BITO: How To Benefit From The SEC Delaying Bitcoin ETF Approval

Summary The ProShares Bitcoin Strategy ETF provides a convenient way for investors to access Bitcoin futures, appealing to those who don't want to deal with self-custody. There is speculation that the approval of Bitcoin ETFs could lead to a "sell the news" event, where investors take profits after the anticipated event occurs. Factors such as the upcoming Bitcoin halving and the delayed Mt. Gox repayment may mitigate the potential sell-off after ETF approval. The ProShares Bitcoin Strategy ETF (BITO) is a convenient vehicle for investors to tap into Bitcoin futures. This particularly appeals to those who prefer not to mess around with self-custody (although, if done correctly, it saves fees). The ETF levies a yearly fee of approximately 0.95%. Everyone is waiting for the Bitcoin ETFs and there is a lot of excitement around it. There seems to be a prevalent belief that it is a "sell the news" event. This comes from the trading idea of "buy the rumour, sell the news". Before a major anticipated event or announcement (like a Tesla (TSLA) or Apple (AAPL) product launch, regulatory decision, or a rumored corporate takeover), there can be significant speculation and buying activity in the market. Investors often buy assets in anticipation of positive news, expecting the announcement to lead to a further increase in price. This speculative buying can (and should) drive the price up before the actual news is released. When the actual event finally materializes, some of the upside is already priced in. There's limited upside remaining, and this lack of additional positive momentum can lead to profit-taking. Especially among shorter-term traders. Again, I fully agree some of this risk is present. Short-term traders may take some profits. If these ETFs are approved, it doesn't necessarily mean that institutions are immediately shoveling in assets while the price has a lot of momentum. I think it is a positive, but especially a long-term positive, where the financial instrument can easily and responsibly be included in asset allocation strategies designed by financial advisors, banks, etc. This will be a longer-term tailwind for Bitcoin as an asset class. It is going to make a big difference over time. Another factor why I'm not a believer in a huge sell-off after ETF approval is the fact that the Bitcoin halving is coming up. This means there's immediately another near-term event in focus. The Bitcoin halving happens every ~4 years and is a mechanical reduction of the reward that miners receive for adding new blocks to the Bitcoin blockchain. Because the rewards halve, a lot of equipment to verify transactions is rendered obsolete (it requires too much energy to cost-effectively operate). As equipment is written off and miners take a hit on rewards, they don't produce as much Bitcoin to sell into the market. I was slightly worried about the imminent Mt. Gox repayment. This seems to have started and will be continued in 2024 but the repayment deadline has been pushed back to October 31, 2024. So this could take a while, and possibly payments aren't pushed out all at once. For example, fiat payments in Yen seem to have started. J.P. Morgan (JPM)'s floated an idea that the imminent Grayscale's conversion could potentially trigger a massive sell-off. I'm not so sure. I think many Grayscale holders are institutions that don't have other ways to gain Bitcoin exposure. Then there will be lots of arbs that do engaged in the long Grayscale Bitcoin Trust (GBTC), I've written about this idea often in the past year, while maintaining a short Bitcoin position (through futures). For short-term or trend traders, the GBTC margin requirements aren't very attractive. It is much easier and more convenient to trade MicroStrategy (MSTR) as a bitcoin proxy. Another reason I'm not convinced we're at max Bitcoin fervor is that the funding rates are far below historical highs. The chart below from Cryptoquant shows the Bitcoin funding rates and the price of Bitcoin. funding rate Bitcoin (cryptoquant.com) Funding rates are periodic payments to traders that are long or short based on the difference between perpetual contract markets and spot prices. Funding rates are a sentiment indicator but can also indicate how traders are positioned. Finally, to an extent, they reflect the real and perceived risk of having exposure to an underlying exchange. Positive (green) funding rates show that traders pay up to fund short trades. I think being long BITO is fine but looking at the options other positions looked interesting as well. The BITO ETF (which correlates closely with Bitcoin spot) has shown a realized volatility of 54.56% over the past 20 days. The prices of the options over the next 30 days have an implied volatility of 64.32%. The put to call ratio is 0.36. Meaning a lot more calls are being bought. Over the past year, Bitcoin's implied volatility has closed at a lower level 99% of all days. Clearly the market is pricing in some volatility surrounding this ETF approval but nothing like there's a biotech therapy about to be approved. A January 12, 2024, BITO call goes for almost $0.91. I think it is interest to buy the January 26, 2024, call for $1.51. If the SEC manages to delay the approval of the Bitcoin ETF's this will work really well. If Bitcoin declines on the news, it will work really well too. If ETF approval is delayed and the closest expiration passes it will be possible to hold the back expiration outright (it could be somewhat profitable as implied volatility is highest for the nearest expiration) but alternatively it will be possible to sell a BITO call for the 19th. If this goes extremely well, that expires as well. This isn't my base case but I do think there is a 40%-50% chance there are further delays. Note that these positions give you very little actual exposure to the underlying because you buy and sell a call on the same thing. That changes if one leg expires, so beware of that. If it gets approved this week and/or Bitcoin declines on the approval, you've essentially paid premium for nothing.