Bitcoin ETFs in the US... Finally!

We can see a Bitcoin ETF from Proshares trading this week. It would use Bitcoin futures as the base. In the last few days, Bitcoin rose above $61K (close to its all time high) primarily due to this news.

How many of you are excited and any thoughts? Would like to understand benefits of holding a Bitcoin directly vs via an ETF…


BITO started with $20 million as seed capital and ended day 1 with $570 million in assets! The ETF gained ~5% on day 1 of its trading. More details here.

After the 1st ETF, SEC may approve a few more pending crypto ETFs proposals this week, as per the reports. This will open the doors for investors to easily take a position in crypto without actually owning it! Exciting times ahead…

Is it legal to trade in Bitcoin Futures, considering the ambiguous stance of the Indian Government?
When I remitted funds to Vested, my bank made me sign a document saying that the funds will not be used for currency trade. Does that include crypto? Please advise. Thanks.

BTW it seems to be legal to trade in Crypto in India since CoinDCX won in the supreme court. The problem is that every exchange in India has a different price for the same Crypto and it’s normally a premium of 5-10% over the International price, but since the buy and sell price is the same, it doesn’t really matter. One can buy and trade Crypto in India, book profits and convert them back to INR, if you so please, and can be transferred back to your bank account. I have invested through CoinDCX and am up >25% in less than 5 weeks in BTC and 10% in ETH.

As far as I understand, one can invest in US ETFs (including Bitcoin but will need to check with an expert if the futures-based ETF like BITO is legal).

Yes, the current system in India is not as seamless as one would like it to be. Having your crypto (via an ETF) + global portfolio together at one platform is not a bad option :slight_smile:

Also, there are more ETFs in the pipeline that may get approved soon which will have direct exposure to Bitcoin / crypto. That should be legal!

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I’ve been watching the $BITO since the time I got the news of an ETF based on crypto about to be launched on the exchange, it was much awaited for me.
And I’ve been asking my circle to start pumping their investment either on $BITO or directly into usual coins(ETH/BTC/BNC/XRP).

In the short run upto next halving of btc, I believe we have good a good rally on both the investment tracks. So, why not even capitalize on $BITO :slight_smile: ?

In my opinion, BITO is not good for the average retail investor or anyone that wants to have BTC exposure more than a month or so. I’m actually writing about this in next week’s email - so here’s a little preview:

It is actually an ETF of futures, as you guys mentioned above.

What are futures contracts? They are legal agreements to trade Bitcoin at a predetermined price at a specified time in the future. These are financial derivatives that are used to speculate and hedge on price movements of Bitcoin prices. The way ProShares’ ETF works is that the fund buys short term futures (typically contracts that are one month out). When the contract is about to expire, the ETF cannot buy Bitcoin (the SEC does not allow this yet!) and let the contract expire. So instead, the fund sells the current futures contracts it owns and buys new ones.

Which leads us to the next question - what if the new futures contracts that the ETF has to buy are cheaper/more expensive than the ones it is selling?

  • If the new futures contracts are priced higher than the ones the ETF is selling, then the fund has to use its cash reserve (which introduces cash drag) to buy the same number of futures. This is called contango.
  • If the futures contracts are priced lower than the ones the ETF is selling, then the the ETF generates extra cash flow as it sells the more expensive contracts for the new, cheaper ones. This is called backwardation.

Here’s BITO holding as of 21st of October 2021: It has 37% T-bill (which act as cash reserve). Not to mention the expense fee of 0.95%!

As a result, for the reasons above, using futures contracts ETF to track Bitcoin prices is not very efficient. The correlation is never a perfect 1:1.

Since BITO is new, we don’t have long term historical data. But as you may know, the OIL ETF is also futures based. Here’s the comparison between OIL ETF and the oil spot price (WTI)

In oil futures ETFs, what you see is that, in the long run, the ETF does not track oil prices well. When oil prices go up, the ETF either does not go up as much or stays flat

Note: opinions are my own. Not investment advice.

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Thanks for putting this preview, analysis and right questions/thoughts with the Oil Futures @Darwin :raised_hands:

Would it not be relevant to compare Bitcoin ETF with Gold ETF, rather than Oil ETF?
Looking forward to your weekly digest.

In my opinion, why we should compare a Gold ETF for analysis of BITO:
Because Oil is a consumable/perishable commodity which cannot be replenished soon or by any means to be stored for as long time as Gold until we have jets running on solar power/force that’s natural. Or not like a reserve exchange commodity how Gold is or was i.e limited based on whatever is mined from Earth. If I recollect it right, Gold/Silver coins were the early exchange of the economies, beyond being used in ornaments. And that’s why we refer to BTC as digital gold of cryptocurrency, at this point.

And while I try to compare BITO with SPDR Gold Trust,
I feel, BITO can shoot up 2x in current value as BTC/ETH will be more accepted, there can be a drop later to that till the current price levels (after halving) and sharp rise again because of any other crisis that would be hitting fiat currencies economy harder.

With this, on a short term, holding a pie of BTC/ETH or any other coin sounds better than holding BITO. However, BITO is safer to be bought at this point in terms of price, and as you said - it may be tough to track the future prices here, while there is little data for comparison and the prices of BTC/ETH are quite high & volatile, until things are regulated to certain extent. (which I do not know, if it is ever going to happen)

I think what is important here is not the nature of underlying commodity: (Bitcoin vs Oil) or (Bitcoin vs Gold), but the nature of the ETFs themselves. BITO owns Bitcoin futures, not BTC directly (in fact the fund cannot own BTC - the SEC has not allowed any ETFs to own the underlying crypto commodity).

In contrast, Gold ETFs (GLD for example) are typically backed by physical gold, stored in a vault somewhere. So investors in the ETF is more directly exposed to the price fluctuation of gold.

BITO ETF owns short term futures - that is why the comparison with OIL ETF is more appropriate. Both ETFs are based on futures. Neither ETFs own the underlying commodity - so it really does not matter how the commodity is consumed. What matters is the market’s opinion of the short term price movement of the commodity (because the funds are holding future contracts).

Another silly thing about BITO is - why go through all the trouble with the ETF? More than 30% of the fund goes to US Treasury, there’s 0.95% expense ratio, and there are risks of contango. Why bother? Bitcoin is a digital asset, you can directly bypass the intermediary (the ETF) and directly own the underlying commodity via your nearest crypto exchange. Something you cannot do practically with gold or oil (there’s a limit of how much gold bards you can store safely in your home - which makes gold ETF that holds physical gold useful).

Here’s another data point why Futures based ETF is bad for long term investors. This is the 11 year return chart of two Gold ETFs: GLD (based on physical gold) vs DGL (based on gold futures). Investing on the futures based ETF gives you half the returns.

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Thankyou very much!
I get the complete picture now :raised_hands:

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