BITO: Reports of Crypto’s Death Greatly Exaggerated?

January 10, 2023

The ProShares Bitcoin Strategy ETF (BITO) provides exposure to the leading cryptocurrency by investing in cash-settled, front-month bitcoin futures traded on CFTC-regulated futures exchanges. BITO doesn’t directly buy bitcoin for its investors. 

Bitcoin had a rough time in 2022, and as a result, BITO tumbled too. The cryptocurrency fell 64% and now sits at around $17,300, a sad return after many crypto fans in 2021 had expected bitcoin to hit $100,000.

Bitcoin may be down, but history tells us it’s far from out. The financial world has embraced blockchain technology, and bitcoin is its first-born token. Volatility in bitcoin and the crypto asset class is unprecedented. After losing nearly 75% of its value from the peak, now may be the perfect time to consider dipping a toe in. 

Boom and Bust Is Nothing New 

The 75% plunge in bitcoin was ugly, but it is not unprecedented since crypto arrived on the scene in 2010. 

 

Source: Barchart 

 

  • The chart of bitcoin’s exchange rate against the U.S. dollar shows a series of bust periods for the leading cryptocurrency: Bitcoin declined from $1,135.45 in November 2013 to $214.30 in August 2015, an 81.1% drop. 
  • After reaching $19,862.00 in December 2017, the price fell to $3,158.10, or 84.1%, in December 2018.  
  • Bitcoin dropped 71.6% from $13,844.30 in June 2019 to $3,925.27 in March 2020.  

Each of these dramatic corrections was greater on a percentage basis than the recent 75% decline. Moreover, each of the three plunges came before an explosive rally.  

Cryptos Digesting Bad News 

The November 2013 through August 2015 decline came on the heels of the Mt. Gox bankruptcy that shook investors’ and traders’ confidence in the burgeoning asset class. The crypto prices shook off the scandal and rose to a new record high in early 2017.  

In 2022, FTX, Voyager, along with other crypto platforms and related businesses, went belly-up after the price plunge from the November 2021 high. Warren Buffett’s quip that “Only when the tide goes out do you learn who has been swimming naked” sums up the cryptomarket in 2022. 

This year, the asset class continues to digest the events and experience the systemic impacts, with bitcoin prices consolidating between $16,000 and $17,000 per token. Considering the boom-and-bust price action over the past 13 years and that a $100 investment in Bitcoin at five cents is still worth $33 million at $16,500, the potential for the next round of speculative fever remains high.  

Bitcoin Debate Getting Emotional 

The U.S. dollar index moved 8% higher in 2023, but the move in the world’s reserve currency could be a mirage. In the last reading, U.S. inflation at more than 7% erodes the dollar’s purchasing power.  

Moreover, worldwide inflation remains at a multidecade high, with almost half the world experiencing double-digit inflation.  

The three factors weighing on all fiat currencies are: 

  • The decline in faith and credit of countries issuing legal tender. 
  • The bifurcation between the world’s nuclear powers has weakened the global reserve currencies’ role in cross-border transactions.  
  • Long overdue technological innovation in finance that boosts blockchain applications. 

Meanwhile, the debate over cryptocurrencies continues. Detractors including Warren Buffett, Charlie Munger and Jamie Dimon saying “I told you so” while supporters like Elon Musk, Mark Cuban and Jack Dorsey continue to cite the asset class’ utility and value. The debate has an emotional element that pits old-school investors and finance leaders against a new crop of billionaires and innovators embracing technology.  

BITO May Be Safer Than Bitcoin 

BITO began trading on Oct. 19, 2021. At $10.98 per share on Jan. 9, BITO had $544.81 million in assets under management. The fund trades an average of over 3.85 million shares daily and charges a 0.95% management fee. It is a liquid ETF that tracks bitcoin futures prices. For many investors and traders concerned about the safety of bitcoin investments, BITO offers several advantages: 

  • It precludes the need to hold bitcoin on exchanges subject to hacks, bankruptcies and other events not covered by any insurance.  
  • It precludes the need to own bitcoin in computer wallets that require cumbersome keys that can be lost or hacked.  
  • BITO invests in bitcoin futures, regulated by the CFTC. 
  • Bitcoin was 64.02% lower in 2022, while BITO fell 63.9%. The ETF did an excellent job tracking bitcoin on the downside and should also perform on the upside.  

The latest tradability data on BITO includes: 

 

Source: ETF.com 

 

BITO allows traders and investors to invest in bitcoin in standard stock trading accounts. When it comes to the asset class in 2023, the recent bankruptcies and drama of the upcoming Sam Bankman-Fried trial should lead to increased regulation and oversight, which could increase investor participation. Moreover, the events of the past months have likely flushed out weak holders, which could set the stage for another substantial rally.  

Invest What You Can Afford to Lose 

Bitcoin and crypto are highly volatile assets that have experienced boom-and-bust cycles. In bitcoins’ 13th year, the historical trading pattern suggests another boom period could be on the horizon. 

However, past performance is never a guarantee of future performance, and it is plausible the asset class could implode and fade into an abyss, with holdings becoming cyberspace dust collectors.  

The level of price variance behooves market participants looking to dip a toe into bitcoin, BITO or any other related cryptocurrency assets only to invest money they are willing to lose. The risk is always a function of potential rewards, and the potential for another boom comes alongside the risk of a bust that takes values to zero.  

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