Popular New Bitcoin ETFs Face Hurdles

October 22, 2021

Shattering a nearly 17-year-old record, the ProShares Bitcoin Strategy ETF (BITO) has become the fastest ETF ever to attract $1 billion in assets under management (AUM)—in just two days of trading.  So much for the question of whether there was demand for a future-based ETF product.

The SPDR Gold Trust (GLD), which launched in November 2004, was the previous record-holder, having reached the milestone after three days of trading. But in a poetic turn, it is “digital gold” that has finally knocked GLD off its throne.

Entering its final trading session of its first week, BITO had already gathered $1.2 billion in AUM, and has seen more than $2 billion in trading volume since launch. In spite of its success gathering assets, the ETF dipped below the opening price of $40 in early trading on Friday.

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The fall is in line with the broader crypto complex, which has seen prices fall since Bitcoin set a new all-time high earlier in the week. (Read: Bitcoin Notches New Record High)

As of Friday morning, the price of Bitcoin has fallen about 3% from the prior 24 hours. Other cryptocurrencies such as Ethereum and Litecoin have fallen as well.

Roll Costs Coming

One thing that is important for investors to keep in mind is that BITO is a futures-based ETF, meaning it will not perfectly track the spot price of bitcoin. While the prospectus for BITO states that the fund “seeks to invest in cash settled, front-month bitcoin futures,” the ETF has already started to sell October contracts and purchase November contracts.

Bitcoin futures expire on the last Friday of the month, meaning that all October contracts will be sold by next Friday, Oct. 29.  

Here is where the shape of the futures curve can have a significant impact on performance relative to the spot price of Bitcoin.

As of Friday morning, November Bitcoin futures contracts were more expensive than October contracts. December contracts were even pricier. This is known as contango, a situation in which the futures price of a commodity is higher than the spot price. If the future price of Bitcoin were projected to be higher than the spot price, this would be known as backwardation.

As long as the futures curve is in contango, this means BITO faces a performance head wind in terms of negative roll costs as it shifts with the passage of time, which will negatively impact investors in the ETF relative to those who choose to hold bitcoin itself.

The estimated annualized roll cost at current prices is approximately 16.5%.

Though it hasn’t seemed to deter them so far, time will tell whether roll costs will dissuade investors who have piled in to BITO at a record rate.

 

4 p.m. ET UPDATE:

BITO fell by 3.3% for the day, closing at $39.49. This brings its cumulative return for the first week of trading to a loss of 1.3%. Bitcoin also fell during Friday trading, dropping by 3.0% from the prior 24 hours.

Bitcoin futures also slumped for the day, and though the curve is still in contango, November and December contracts have fallen slightly more in percentage terms than October contracts. This means the futures curve is not quite as steep as it had been earlier in the day, reducing roll cost.

Contact Jessica Ferringer at [email protected] or follow her on Twitter

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