin.

The results of the study led to the conclusion that the optimal weighting and selection of the stocks making up the portfolio should be based on their Beta (historical sensitivity) compared to the benchmark index (here Bitcoin)

By maximizing the sensitivity of the stock portfolio to Bitcoin, cThis original methodology makes it possible to obtain exposure to the Bitcoin theme without direct investment in Bitcoin or cryptocurrencies.

What is the investment universe?

The shares in the investment universe of this ETF are those of companies listed in Europe or North America and whose revenues fall within one of the following segments.

Asset management and cryptocurrency trading

Provision of cryptocurrency-related asset management and trading products and services.

“Crypto Banking” and related services

Provision of banking, custody and associated services related to cryptocurrencies to retail and institutional clients.

Cryptocurrency mining and supply of cryptocurrency mining equipment

Operation of cryptocurrency mining pools or infrastructure, or provision of materials and equipment for the operation of mining activities.

blockchain technology

Provision of blockchain technology, software or advice.

Entities with cryptocurrency assets on their balance sheet

Companies must have at least US$10 million allocated to cryptocurrencies on their balance sheet, either as cash and receivables or as investment assets.

Action selection criteria

Capitalization and liquidity criteria

All stocks in the universe must be listed on a regulated European or North American stock exchange. Companies with a market capitalization of less than US$100 million are excluded from the final selection. Selected universe stocks must have an average daily trading volume of at least $500,000.

Stock selection and weighting

Melanion selects among the values ​​respecting the preceding criteria the 30 stocks with the highest historical sensitivity (the strongest historical Beta) compared to the price of Bitcoin.

The weighting, and this is one of the originalities of the product, is not the same for the 30 shares or is not based on market capitalization: it is linked to the sensitivity of the shares to the Bitcoin price. The higher this sensitivity, the greater the weight of the action.

To avoid possible over-representation of a company, ua weight limit of 10% per share has also been put in place. Finally, to prevent a value that is too illiquid from having too much weight, a limit linked to liquidity is also put in place. The portfolio is also reviewed (rebalanced) every 3 months.

The final portfolio

Melanion Capital’s ETF portfolio consists of 30 stocks. We find the various business segments described above.

Below are the 10 biggest weights as of the last mid-December 2022 rebalance.

The product of Melanion Capital

The characteristics of the ETF

• Launch date: October 22, 2021;
• Listings: on Euronext Paris and Euronext Milan (ex. Borsa Italiana);
• Marketing: the ETF is distributed in more than 10 countries in Europe (including USA, Italy, the Netherlands, Luxembourg, Germany);
• ETF custodian bank: Société Générale Securities Services (SGSS). This custodian bank (which is also the custodian bank for Amundi ETFs) keeps the fund’s assets. In the event of the insolvency of the Manager, the assets of the fund will not be affected. The Custodian Bank is required by law and regulations to separate its own assets from the assets of the fund;
• UCITS: the ETF complies with this demanding European regulatory framework. This allows it to be eligible for the main envelopes regulated in Europe such as Life Insurance or the Retirement Savings Plan.

Its behavior in relation to Bitcoin

Since the launch of the ETF

In the ETF’s first full year of history, in 2022, the correlation in monthly data with the Bitcoin price was 0.9 and the historical Beta was 1.02 :

The ETF alternated phases of underperformance and outperformance against Bitcoin. The zoom below on the last 8 months highlights this aspect.

We remind you that the past performance of an asset does not prejudge its future performance. The level of past correlation of the ETF to Bitcoin does not predict the level of future correlation.

Over the last 8 months

Where and how can this ETF be purchased?

Melanion wanted to create an innovative product, but above all simple and accessible. Investing in the ETF does not require having a crypto portfolio of offshore entities or hack-prone platforms. There is also no minimum investment required.

You can buy or sell the ETF through the following traditional means :

• Bank Securities Accounts;
• Securities Accounts of Online Brokers;
• French Life Insurance (the ETF is listed with AG2R La Mondiale);
• Luxembourg Life Insurance;
• Retirement Savings Plan (the ETF is available within the PER Enedia, provided by AG2R La Mondiale and distributed by Nortia).

Warnings

The ETF has a risk indicator of 7 which is the highest level of the risk scale. Please refer to the prospectus of the UCITS and to the key investor information document before making any final investment decision.

The information relayed in this article must be considered and analyzed with regard to all the risks identified in the pre-contractual documentation of the vehicle, in particular the following risks:

Equity risk

The price of a share may vary upwards or downwards, and reflects in particular the evolution of the risks associated with the issuing company or the economic situation of the corresponding market. Equity markets are more volatile than interest rate markets, on which it is possible, for a given period and under equal macroeconomic conditions, to estimate earnings.

Small and Mid Cap Risk

The fund may be exposed to small and mid-cap issuers which, given their specific characteristics, may present a liquidity risk. Due to the narrowness of the market, the movement of these securities is more marked upwards and downwards and may lead to an increase in the volatility of the net asset value.

Risk of capital loss

The capital invested is not guaranteed. Consequently, the investor runs the risk of losing capital. All or part of the amount invested may not be recovered, in particular if the performance of the Index is negative over the investment period.

Liquidity risk

If, when the ETF adjusts its exposure, the markets linked to this exposure are limited, closed or subject to significant buy/sell price differentials, the value and/or liquidity of the ETF may be negatively affected. The inability, due to low trading volumes, to carry out transactions linked to the replication of the Index may also have consequences on the process of subscriptions, conversions and redemptions of units.

Risk of change

The fund is exposed to currency risk to the extent that the underlying securities making up the Index may be denominated in a currency different from that of the Index, or be derived from securities denominated in a currency different from that of the Hint. Fluctuations in exchange rates are therefore likely to negatively affect the Index tracked by the fund.

The other risks are present in the rules that you can find on the Melanion Capital website.

As mentioned in this article, the ETF invests in companies with significant activities in the Bitcoin theme. Investors’ attention is drawn to the fact that no minimum correlation threshold has been pre-established between the price of these companies and the price of Bitcoin.

On the other hand, the ETF’s methodology aims to select the securities with the highest sensitivity to the Bitcoin price. By investing in stocks exposed to Bitcoin, the ETF will not necessarily or mechanically follow the price of Bitcoin itself, either up or down.

The recommended minimum investment period is more than 5 years. Past performance is not an indication of future performance.

This article was written by Cyril Sabbagh, Managing Director at Melanion Capital and designer of this ETF