ProShares Bitcoin Strategy Fund (BITO): Analysis of the Bitcoin ETF

The ProShares Bitcoin Strategy Fund, also known by its ticker symbol BITO, is a type of investment fund that allows investors to gain exposure to Bitcoin's price movements without directly buying Bitcoin itself. Instead of investing in Bitcoin directly, BITO invests in Bitcoin futures contracts.

BITO is significant because it was one of the first Bitcoin-linked exchange-traded funds (ETFs) available on a major U.S. stock exchange. This made it easier and more accessible for a wider range of investors to invest in Bitcoin, especially those who prefer not to deal with the complexities and security concerns of buying and holding cryptocurrencies directly.

bitcoin ETF BITO

BITO ETF

On Tuesday, October 19, 2021, the ProShares Bitcoin Strategy Fund ETF (BITO) had a volume of $1 billion and this was accompanied by a rise in the price of Bitcoin which reached a new high of $66,975 – far above the expectations of the market.

On a historic day for the history of ETFs and cryptocurrencies, the financial world's spotlight shone on this emerging asset class, marking a milestone in its acceptance and legitimacy in the world's largest market. The SEC's approval of the ProShares Bitcoin Strategy Fund (BITO) signals a broader acceptance of cryptocurrency-related Exchange Traded Products (ETPs), hinting at more digital currency-linked ETPs to come. However, the journey to this achievement was fraught with challenges.

A brief history

Recalling the Winklevoss twins from “The Social Network,” their early attempts to launch a Bitcoin-linked ETF echo their prior setbacks. Since 2013, they sought approval for such an ETF, but the SEC rejected their application, citing concerns over Bitcoin's volatility, susceptibility to manipulation, and regulatory challenges.

Other proposals also faced rejection, sparking debates over market manipulation reminiscent of the 1920s “bucket shops.” Advocates argued that regulated market trading of Bitcoin could mitigate these concerns.


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What is the composition of the ProShares Bitcoin Strategy Fund (BITO) ETF?

Regulated under the “Investment Company Act of 1940,” the BITO ETF is designed to offer investor protections. It invests in standardised futures contracts traded on the Chicago Mercantile Exchange for four years, benefiting from CFTC regulation and the protections of a clearinghouse.

Important considerations for BITO include:

  1. Price differences: The ETF's prices may not align with Bitcoin's spot prices.
  2. Cost implications of futures: Known as “rollover costs,” the ETF faces potential value erosion during futures contracts rollovers, a significant factor when ETPs hold substantial futures positions. This can exacerbate the discrepancy between the futures price and the spot price, a phenomenon previously observed in volatility-linked ETPs.
bito stock

The ETF follows the CF Bitcoin-Dollar US index which in turn follows the daily movement of Bitcoin by adding different prices from several of the largest markets where the cryptocurrency is traded.

Characteristics of the ProShares Bitcoin Strategy Fund ETF (BITO)

Creation DateOctober 18, 2021
TickerBITO
IndexCF Bitcoin-US Dollar
MarketNYSE Arca
AUM$1.2 Billion
Commission0.95%
DistributionQuarterly

Who is the BITO suitable for?

One of the first questions that arise is why buy the ETF that has bitcoin futures instead of buying the spot bitcoin in markets like Coinbase or Bitso?

It is a totally valid question since the ETF, apart from the explicit annual commission, will also have other implicit costs, for example, the rollover of futures contracts and the spread both in the futures market and in the purchase and sale of the ETF by the investor. In fact, JPMorgan analysts estimate that the extra carry cost could be between 8% and 9%.

For those who have access and willingness to trade Bitcoin in unregulated markets like the ones mentioned before, then the ETF is quite expensive. But we must also accept that it opens the doors for many new investors who prefer all those extra layers of protection that this ETF has and are willing to pay the cost that this implies. And, over time, these new participants may want to make the transition to the spot market with more confidence.

What does the future hold for BITO?

The future of the ProShares Bitcoin Strategy Fund (BITO) is closely tied to the evolving regulatory landscape, the performance of Bitcoin in the market, and the adoption of cryptocurrencies by institutional and retail investors. As the financial world becomes more open to digital assets, BITO may see increased interest.

However, its performance will also depend on the volatility of Bitcoin prices and how well it can manage the complexities of futures contracts. Additionally, further regulatory approvals for cryptocurrency-related products could either bolster BITO's position or introduce new competitors, shaping its trajectory in the dynamic cryptocurrency market.

Where to buy BITO ETF UK?

In the UK, directly purchasing cryptocurrency ETFs like the ProShares Bitcoin Strategy ETF (BITO) is not straightforward due to regulatory restrictions by the Financial Conduct Authority (FCA). However, UK investors interested in gaining exposure to Bitcoin and the broader cryptocurrency market have several alternatives.

One approach is to look into other Bitcoin or cryptocurrency-related ETFs that might be accessible. For example, some of the top Bitcoin and related ETFs include Amplify Transformational Data Sharing ETF (BLOK), Bitwise 10 Crypto Index Fund (BITW), and First Trust Indxx Innovative Transaction & Process ETF (LEGR), among others. These ETFs are structured around companies in the cryptocurrency and digital asset economy or follow indices related to blockchain and cryptocurrency innovation.

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Conclusion

The ProShares Bitcoin Strategy Fund (BITO) represents a significant step in bridging traditional finance with the cryptocurrency world. By offering exposure to Bitcoin through futures contracts, BITO provides a regulated, accessible platform for investors, albeit with the nuances of futures-based investment strategies and market volatility.

FAQs

How does BITO work?

BITO invests in Bitcoin futures contracts, not directly in Bitcoin, aiming to track the cryptocurrency's market price movements.

Is BITO suitable for all investors?

BITO may not be suitable for all investors, especially those averse to high volatility or unfamiliar with cryptocurrency markets.

Can BITO's price diverge from Bitcoin's actual market price?

Yes, due to the nature of futures contracts and market dynamics, BITO's price may not exactly mirror Bitcoin's spot market price.

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