On Monday (January 22), activity in the ProShares Bitcoin Strategy ETF (BITO), the world's leading Bitcoin (BTC) futures exchange-traded fund, has shown since the ETF that invests directly in the cryptocurrency began trading in the United States on January 11. Cool down.
According to data tracked by crypto exchange Coinbase, the total value of BITO shares traded on the New York Stock Exchange last Thursday was just over $500 million, down 75% from the record of $2 billion set on January 11. ETF.com data shows that BITO has experienced a net outflow of more than $270 million during the same period.
Meanwhile, according to Coinbase data, 11 spot ETFs had a cumulative trading volume of $14 billion in their first week, a figure that exceeded all other ETFs launched in 2023. These funds have raised more than $1.2 billion in investor funds in the week since their launch.
These spot ETFs invest in Bitcoin, allowing investors to gain exposure to the cryptocurrency while bypassing the hassle of storing the cryptocurrency, and are considered a better alternative to futures-based ETFs such as BITO. Since BITO invests in Bitcoin futures on the Chicago Mercantile Exchange (CME), it must roll expiring contracts into new contracts, incurring “rolling costs” that adversely affect the fund’s performance over the long term.
Still, some observers believe that the cash-creating structure of spot ETFs will ensure that futures ETFs remain relevant.
There are two ways for ETFs to be created and redeemed: in-kind and cash creation. In the former, when the ETF issuer wants to create new shares, an authorized participant (AP) buys the underlying securities that make up the ETF and delivers them to the issuer in exchange for ETF shares, which can be sold on the open market. When the ETF wants to redeem shares, the process is exactly the opposite.
In a cash creation structure, the process remains the same, except that the AP provides cash to the issuer, who then purchases the actual asset.
This exposes authorized participants (APs), institutions and market maker firms to the risk of bitcoin price fluctuations between the time a buy order is received and the time the issuer purchases the asset to issue new shares. As a result, some observers believe that APs may hedge with regulated products such as BITO and CME futures.
Laurent Kssis, crypto trading advisor at CEC Capital and former ETF market maker, said: “It is not uncommon for APs to turn to regulated products such as BITO to hedge their positions (called delta) because they may not have an account to execute trades on CME futures. If they cannot buy CME Bitcoin futures, cannot even buy Bitcoin, or are banned from contact by compliance departments, or do not even have the infrastructure, i.e. custodian or logistics system to coordinate their positions, this is often considered a good alternative.”
He added: “The risk of being exposed or unhedged is very high, so BITO will provide fairly good protection, although it is not a perfect hedge because there is slippage and considerable fees to buy BITO. But many APs may have no choice.”
David Duong, head of institutional research at Coinbase, said in a weekly newsletter that despite a recent drop in BITO trading volume, it will remain “an important component of the Bitcoin ETF space. We believe some APs (particularly brokers) will continue to rely on regulated hedging vehicles, such as long CME futures or long BITO when creating shares, or short CME futures when redeeming.”
David Duong added that some APs may buy Bitcoin and sell BITO before the spot ETF is launched to “hedge potential clients’ intraday buying and selling.”
