New innovation risk: Bitcoin is a relatively new innovation and the market for bitcoin is subject to rapid price swings, changes and uncertainty. It is not backed by any authorities, government or corporations. Continued and further development of the Bitcoin Network and the acceptance and use of bitcoin are subject to a variety of factors that are difficult to predict or evaluate. Any cessation or reversal of such development of the Bitcoin Network or the acceptance of bitcoin may adversely affect the price of bitcoin and thus the Sub-Fund’s investment.
Unforeseeable risks: Given the rapidly evolving nature of bitcoin, including advancements in the underlying technology, market disruptions and resulting governmental interventions that are unforeseeable, an investor may be exposed to additional risks which cannot currently be predicted.
Speculative risk: Bitcoin is highly speculative as it has limited track record and lack of intrinsic value. Its value is primarily driven by supply and demand dynamics within the bitcoin market and does not generate cash flows.
Extreme price volatility risk: Investing in bitcoin and related products is highly volatile compared to investments in traditional securities, and their price movements are difficult to predict. The prices of bitcoin have historically been extremely volatile. For example, the price of bitcoin dropped 77% during the period from 10 November 2021 to 9 November 2022. Also, the value of bitcoin could decline significantly in a short period of time and without warning, including to zero. For example, in 2020, the biggest single-day drop of the price of bitcoin was 39%. The value of the Sub-Fund’s investments in bitcoin could decline significantly and without warning, including to zero.
Risk relating to the limited history of bitcoin: Bitcoin and the Bitcoin Network have a limited history, therefore, it is unclear how all elements of bitcoin will unfold over time, specifically with regard to governance between miners, developers and users, as well as the long-term security model as the mining reward of bitcoin decreases over time. Insufficient software development or any other unforeseen challenges that the bitcoin community is not able to resolve could have an adverse impact on bitcoin price and thus the Sub-Fund’s investment.
Cybersecurity, fraud, market manipulation and security failure risk: Bitcoin may be subject to the risk of fraud, theft, manipulation or security failures, operational or other problems that impact bitcoin trading venues. In particular, the Bitcoin Network and entities that hold bitcoin in custody or facilitate the transfers or trading of bitcoin are vulnerable to various cyber attacks. Malicious actors may also exploit flaws in the code or structure in the Bitcoin Network that will allow them to, among other things, steal bitcoin held by others, control the blockchain, steal personally identifying information, or issue significant amounts of bitcoin in contravention of the protocols. The occurrence of any of the above may have negative impact on the price of bitcoin and thus the Sub-Fund’s investment.
Concentration of ownership risk: A significant portion of bitcoin is held by a small number of holders who may have the ability to manipulate the price of bitcoin. As a result, large sales by such holders could have an adverse effect of the market price of bitcoin.
Changes in acceptance of bitcoin: The value of bitcoin is subject to risks related to its usage and there is no assurance that bitcoin usage will continue to grow over the long-term to support its value. Reduction or slowdown in the acceptance and/or prevalence of bitcoin may result in lack of liquidity, increased volatility or a significant reduction in the price of bitcoin and thus the Sub-Fund’s investment.
Custody Risk: Ownership and rights to bitcoin depend on securely storing and knowing the private key. If the private key is lost without a backup, access to the corresponding bitcoin address is lost as well, with no possibility of restoration by the Bitcoin Network. While the Manager has conducted due diligence on the Sub-Custodian and believes that there are security procedures in place for the Sub-Fund by the Sub-Custodian, the Manager does not control the Sub-Custodian’s or the virtual asset trading platforms’ operations or their implementation of such security procedures and there can be no assurance that such security procedures will actually work as designed or prove to be successful in safeguarding the Sub-Fund’s assets against all possible sources of theft, loss or damage. While the Sub-Custodian will store most of the Sub-Fund’s bitcoin holdings in the cold wallet (i.e. where the private keys to bitcoin are kept in an offline environment), the Sub-Fund’s bitcoin may be temporarily held online in the hot wallet (i.e. where the private keys to bitcoin are kept in an online environment) for meeting the needs of subscriptions and redemptions, which is more susceptible to cyber-attacks. Any insurance coverage obtained by or for the Custodian/Sub-Custodian is solely for the benefit of the Custodian/Sub-Custodian and does not guarantee or insure the Sub-Fund in any way. There is no third-party insurance held on behalf of the bitcoin accounts. The Sub-Fund itself does not insure its holdings in bitcoin. While the Sub-Custodian is required by the applicable Laws and Regulations to have in place a compensation arrangement to cover potential loss of client Virtual Assets through third-party insurance or other permitted means, such compensation arrangement is shared among all clients of the Sub-Custodian and is not specific to the Sub-Fund. There is no assurance that such compensation arrangement is adequate to protect the Virtual Assets of the Sub-Fund from all possible losses. Where the compensation arrangement of the Sub-Custodian is not sufficient to cover the loss of Virtual Assets of the Sub-Fund, neither the Manager nor the Sub-Fund will be responsible for the shortfall.
Counterparty Risk: Counterparty risk involves the risk that a counterparty or third party (e.g. the Custodian, the Sub-Custodian and virtual asset trading platform(s)) will not fulfil its obligations to a Sub-Fund and settle a transaction in accordance with market practice. A Sub-Fund may be exposed to the risk of a counterparty through investments. A Sub-Fund may be exposed to the credit risk of any Custodian, Sub-Custodian and virtual asset trading platform(s), or any depository used by the Custodian where cash or other Scheme Property is held by the Custodian, Sub-Custodian or other depositaries. In the event of the insolvency of the Custodian, Sub-Custodian or other depositaries, a Sub-Fund will be treated as a general creditor of the Custodian, Sub-Custodian or other depositaries in relation to cash holdings of the relevant Sub-Fund. The Sub-Fund’s investments are however maintained by the Custodian, Sub-Custodian or other depositaries in segregated accounts and should be protected in the event of insolvency of the Custodian, Sub-Custodian or other depositaries. A Custodian may be unable to perform its obligations due to credit-related and other events like insolvency of or default of it. In these circumstances the relevant Sub-Fund may be required to unwind certain transactions and may encounter delays of some years and difficulties with respect to court procedures in seeking recovery of the relevant Sub-Fund’s assets.
Regulatory risk: The regulation on bitcoin, digital assets and related products and services continues to evolve and increase. To the extent that future regulatory actions or policies limit or restrict bitcoin usage, bitcoin trading or the ability to convert bitcoin to fiat currencies, the demand for and value of bitcoin may be reduced significantly. Changes to existing regulation (e.g., regarding dealing in virtual asset-related products) may also impact the ability of the Sub-Fund to achieve its investment objective or operate as planned.
Fork risk: As the Bitcoin Network is an open-source project, the developers may suggest changes to the bitcoin software from time to time. If the updated bitcoin software is not compatible with the original bitcoin software and a sufficient number (but not necessarily a majority) of users and miners elect not to migrate to the updated bitcoin software, this would result in a "hard fork" of the Bitcoin Network, with one prong running the earlier version of the bitcoin software and the other running the updated bitcoin software, resulting in the existence of two versions of bitcoin network running in parallel and a split of the blockchain underlying the bitcoin network. The occurrence of such "fork" may result in an adverse impact on the price and liquidity of bitcoin and thus the Sub-Fund's investment.
Air drop risk: A substantial giveaway of bitcoin to participants in the Bitcoin Network (sometimes referred to as an "air drop") may result in a significant and unexpected declines in the value of bitcoin and thus the Sub-Fund's investment.
Contagion risk: The collapse of any major players in the crypto ecosystem (for example, wallets and exchanges) may have contagious adverse effects on the values of virtual assets including bitcoin and the value of the Sub-Fund's investments.
Control and potential manipulation of Bitcoin Network risk: Bitcoin Network is vulnerable to malicious attack and malicious actor would be able to gain full control of the network and the ability to manipulate the blockchain. If an entity gains control of over 51% of the compute power (hash rate) the entity could use its majority share to double spend bitcoin. Essentially, the entity would send bitcoin to one recipient, which is confirmed in the existing blockchain, while also creating a shadow blockchain that sends that same bitcoin to another entity under its control. After a period of time, the entity will release its hidden blockchain and reverse previously confirmed transactions, and due to the way mining works, that new blockchain will become the record of truth. This would significantly erode trust in the Bitcoin Network to store value and serve as a means of exchange which may significantly decrease the value of the bitcoin and in turn the NAV per Share.
Illicit use of bitcoin: Bitcoin can be used to purchase illegal goods, fund illicit activities or launder money. Negative developments of bitcoin may affect the general outlook on the industry as a whole, trigger governmental intervention/restrictions/regulations, and may have adverse effect on the Sub-Fund's investments.
Risks associated with virtual asset trading platforms: The virtual asset trading platforms that the Sub-Fund may acquire and dispose of bitcoin are still developing. The bitcoin traded on these virtual asset trading platforms may be subject to lower liquidity compared to other spot bitcoin trading venue. As such, there may be a delay in the Sub-Fund's ability to acquire or dispose of its investments from these virtual asset trading platforms. The bid and offer spreads of the price of bitcoin on these virtual asset trading platforms may be large and the Sub-Fund may incur significant trading costs. In the event that the virtual asset trading platform’s licence from the SFC is being revoked/terminated or otherwise invalidated, the Sub-Fund may be prohibited from conducting transactions and acquisitions of bitcoin.