The Cambrian Bitcoin Systematic Trust and Cambrian Ethereum Systematic Trust (together, the “Trusts”) are single asset investment vehicles that will issue units of beneficial interest (“Shares”) to accredited investors through private placements in reliance on Rule 506(c) under the US Federal securities laws. The Trusts intend to apply to have the Shares publicly quoted on the OTCQX Best Market at a point in time approximately one year after launch of the Trusts. The Trusts will continue to issue Shares in private primary offerings following approval of quotation for secondary trading on OTCQX.
Premium and Discounts
Once the Shares have been approved for public quotation, it is possible that the Shares may trade at a “premium” or a “discount” relative to the Net Asset Value (“NAV”) per Share of the respective Trust. The NAV of each Trust is the aggregate value, expressed in USD, of the Trust’s assets, less its liabilities (which include estimated accrued but unpaid fees and expenses). NAV per Share is the NAV of the Trust divided by the total number of Shares outstanding. NAV calculation for the Trusts will be published daily each business day. Shares are considered to be trading at a premium when the price paid by an investor buying Shares on OTCQX is higher than the NAV per Share paid by an investor subscribing for Shares directly from the Trust. Premiums may occur when there is more buy side demand for Shares on the secondary market than sell side supply. Conversely, Shares are considered to be trading at a discount when the price paid by an investor buying shares on OTCQX is lower than the NAV per Share paid by an investor subscribing for Shares directly from the Trust. Discounts may occur when there is less buy side demand for Shares on the secondary market than sell side demand.
Premium Example: The share price of the Cambrian Bitcoin Systematic Trust’s Shares trading on OTCQX is $15 while the NAV per Share for investors subscribing directly for Shares is $10. In this fact pattern, the Shares would be considered to be trading at a 50% premium to NAV per Share.
Discount Example: The share price of the Cambrian Ethereum Systematic Trust’s Shares trading on OTCQX is $5 per Share while the NAV per Share for investors subscribing directly for Shares is $10. In this fact pattern, the Shares would be considered to be trading at a 50% discount to NAV per Share.
As described above, the Shares will be sold in private placements and will not be registered with the Securities and Exchange Commission (“SEC”). As a result, investors will be required to hold Shares for at least one year and a day in order to be qualified to resell their Shares on OTCQX.
The Trusts are classified as Delaware Statutory Trusts and will function differently than Exchange Traded Funds (“ETFs”). Unlike ETFs which create shares on a daily basis and provide the ability for immediate resale, the Trusts will accept new subscriptions on a weekly basis only and investors will not have the ability to resell their Shares until at least one year and a day after they purchase the Shares. In addition, shares of ETFs are always issued and always trade at NAV based on the funds ability to rebalance assets on a daily basis. As a result the price of newly created shares and the price of shares traded on the public market are always equivalent.
In addition, unlike some other private investment funds, the Trusts will not initially offer redemption. However, to the extent that the Shares are not qualified for public quotation on OTCQX or secondary liquidity is not otherwise available for the Shares within 36 months from the date the Trust accepts its initial subscriptions, the Sponsor will initiate the operation of a redemption program in accordance with the terms of the Trust Agreement and unless prohibited by applicable law or regulation. Redemptions typically allow an investor the ability to return shares to a fund in exchange for a proportional share of the fund’s NAV. This can act as an arbitrage mechanism, preventing deviation of share price from NAV.
It is also important to note that the Trusts are not similar to Closed-end Funds (“CEFs”), which generally accept subscriptions at launch and for a limited time thereafter but do not offer continuous opportunities to invest. Instead, the Trusts will offer accredited investors the ability to subscribe for an unlimited number of Shares on a continuous basis for an infinite period of time.
Examples of Historical Premiums & Discounts: GBTC, ETHE
The largest private investment vehicle sharing similarities with the Trusts is the Grayscale Bitcoin Trust (GBTC). As of August 25, 2021, GBTC had AUM of $31.7B AUM and traded at an average premium of 2.97% to NAV per Share over the course of 2021. Over the past five years, GBTC shares have experienced significant share volatility on OTCQX ranging from a discount of 21.23% to NAV per Share to a premium of 132.6% to NAV per Share.
Grayscale’s second largest single asset investment product, Grayscale Ethereum Trust (ETHE), has traded at an average premium of 25.88% to NAV per Share in the last 52 weeks since August 25, 2021. In contrast to GBTC, ETHE has experienced significantly higher premiums over the last few years. Since early 2017, ETHE shares have experienced share volatility ranging from a discount of 14.34% to NAV per Share to a premium of 3.55K% to NAV per Share.
While the Cambrian Trusts may be single asset investment vehicles consistent with the Grayscale GBTC and ETHE products, there are significant differences between the actual legal structures of the trusts. Unlike GBTC and ETHE, which offer passive exposure to Bitcoin and Ethereum, Cambrian’s Trusts are actively managed. Through this active management, the Trusts seek to reduce exposure to material drawdowns in the price of Bitcoin and Ethereum through the use of short selling, put options, and other derivative instruments. Because of this, notable differences in premiums and discounts to NAV per Share may emerge in the performance of the Trusts relative to the Grayscale products.
Example of Historical Premiums & Discounts: BITW
A more recently launched investment vehicle that has experienced significant variation between the public market price and NAV per Share is the Bitwise 10 Crypto Index Fund (BITW). Launched in late 2017, the Bitwise 10 Crypto Index Fund tracks the top 10 most highly valued cryptocurrencies while rebalancing the coin components on a monthly basis based on the actions of an affiliated index. Since trading on OTCQX commenced in December 2020 through August 25, 2021, BITW has traded at an average premium of 74.08% to NAV per Share and has accrued AUM of $990MM AUM. BITW’s share price on OTCQX has experienced volatility ranging from a discount of 5.98% from NAV per Share to a premium of 649.38% to NAV per Share.
Notable differences in premiums and discounts between the Trusts and BITW may emerge as the investment products function differently. While BITW offers investors exposure to an index of ten cryptocurrencies, the Cambrian Trusts offer exposure only to actively risk managed Bitcoin and Ethereum, respectively.
Shares in both the Cambrian Systematic Bitcoin Trust and Cambrian Systematic Ethereum Trust are expected at times to trade at significant premiums and/or discounts to NAV per Share. The amount of premium or discount can change rapidly and there is no arbitrage mechanism to correct the public market price to NAV per Share, which adds risk to any investment in the Shares. Potential investors should consider these and all other risks outlined in the Trusts’ respective Private Placement Memorandum carefully before deciding to make an investment in either or both of the Trusts.