Yesterday’s launch of the Bitcoin futures ETF marked an important milestone for the industry. According to Bloomberg, the ProShares BITO ETF saw more than 24 mln shares traded with a turnover of almost $1 bln, the second most heavily traded fund on record. While the product is controversial for many reasons (see below), we see it as an undeniably positive step for the crypto industry, and the market seems to agree. Bitcoin and Ethereum are both trading near all-time highs, suggesting that the buy-the-rumor-sell-the-fact outcome many had predicted did not materialize – at least not yet.
BITO will likely prove an inefficient product in many ways, but we already knew that. First, the expense ratio is 1%. For most investors, bitcoin has no (recurring) storage cost from holding it; you buy it and leave it in your wallet or centralized exchange account. Moreover, bitcoin (and especially wrapped bitcoins) can be used as collateral for borrowing. They can also easily generate yield by depositing them in interest-bearing accounts such as Blockfi, Celsius our Crypto.com.
But the biggest controversy is around the cost of rolling the futures contracts. Because the bitcoin futures curve is almost always in contango, BITO will have to pay up a premium every time the contract expires (though this could reverse during periods of backwardation). At the time of writing, for bitcoin spot is trading at $64.2K, the October contract at $64.6, and the November one at $65.2K. This rolling cost led many observers to question the SEC’s choice of instrument compared to a spot ETF product since BITO is arguably disadvantageous for the consumer the SEC is seeking to protect.
All that said, BITO will provide U.S. retail investors with a convenient wrapper to gain crypto exposure and, perhaps more importantly, it reduces the odds of more draconian regulation against the sector. One can easily argue that the elevated costs associated with BITO will be more than offset by the convenience of an ETF wrapper. Moreover, investors can benefit from favorable tax treatment when purchasing in a retirement account, such as 401K. But for us, the most crucial point here is the validation of the industry. It also makes it more likely, in our view, that the SEC will eventually approve a spot ETF – though this is far from assured. This is probably just the first step for regulators to deliver the much-needed clarity for the digital asset industry.
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