The launch of the first Bitcoin futures exchange-traded fund (ETF) in the US, the ProShares Bitcoin Strategy ETF ($BITO) has been met with mixed reactions from investors and analysts. While some see it as a milestone for the mainstream adoption of cryptocurrencies, others argue that it is not a true representation of the underlying asset and that it suffers from several drawbacks.
One of the main criticisms of $BITO is that it does not track the spot price of Bitcoin, but rather the price of Bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). This means that $BITO is exposed to the futures premium or discount, which is the difference between the futures price and the spot price. The futures premium or discount can vary depending on the supply and demand of the contracts, as well as the expectations of future price movements.
The futures premium or discount can have a significant impact on the performance of $BITO compared to the spot price of Bitcoin. For example, if the futures price is higher than the spot price, $BITO will have to pay more to roll over its contracts when they expire, resulting in a negative roll yield. This can erode the returns of $BITO over time and cause it to lag behind the spot price of Bitcoin.
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On the other hand, if the futures price is lower than the spot price, $BITO will benefit from a positive roll yield, as it can buy cheaper contracts to replace the expiring ones. This can boost the returns of $BITO and make it outperform the spot price of Bitcoin.
However, the futures premium or discount is not constant and can change unpredictably depending on market conditions. Therefore, $BITO investors cannot rely on a consistent relationship between $BITO and the spot price of Bitcoin.
Another drawback of $BITO is that it is subject to contango and backwardation, which are situations where the futures curve is upward or downward sloping, respectively. Contango occurs when the futures price is higher than the expected future spot price, while backwardation occurs when the futures price is lower than the expected future spot price.
Contango and backwardation can affect the returns of $BITO in different ways. For instance, if $BITO is in contango, it means that it is buying high and selling low, which can result in a negative return over time. Conversely, if $BITO is in backwardation, it means that it is buying low and selling high, which can result in a positive return over time.
However, contango and backwardation are also dynamic and can change depending on market sentiment and volatility. Therefore, $BITO investors cannot anticipate how contango and backwardation will affect their returns.
Given these limitations of $BITO, some investors and analysts are calling for a spot Bitcoin ETF, which would track the actual price of Bitcoin rather than its derivatives. A spot Bitcoin ETF would eliminate the issues of futures premium or discount, roll yield, contango and backwardation, and provide a more accurate and transparent exposure to Bitcoin.
However, a spot Bitcoin ETF faces several regulatory hurdles in the US, as the Securities and Exchange Commission (SEC) has repeatedly rejected or delayed such proposals due to concerns over market manipulation, custody, liquidity and investor protection. The SEC has also stated that it prefers a futures-based ETF over a spot-based one, as it believes that the CME futures market is more regulated and mature than the spot market.
Therefore, while a spot Bitcoin ETF may be desirable for some investors and analysts, it may not be feasible in the near future. Until then, $BITO remains the only option for US investors who want to gain exposure to Bitcoin through an ETF. However, $BITO is not the only Bitcoin ETF available globally. There are several other countries that have approved or launched Bitcoin ETFs that track either the spot price or a basket of cryptocurrencies. For example:
Canada: The first country to approve a Bitcoin ETF in February 2021. There are currently nine Bitcoin ETFs listed on Canadian exchanges, with varying fees and structures. Some of them track the spot price of Bitcoin directly (such as Purpose Bitcoin ETF), while others use a multi-crypto index (such as Evolve Crypto Assets Index ETF).
Brazil: The second country to approve a Bitcoin ETF in March 2021. There are currently two Bitcoin ETFs listed on Brazilian exchanges: QR Asset Management’s QBTC11 and Hashdex’s HASH11. Both of them track an index composed of several cryptocurrencies, including Bitcoin.
Europe: Several countries in Europe have launched exchange-traded products (ETPs) that track either Bitcoin or other cryptocurrencies. These ETPs are similar to ETFs but have some differences in terms of regulation and taxation. Some examples are 21Shares’ ABTC (which tracks Bitcoin) and HODL (which tracks a basket of cryptocurrencies), listed on several European exchanges.
Australia: The first country to approve a spot Bitcoin ETF in October 2021. The ETF, called BetaShares Bitcoin ETF, is expected to launch in early 2022 and will track the price of Bitcoin directly.
These Bitcoin ETFs and ETPs offer different advantages and disadvantages for investors, depending on their fees, liquidity, tax implications, and exposure to the spot or futures market. Therefore, investors who are interested in investing in Bitcoin through an ETF or ETP should do their own research and compare the various options available before making a decision.