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The ProShares Bitcoin Strategy ETF (BITO) is designed to expose investors to the lucrative performance of Bitcoin. BITO is the first-ever Bitcoin-related ETF in the US that seeks to provide returns that correspond to the implementation of Bitcoin in the spot market. The BITO ETF does not hold or directly invest in Bitcoin, though; it actively invests in Bitcoin futures contracts. BITO provides a convenient route for investors to access Bitcoin returns via the liquid, transparent, and tax-efficient ETF market rather than deal with the hassles of owning and securing the cryptocurrency themselves.
Since 2016, the US SEC (Securities Exchange Commission) has reviewed crypto ETFs proposals. The SEC initially maintained a negative stance on the proposals, citing that allowing ETFs based on unregulated digital assets was in direct contravention of their mandate to protect investors’ interests. This, however, changed on the 18th of October 2021, when the BITO ETF made its debut on the NYSE Arca.
BITO started with a price of $40 per share at inception. The initial hype drove BITO to circa $44, but consistent lower prices of Bitcoin have weighed heavily on the ETF, which traded around the $24-price area as of January 2022. BITO made its entry when the price of Bitcoin was around its all-time highs above $65,000, and lower prices of the coin have pressured the ETF lower.
BITO is an actively managed ETF. The fund’s objective is to achieve capital appreciation through exposure to Bitcoin. BITO mainly buys Bitcoin futures contracts, but the fund manager can use a small portion of the portfolio to buy other money market instruments such as treasuries and bonds. As an actively managed ETF, BITO generally holds Bitcoin futures contracts in all seasons. That is, whether prices are rising, falling, or flat. To ensure that it tracks the performance of Bitcoin futures, BITO usually rolls its contracts which means that near-term contracts are sold and replaced with longer-term contracts. BITO is classified as a non-diversified ETF, which means that a substantial portion of its assets is concentrated on a single financial instrument – Bitcoin futures contracts. Generally, non-diversified ETFs are more prone to volatility than highly diversified funds.
As a non-diversified ETF, BITO performance is mainly influenced by its underlying investment strategy. While the fund may not strictly mirror the performance of the Bitcoin spot market, significant fluctuations will impact the price of BITO. Bitcoin is a highly volatile asset, and massive price changes will influence the value of Bitcoin futures contracts that the BITO ETF tracks.
Throughout its history, the price of Bitcoin has been influenced by demand, supply, regulatory concerns, and adoption levels. Any significant changes in these factors will trigger high volatility in the price of Bitcoin and Bitcoin futures contracts. This will consequently impact the value of the BITO ETF. Bitcoin futures have traded at a premium or discount to the actual spot Bitcoin price. This means that significant price changes in the spot value of Bitcoin can result in even more substantial price impacts on Bitcoin futures and the BITO ETF.
The active management of BITO also influences its price. Futures contracts have an expiry, and the BITO ETF generally aims to sell near-term contracts when the market is in contango (futures prices are higher than spot price). At the same time, buying longer-term contracts when the market is in backwardation (futures prices are lower than spot price). While this seems to be straightforward, it is essential to note that Bitcoin futures have been known to experience extended periods of contango. This means that the fund may sometimes be unable to apply its active management strategy as intended, consequently impacting the performance and price of BITO.
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