As investors awaited SEC approval for a Bitcoin ETF during the crypto heydays of 2021, they flocked to other alternatives. The ProShares Bitcoin Strategy ETF saw $570 million in purchases when it debuted on Oct. 19, 2021.
It was the first ETF that offered exposure to cryptocurrencies in the U.S. through Bitcoin futures. The timing was perfect as Bitcoin scaled above $60,000 that week.
BITO does not hold any Bitcoin itself. As of Sept. 23, 75% of its futures contracts had a September expiry with the remaining expiring in October.
The Regulation Advantage Of Bitcoin Futures ETFs
Futures started out as agreements for price guarantees at a future time for farmers who needed to manage price fluctuations. Through futures, they could place bets on future price points for agricultural products and livestock and hedge for future risk.
Futures contracts became a regulated way of trading on future prices and hedging risk in the nineteenth century, when the railway made long-distance trades for farmers' grain possible. As their use grew, the Chicago Mercantile Exchange (CME) in 1919 opened futures contracts to public trading.
BITO's futures contracts trade on the regulated CME. All trades go through CME's clearinghouse, which makes the exchange an intermediary between buyers and sellers.
For the emerging asset class, BITO showed that regulatory approval has been gaining traction. Other futures ETFs have been quick to follow. The VanEck Bitcoin Strategy Fund, the Valkyrie Bitcoin Strategy Fund also provide exposure to the leading crypto.
Price Action
BITO seeks to grow investors' capital through managed Bitcoin futures contracts. The price of its futures contracts depends on the daily trade settlement and volume on the Chicago Mercantile Exchange.
Futures usually trade at a premium to spot prices. For BITO, the premium has been declining. This may be due to a maturing Bitcoin futures market, which has seen volumes surge.
However, in the near term, investors should watch to see if the premium falls below spot prices. A recent trend for the second leading crypto, Ethereum, bears that lesson.
After its launch, BITO's price fell steeply with Bitcoin's plunge. It is trading more than 70% below its opening price of 40 per share.
Further, as markets reversed and Bitcoin dived below $20,000, ProShares launched a futures ETF that held short positions on Bitcoin — ProShares Short Bitcoin Strategy — in June.
Trading on the day after the launch reached $35 million. Today, its average daily dollar volume is about $25 million. By comparison, BITO's average daily dollar volume is around $85 billion even as the ETF trades near all-time lows.
The SEC has rejected ETFs that track Bitcoin spot price, citing a need for investor protections. The SEC, which does not oversee crypto exchanges, in June blocked Grayscale Investments from converting its Bitcoin Trust into an ETF.
For investors, futures ETFs address crypto's regulatory risk, and bring the standard features of futures contracts: transparency, liquidity and guaranteed execution. Yet the near term risk of premiums falling below spot prices is one to watch.
While an ETF that tracks Bitcoin prices still seems far away, Bitcoin futures ETFs have likely found their niche as a way of providing managed exposure to Bitcoin.
Follow Vidya Ramakrishnan on Twitter @VidyaRamakrishnan
