ProShares Bitcoin Strategy ETF (BITO): What You Should Know About the First-Ever Bitcoin-Linked ETF
Sudhan P●
Bitcoin proponents have been pushing for a bitcoin exchange-traded fund (ETF) for some time.
Since 2013, in fact.
Their wish has been answered finally.
The launch of ProShares Bitcoin Strategy ETF (ticker: BITO), pencilled to start trading in the US on 19 October, is a significant milestone for the cryptocurrency world.
The fund is the first bitcoin-linked ETF that aims to provide capital appreciation mainly through exposure to bitcoin futures contracts.
But what does that mean?
And what are the risks involved?
Let’s find out more right here.
What’s the ProShares Bitcoin Strategy ETF About?
The advantage of the new ETF is that it can be bought and sold like a stock without the need for a cryptocurrency exchange account or a crypto wallet.
Although the ETF’s name mentions “bitcoin”, it doesn’t invest directly in bitcoin.
But it does give investors exposure to bitcoin without them having to hold the cryptocurrency directly.
That is done by investing primarily in bitcoin futures contracts.
A futures contract is a legal agreement to buy or sell a particular commodity asset at a pre-determined price at a specified time in the future.
Futures contracts are traded on a futures exchange.
As for the ProShares Bitcoin Strategy ETF, its bitcoin futures contracts are traded on the Chicago Mercantile Exchange (CME).
What Are the Holdings of the ETF?
As of 18 October 2021, the ProShares Bitcoin Strategy ETF has the following holdings:
| Description | Ticker | Exposure Value | Shares/Contracts |
|---|---|---|---|
| CME Bitcoin Futures | BTCV1 | 19,728,000 | 64 |
| CME Micro Bitcoin Futures | BMRV1 | 258,930 | 42 |
Both BTCV1 and BMRV1 are futures contracts expiring in October 2021.
What’s the ETF’s Expense Ratio?
According to ProShares, the ProShares Bitcoin Strategy ETF has an expense ratio of close to 1%.
0.95%, to be exact.
That’s high…
What Are the Risks Associated with the Proshares Bitcoin Strategy ETF?
Buyer beware.
Since the ETF invests in bitcoin futures contracts and not directly in bitcoin, the price and performance of bitcoin futures are expected to differ from bitcoin’s current “spot” price.
The spot price refers to the price of physical bitcoin that can be purchased.
The price difference between the bitcoin futures and the spot price of bitcoin can be significant.
For instance, the CME Bitcoin Futures (BTCV1) last traded at US$62,715, while the bitcoin spot price is around US$62,390.
Since futures contracts expire each month, they must be repurchased constantly.
In particular, the ProShares Bitcoin Strategy ETF seeks to invest in cash-settled, front-month bitcoin futures.
Front-month bitcoin futures contracts are those with the shortest time to maturity.
Therefore, to maintain constant exposure to bitcoin futures contracts, the ETF must sell its futures contracts as they near expiration and replace them with new futures contracts with a later expiration date.
This process is called “rolling” a futures contract.
We also need to understand two other terms called “contango” and “backwardation.”
Futures contracts with a longer term to expiration are generally priced higher than futures contracts with a shorter time to expiration, a relationship called “contango.”
When rolling futures contracts that are in contango, the ETF sells the expiring contract at a relatively lower price and buys a longer-dated contract at a relatively higher price.
On the other hand, futures contracts with a longer term to expiration can also be priced lower than futures contracts with a shorter period.
This is called “backwardation.”
When rolling futures contracts that are in backwardation, the ETF will sell the expiring contract at a relatively higher price and buy a longer-dated contract at a relatively lower price.
Contango and backwardation in the bitcoin futures market may have a massive impact on the performance of the ETF and may cause bitcoin futures to underperform the spot bitcoin price.
Due to the frequency with which the ETF rolls futures contracts, the impact of contango or backwardation on its performance may be greater than it would have been if the ETF rolled futures contracts less frequently.
Investors should consider the risks associated with a futures-based ETF like the ProShares Bitcoin Strategy ETF before investing.
Taking note of the risks and rewards, if I were looking for some bitcoin exposure, I would instead invest in stocks that have exposure to cryptocurrency, such as Square (NYSE: SQ) and Tesla (NASDAQ: TSLA), than buy the ProShares Bitcoin Strategy ETF.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before buying any investment.
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