Amidst swirling speculation in the world of cryptocurrencies, ProShares has gone a step further to claim that its pioneering Bitcoin futures-based ETF has remained closely in sync with the spot price of Bitcoin. According to the firm, concerns about business costs causing tracking errors are simply misplaced. As the world’s largest crypto fund, the performance of the ProShares Bitcoin Strategy Fund could have deeper implications for the evolving relationship between traditional and crypto finance.

Brave New World: ProShares Bitcoin Strategy Fund

The ProShares Bitcoin Strategy Fund, trading under the ticker BITO on the New York Stock Exchange, broke new ground in October 2021. It offered investors a way to interact with Bitcoin without the complexities of direct ownership. The BITO invests in regulated and cash-settled Bitcoin futures listed on the Chicago Mercantile Exchange (CME).

However, this pioneering ETF raised concerns from observers who feared that the costs associated with “rolling”—selling futures contracts that are nearing expiration and buying the next set—could cause BITO to underperform Bitcoin.

Sailing the rough seas of Contango

This fear is rooted in a market condition known as ‘contango’. Here, futures contracts that expire later in the future trade at a premium to those that are about to expire. Contango tends to deepen during bull markets, increasing “turnover costs” and potentially impacting performance.

However, according to Simeon Hyman, global investment strategist at ProShares, concerns about renewal costs are unfounded. He insists that since its inception, BITO has remained closely aligned with Bitcoin’s price movements. The small difference in their returns can be largely attributed to BITO’s annual fee of 95 bp.

The battle between BITO and Bitcoin: is Roll Cost the real villain?

As Bitcoin recovers and the contango widens, concerns about roll costs have resurfaced, fueling demand for spot ETFs. These ETFs invest directly in Bitcoin, eliminating the need for rollover. Giants like BlackRock and Invesco are already knocking on SEC doors with applications for spot-based Bitcoin ETFs.

But Hyman remains unfazed. He argues that the interest income from BITO’s cash holdings offsets the roll costs. The recent rise in the Federal Reserve’s benchmark interest rate has boosted premiums and consequently rollover costs for Bitcoin futures. However, the same rate also drives interest on the BITO cash balance, thus negating the impact of roll costs.

The Future of Bitcoin ETFs: Spot or Futures?

As the popularity of Bitcoin continues to rise, so does the anticipation for point-based ETFs. But, according to Hyman, predicting the impact of these hypothetical products on existing ones based on futures remains speculative. As the ProShares ETF thrives with $1.1bn in assets under management and inflows of $336.2m so far this year, it shows the effectiveness of a Bitcoin futures strategy within an ETF.

This post ProShares BITO ETF: a close competitor to Bitcoin spot price amid ‘turnover cost’ controversy

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