In October 2021, ProShares introduced the Bitcoin Strategy Fund, a first-of-its-kind futures-linked ETF that began trading as BITO on the New York Stock Exchange. Designed to offer investors exposure to bitcoin (BTC) minus the requirement to actually own the cryptocurrency. The ETF trades in regulated, cash-settled bitcoin futures listed on the Chicago Mercantile Exchange (CME).
However, its inauguration provoked speculation that BITO and similar future-based ETFs would underperform bitcoin due to costs tied to the rolling over of futures contracts: selling expiring contracts and purchasing the next set. The condition known as contango, where longer-dated futures contracts trade at a premium to those nearing expiry, typically intensifies in bull markets, increasing the associated costs, or ‘contango bleed’.
Nonetheless, Simeon Hyman, a global investment strategist at ProShares, dismisses this perspective as misguided. He highlighted that through to mid July 2022, BITO returned -54.5% compared to Bitcoin’s -51.5%, attributing over half that slight difference to BITO’s annual fee of 95bps.
Bitcoin’s recent rally and the subsequent broadening of contango at the end of June rekindled apprehensions about the roll costs and fortified the push for spot-based ETFs. These would directly invest in Bitcoin, eliminating the necessity for rolling over positions. Given this, a noteworthy number of traditional finance bigwigs and conglomerates including those such as BlackRock and Invesco submitted applications to the U.S. Securities and Exchange Commission (SEC) for spot-based bitcoin ETFs.
Hyman stated that BITO is maintaining key parity with the spot price, largely due to the fund’s interest income from cash holdings compensating for the roll costs. These roll costs are particularly sensitive to the fluctuation of interest rates in the U.S. economy. Hyman explains, “The Fed’s raising of the benchmark interest rate by 500 basis points since March 2022 has been a key driver of those premiums, and consequently the roll costs of a bitcoin futures strategy.”
ProShares insists that BITO’s performance and flows are indicative of the efficacy of a bitcoin futures approach within an ETF and sustained investor interest, having accumulated $1.1 billion AUM as of mid-July. The possible advent of spot-based ETFs is expected to significantly unlock institutional money channels. Conversely, Hyman argues that it is difficult to predict the impact of potential spot ETFs on existing future-based products.
Source: Coindesk
