Reading 1.1

Question 1

What is a basic feature of digital assets (like bitcoin) for the holders of the asset?

Answer 1

They can self-custody the assets (store them)

Question 2

4 Channels for exposure to bitcoin

Answer 2

1) third party custody
2) passive single asset funds
3) futures contracts
4) actively managed funds

Question 3

2 reasons Why do some fiduciaries avoid self custody?

Answer 3

1) LIMITS: regulatory and operational

2) SECURITY REQUIREMENTS: requires robust security and risk management - NOT ALL HAVE time and resources for this

Question 4

Most common path for exposure to digital assets?

Answer 4

60% - self custody

In general: spot trading and custody

Question 5

3 Benefits of gaining exposure to digital assets via a third party custodian:

Answer 5

1) CONVENIENT SERVICE: maturation of custody solutions
2) LOW COST of maintaining spot exposure
3) CAN USE LEVERAGE: potential capital efficiency benefits of holding the underlying bitcoin - Investors can leverage its as collateral

Question 6

Slippage

Answer 6

Difference between expected price of a trade and executed price

Question 7

3 Challenges associated with the ownership of digital assets

Answer 7

1) NEED FOR TDD of exchange or custodian (often outsource this)

2) FRAGMENTED LIQUIDITY (several exchanges: different regulations, security, etc)

3) LACK OF INTEGRATION WITH TRADITIONAL ASSETS - separate accounts

Question 8

2 most common digital asset custody methods:

Answer 8

1) HSM - tamper resistant hardware that is isolated from external systems
2) MPC - collaborative generation of key

Question 9

2 Benefits of investing (private placement) in bitcoin through passive funds

Answer 9

1) Similar Reporting: convince and familiarity- familiar operations, tax and reporting benefits
2) Accounting: treatment at fair value

Question 10

2 Challenges with private placement in passive funds of digital assets?

Answer 10

1) HIGH COST - 0.5-2%
2) REDEMPTION FREQUENCY TBD: needs to be determined (return of cash or assets - i.e. when you get out)

Question 11

What is an open ended private trust?

Answer 11

Trust that is open ended. I.e. allows for flexibility in beneficiaries, contributions and etc

Question 12

2 Types of regulated Futures market for digital assets

Answer 12

1) cash settled
2) physical delivery

Question 13

3 Potential benefits of cash settled futures

Answer 13

1) Same futures platform as for other frequently traded futures

2) Connections to MERCHANTS (futures commission merchants (FCMs)

3) No physical delivery

Question 14

2 Challenges of cash settled futures?

Answer 14

1) price manipulation of thinly traded digital assets on not regulated exchanges

2) costs
A) bitcoin cash settled futures are usually in contango (trade above the spot)

B) maintaining long exposure means rolling contracts => increases costs

C) account for cost of custody

Question 15

Who regulates the futures market?

Answer 15

Commodity Futures Trading Commission - CFTC

Question 16

Pros and cons of regulated physically settled futures?

Answer 16

Pros:
1) asset exposure
2) no price manipulation risks (the investors are not concerned)

Cons:
1) barrier to adoption - FCM dont want the hassle of settling the bitcoin transactions

Question 17

5 Main structure elements of ACTIVELY TRADED FUNDS HOLDING DIGITAL ASSETS

Answer 17

1) structured as hedge funds
2) management fees: 1-2%
3) carried interest: 10-20%
4) 1-3yrs lock up period
5) quarterly redemptions

Question 18

3 Benefits of digital asset ETFs

Answer 18

1) LIQUIDITY redemption mechanism - real time redemption (because in publicly traded trusts you have lock up periods)

2) APPROVED PRODUCT - product past regulation (good for certain clients)

3) ACCESSIBILITY (lower cost and availability)

Question 19

2 Challenges with digital asset ETFs?

Answer 19

1) custody of ASSET

2) Manipulation of PRICE

Question 20

Costs of establishing bitcoin exposure across channels: 5m, 50m, 1b over a 10yr period (Most economic vehicle for each)

Answer 20

Most economic vehicle for:
1) 5m - CME bitcoin futures
2) 50m - CME bitcoin futures
3) 1b: Spot trading and custody