ARK CoinDesk 20 ex-Bitcoin Crypto ETF Launch – What You Need to Know

Thinking about diving into the crypto world but unsure where to begin? You might have heard about a new investment option: the ARK CoinDesk 20 ex-Bitcoin Crypto ETF. This guide draws from a draft filing dated January 23, 2024, so remember that details can change before its official launch. While the name sounds complex, let's break it down in simple terms, like we're just chatting over coffee.

This isn't a typical company IPO where they sell products or services. Instead, it's an Exchange Traded Fund (ETF) – essentially a pre-made basket of investments you can easily buy and sell on a stock exchange. Think of it as a convenient way to invest in a specific part of the crypto market without buying individual digital coins yourself.

Here’s what you really need to know:

1. Business Description: What does this fund actually do?

This isn't a "company" in the traditional sense, but an investment fund. ARK Invest, the firm behind this fund led by Cathie Wood, created a special strategy. Rather than directly buying and holding actual cryptocurrencies, this ETF primarily invests in futures contracts.

Here's the twist: The fund aims to track the performance of the top 20 cryptocurrencies (the CoinDesk 20 Index), but without Bitcoin's influence. The CoinDesk 20 Index is a market-capitalization-weighted index designed to measure the performance of the largest and most liquid digital assets, excluding Bitcoin. It typically rebalances monthly to reflect the current market.

To achieve its "ex-Bitcoin" exposure, the ETF buys futures contracts that track the overall CoinDesk 20 Index. Simultaneously, it places "short" bets on Bitcoin futures. This "short" bet on Bitcoin futures cancels out the Bitcoin portion of the broader index futures, leaving you with exposure to other major cryptocurrencies (often called "altcoins"). This strategy aims to offer investors exposure to the growth potential of a diversified basket of altcoins, potentially providing higher returns or diversification benefits compared to Bitcoin-only exposure.

So, when you buy a share of this ETF, you're essentially investing in a strategy that uses futures contracts to gain exposure to a diversified group of major cryptocurrencies other than Bitcoin. This approach bypasses the hassle of setting up crypto wallets or buying each altcoin individually.

Important: You will not directly own any actual altcoins with this ETF. Instead, you invest in futures contracts, primarily traded on regulated exchanges like the CME Group. The fund strives to minimize tracking error, meaning it aims to match its target index's performance as closely as possible.

2. Financial Highlights: How does the fund operate financially?

As a fund, it doesn't "make money" by selling products. Instead, ARK Invest, the company managing this ETF, earns revenue by charging an annual management fee (known as an "expense ratio") on the total amount invested in the fund. This fee, a specific percentage disclosed in the final prospectus, covers annual management, futures contract handling, and accurate tracking of the CoinDesk 20 index (ex-Bitcoin). Investors may also incur other operational expenses.

The ETF itself grows in two ways:

• Value Appreciation: If the cryptocurrencies (that its futures contracts track) increase in value, your investment grows.
• Increased Investment: More money flowing into the fund allows it to buy more futures contracts and hold more collateral.

Since this is a brand new ETF, it lacks a performance history. However, ARK Invest, as a company, has experienced significant growth and interest in its other funds, particularly those focused on innovative technologies.

3. Use of Proceeds: What will the fund do with your investment?

When you buy shares of this ETF, your money does not go into ARK Invest's pocket for new projects or marketing. Instead, almost all of it directly purchases the futures contracts the ETF holds.

The fund also holds a substantial portion (typically 80-100%) in cash and highly liquid U.S. government securities (like short-term Treasury bills). This cash and these securities act as "collateral" – money set aside to back the futures contracts and cover potential losses. The fund manages this collateral to ensure liquidity and security.

Therefore, if you invest $100, that $100 (minus a tiny bit for fees) purchases futures contracts and holds collateral, effectively pooling everyone's money to create a diversified crypto futures portfolio.

4. Risk Factors: What are the main risks to consider?

Investing in crypto, even through an ETF, involves significant considerations. This ETF's specific strategy introduces additional layers of risk:

• Wild Price Swings (Volatility): Cryptocurrencies are notorious for rapid and substantial price fluctuations. What's up today could be down tomorrow. This ETF will be just as volatile as Bitcoin, if not more so, because it holds other, often smaller, cryptocurrencies through futures.
• Futures Contract Risk: This is a major factor.
  • No Direct Crypto Ownership: You will not own actual cryptocurrencies. Instead, you face the complexities and risks of futures markets.
  • Tracking Error: Futures contracts might not perfectly track the "spot" (real-time) prices of the underlying cryptocurrencies. This means the ETF's performance could differ from the actual altcoin market.
  • Rolling Costs: Futures contracts expire. The ETF must "roll" its positions, closing expiring contracts and opening new ones. This process can incur costs (e.g., contango, backwardation) and potentially significantly drag returns, especially in certain market conditions.
  • Counterparty Risk: A small risk exists that the other side of a futures contract might not fulfill its obligations.
  • Liquidity Risk: Futures markets for some altcoins may be less liquid than for Bitcoin. This could lead to wider bid-ask spreads and higher transaction costs when the fund needs to buy or sell contracts.
• "Ex-Bitcoin" Risk / Concentration Risk: By excluding Bitcoin, you miss out on the largest and most established cryptocurrency. While this might offer exposure to potentially faster-growing altcoins, it also means you invest in assets that can be even riskier and less proven than Bitcoin. Furthermore, while diversified, the CoinDesk 20 Index might still concentrate significantly in a few top altcoins, meaning their performance could heavily influence the ETF's returns.
• Regulatory Uncertainty: Governments worldwide are still defining how to regulate cryptocurrencies and futures markets. New laws or crackdowns could significantly impact their value. While ARK Invest is regulated as a "commodity pool operator" by the CFTC, this ETF is not regulated like traditional mutual funds or ETFs under the Investment Company Act of 1940. Consequently, you will not receive some investor protections associated with those types of funds. Changes in CFTC or exchange rules could also impact the fund's operations.
• Tax Implications: Investing in futures-based ETFs can have different tax implications than traditional stock or ETF investments. For U.S. investors, futures contracts are generally treated as "Section 1256 contracts." This means they are marked to market at year-end and taxed at a blended rate of 60% long-term capital gains and 40% short-term capital gains, regardless of how long you held the investment. This can be complex and may result in a higher tax burden than expected.
• Security Concerns: While the ETF's assets (futures and cash) are held securely, the broader crypto world still faces risks like hacking or theft, which could indirectly affect market sentiment and prices. Operational risks, such as system failures or errors by service providers, could also impact the fund.
• Interest Rate Risk: A significant portion of the fund's assets will be held in U.S. government securities. Interest rate changes could affect these securities' value, impacting the fund's overall performance.
• New Product, No Track Record: As a brand new fund that has not commenced trading, it lacks any past performance history. You are investing in something unproven. The filing explicitly states, "THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY."
• Reduced Reporting: As an "Emerging Growth Company," this ETF might have fewer reporting requirements than larger, more established companies, potentially leading to less frequent updates.

5. Competitive Landscape: How does this fund compare to others?

• Other Crypto ETFs (like Bitcoin ETFs): You may have heard of ETFs that hold actual Bitcoin (like those from BlackRock or Grayscale) or Bitcoin futures ETFs. This ARK ETF differs because it specifically excludes Bitcoin and uses futures contracts rather than holding the actual cryptocurrencies directly.
• Buying Crypto Directly: You could purchase these cryptocurrencies yourself on a crypto exchange (like Coinbase or Binance). The ETF offers convenience, professional management, and potentially more favorable tax treatment for futures (Section 1256 contracts) compared to direct crypto holdings, but you pay an expense ratio for these benefits. Buying directly gives you more control but also more responsibility (like securing your own digital wallet) and direct exposure to the spot market, not futures.
• Other Diversified Crypto Funds: Few other ETFs specifically target a broad basket of altcoins without Bitcoin using a futures-based strategy. This makes it somewhat unique in the ETF space, though other funds might offer broader crypto exposure, including Bitcoin.

6. Management Team: Who is running the fund?

The entity behind this ETF is ARK Invest, a well-known investment management firm. It is led by Cathie Wood, known for her focus on "disruptive innovation" – investing in companies and technologies she believes will change the world. Her team of experienced analysts and portfolio managers will oversee the fund, ensuring it tracks the CoinDesk 20 index (ex-Bitcoin) using futures and managing the underlying cash and collateral.

ARK Invest, registered as a "commodity pool operator" (CPO) with the Commodity Futures Trading Commission (CFTC), operates under specific regulations for funds that trade futures.

The Trust also involves other key players:

• Trustee: CSC Delaware Trust Company.
• Administrator: This firm is responsible for the fund's day-to-day operations, record-keeping, and net asset value (NAV) calculations. The specific entity will be named in the final prospectus.
• Custodian: This entity is responsible for holding the fund's cash and U.S. government securities. The specific entity will be named in the final prospectus.
• Auditor: An independent accounting firm that reviews the fund's financial statements. The specific entity will be named in the final prospectus.
• FCM (Futures Commission Merchant): This firm will execute the Trust's futures contracts. The specific entity will be named in the final prospectus.

7. Offering Details: Where will it trade and under what symbol?

Once officially listed, you can buy and sell shares of this ETF like any stock.

• Exchange: It is expected to trade on NYSE Arca, Inc., a major stock exchange.
• Ticker Symbol: It will have a unique ticker symbol, its market nickname. This will be announced closer to launch.

8. Offering Details: How many shares and what price range?

ETFs differ from traditional company IPOs regarding shares and pricing.

• Initial Price/NAV: The initial Net Asset Value (NAV) per share at launch is typically a round number (e.g., $25.00 or $50.00), but the confirmed price will be announced closer to launch. This price will then fluctuate daily based on the value of the underlying cryptocurrencies (which the futures track) and investor demand.
• Number of Shares: The number of shares is not fixed like a company IPO. ETFs employ a unique mechanism: new shares can be created or existing shares redeemed based on investor demand. Special financial firms called "Authorized Participants" handle this in large blocks called "Baskets" (typically 50,000 shares or more). If demand is high, more shares can be created. If demand falls, shares can be taken out of circulation. This mechanism helps keep the ETF's market price close to its actual asset value. As an individual investor, you cannot directly redeem shares from the Trust; you will buy and sell them on the stock exchange.
• Continuous Offering: This ETF is a "continuous offering," meaning new shares can be created and sold for up to three years from its launch date, unless extended.

Remember, investing in anything, especially something as new and volatile as crypto and futures, always carries significant risks. It's crucial to conduct your own research and consider if this type of investment aligns with your personal financial goals and risk tolerance.