Options Theory: BITO- The New Bitcoin ETF | Tackle Trading: The #1 rated trading education platform

Options Theory: BITO- The New Bitcoin ETF

bitcoin etf

We’re making progress. After years of waiting for a legitimate Bitcoin ETF in the U.S., we just got one. Kinda. This week, ProShares launched the world’s first futures-based Bitcoin ETF. It’s called the ProShares Bitcoin Strategy ETF (BITO).

The markets’ appetite was ravenous. More than 20 million shares changed hands during Tuesday’s, making it the second-busiest ETF launch in history. Rest assured, the red-hot demand is causing other fund providers to fast-track their own versions. In fact, VanEck has a futures-based Bitcoin fund that is coming to market “as soon as practicable.” The Bitcoin Strategy ETF (XBTF) will compete with BITO for assets.

I had a chance to dig into the prospectus to see what BITO was all about. Here are the 3 key things you should know.

  • It doesn’t track the spot price of Bitcoin, it tracks the front-month futures contract.
  • Its performance can deviate from that of bitcoin prices due to two key variables.
  • The adverse impact of the negative roll yield is a long-term phenomenon.

Let’s take a closer look at each.

Futures, not Spot

When you buy Bitcoin (or any Crypto, for that matter) through Robinhood, Coinbase, BlockFi, Tastyworks, and the like – you’re buying the digital currency directly.

In 2017, when Bitcoin futures launched, it became possible to track and trade derivatives on the cryptocurrency. While tied to the value or “spot price” of Bitcoin, these futures contracts don’t always move in lockstep. The time element (i.e., different expiration dates) and other quirks of futures contract pricing make Bitcoin futures an imperfect proxy or substitute for buying the digital currency directly.

Thus, any ETF that owns Bitcoin futures (like BITO!) can deviate from the actual movement of Bitcoin. ProShares explicitly states this at the top of the funds home page:

“ProShares Bitcoin Strategy ETF (BITO) is the first U.S. bitcoin-linked ETF offering investors an opportunity to gain exposure to bitcoin returns in a convenient, liquid and transparent way. The Fund seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts.

The fund does not invest directly in bitcoin

The price and performance of bitcoin futures should be expected to differ from the current “spot” price of bitcoin”

https://www.proshares.com/funds/bito.html

Two Causes of Deviation

A perfect Bitcoin ETF would own buy Bitcoin directly and have an extremely low expense ratio. Its performance would perfectly track the spot price less a few basis points for the expense ratio. In formula form, we would say:

Pure Bitcoin ETF = Bitcoin – expense ratio

But regulators haven’t seen fit to greenlight a pure Bitcoin ETF. They’ve rejected more submissions than I can count.

In the gold markets, GLD is a pure gold ETF. It’s able to perfectly mirror the daily movements in gold because it buys the commodity directly. Thus,

Pure Gold ETF (GLD) = Gold – expense ratio

BITO is a bit more complicated because it uses futures contracts to get exposure. The problem is two-fold. First, futures contracts’ performance can deviate from that of actual Bitcoin. Second, they expire and thus require constant “rolling” to maintain exposure. And herein lies the rub. Longer-dated contracts are usually more expensive than shorter-dated ones; a phenomenon known as contango. As a result, the fund incurs a cost each time it has to roll, which can cause it to underperform the spot price of Bitcoin over time.

The fund’s prospectus cites this as one of the risks.

Veteran traders familiar with USO and its deviation from crude oil futures know that it suffers from a similar problem. In fact, I wrote an entire newsletter about the issue titled USO and the Oil Riddle.

If I were to describe BITO’s performance in a formula it would look like this:

BITO = /BTC – negative roll yield – expense ratio

For the unaware, /BTC is the ticker for bitcoin futures, and “negative roll yield” refers to the drag caused by monthly rolling.

Long-Term Impact

The adverse impact of rolling isn’t visible in the short run. Like a tiny leak in your car tire, it’s unnoticeable each day. But over time, it weighs on the performance. The best way to see it is to wait a few months and then overlay BITO with /BTC.

I used to do the same thing with USO and /CL to illustrate the difference.

Bottom line: I think BITO will be a good vehicle for getting exposure to bitcoin for short-term plays. But, if you want to buy and hold it for years as a bitcoin proxy, you’re better off buying the crypto directly.


Read more Options Theory [FREE Content]

Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.


Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

Share this

X
Facebook
LinkedIn
Reddit
Pinterest
Telegram
WhatsApp

More Insights

Join the #1 Rated Trading Education Platform

Learn to generate monthly cash flow from the financial markets and how to grow long-term lasting wealth. Tackle Trading is an amazing online community for active traders that is led by seasoned market professionals. Tap into the power of Tackle Trading’s proven trading system and learn how easy it is to make money with the proper coaching and education.

8,800+

Members

100+

Reviews

Ready to take your trading to the next level?

Get in touch today and receive a FREE complimentary consultation.

Let us help you start trading!

Our Pro Membership gives you the tools to tackle all your trading obstacles.

Register for the Master Trader Live Workshop and get the First 15 Days on Us

ELEVATE YOUR TRADING SKILLS

Master Income Strategies

Unlock the Secrets to Income with Covered Calls

Holiday Sales

Up to
43%
OFF

Days
Hours
Minutes
Seconds
Unfortunately, this offer is now closed. If you still want to take advantage of it, reach out to us at team@tackletrading.com.