BITO: Is There Still A Place For Futures ETFs?

Summary With the approval of nearly a dozen spot Bitcoin ETFs in the US market, futures contract funds like BITO have more competition. BITO's expense ratio is high compared to spot funds and daily trading volume has been surpassed both IBIT and GBTC. Still, there may be a reason to long BITO over spot funds if you want to keep BTC out of the control of centralized financial firms. It has been well covered by many at this point, but in case you've been unplugged for a month, the Securities and Exchange Commission begrudgingly approved nearly a dozen spot Bitcoin ( BTC-USD ) ETFs for the US market in mid-January. These funds are fundamentally different from the futures ETFs that have already been available, as they are backed by the underlying asset rather than futures contracts. In this article, we'll take a look at the early returns, volumes, and premiums for the leading spot ETFs versus the ProShares Bitcoin Strategy ETF ( BITO ). We'll also get into why some Bitcoiners may be more inclined to buy BITO than one of the spot ETFs in a traditional brokerage account. Bitcoin ETF Market Action Indications from the early action in the spot ETF market have been positive in my opinion. Entirely unsurprisingly, the biggest loser to this point as been the Grayscale Bitcoin Trust ( GBTC ). The day before that fund's conversion was approved, there were just over 619k BTC held through that fund. As of February 1st, that figure was down to roughly 483k BTC: Fund BTC Balance Fee After Waiver Grayscale Bitcoin Trust 482,592 1.50% iShares Bitcoin Trust ( IBIT ) 70,005 0.25% Fidelity Wise Origin Bitcoin ETF ( FBTC ) 59,224 0.25% Ark 21 Shares Bitcoin ETF ( ARKB ) 15,890 0.21% Bitwise Bitcoin ETF ( BITB ) 15,054 0.20% Invesco Galaxy Bitcoin ETF ( BTCO ) 7,001 0.25% VanEck Bitcoin Trust ( HODL ) 2,942 0.25% Valkyrie Bitcoin Fund ( BRRR ) 2,635 0.49% Franklin Bitcoin ETF ( EZBC ) 1,363 0.29% WisdomTree Bitcoin Fund ( BTCW ) 260 0.30% TOTAL 656,966 Source: BitcoinTreasuries.net, 2/1/24 I like looking at BTC balances rather than dollar-denominated AUM figures for these funds because it gives us a better sense of if Bitcoin is truly being purchased or sold. In my view, it's pretty clear that capital is flowing from Grayscale to the other funds and I'm actually surprised the company is still holding firm on 1.5% given how uncompetitive that rate currently is. Importantly, the net flow for these funds when accounting for BTC migration between the funds has still been highly positive. At 37.8K BTC of spot ETF net inflow, there is roughly $1.6 billion of investment capital that has flowed to these products in a little under a month. This is not something that would have been possible without spot ETFs. I alluded to the fundamental differences between futures funds and spot funds in my introductory coverage of BITO a few months ago: Since the futures contracts are cash-settled, the issuer never actually holds any BTC in the fund. This is different from a spot ETF which could hold a certain amount of Bitcoin per share outstanding and allow for asset redemptions to mitigate the kind of NAV issue that we've witnessed in GBTC shares over the last couple of years. Factoring in the added expense that comes from rolling over futures contracts month after month, the 0.95% expense ratio for BITO isn't attractive for long term investment in my view. That said, BITO's total return has actually been better than the top three spot ETFs and even BTC itself since the spot ETFs were approved in mid-January: Data by YCharts We can also see the NAV discount/premium rates have normalized significantly after what was slight volatility following the initial product launches. That said, the rate premiums haven't sniffed the extremity that we've previously seen in GBTC historically. It remains to be seen how high and low those bands will get, but with the ability to redeem shares, the spot ETFs theoretically shouldn't trade at significant premiums unless there is a massive supply crunch for BTC - which, to be clear, is a possibility under certain scenarios. Data by YCharts From a volume standpoint, BITO still had a commanding lead over the top spot ETFs in mid-January though that lead has since subsided. Many of these top funds now trade at fairly similar volume levels with BITO - particularly with GBTC and IBIT being the standouts. ETF Volume (The Block) Since the spot launches in mid-January, BITO has averaged roughly $419 million in daily trading volume. There are days when IBIT and GBTC are both well above that average as those funds have seemingly taken the reins from BITO from a daily liquidity standpoint. Ark Invest BITO Holdings (Cathie's Ark) One of the notable asset managers that has reduced BITO holdings is Cathie Wood's Ark Invest. That firm was previously sitting in Grayscale's Bitcoin Trust, swapped to BITO temporarily when GBTC's NAV discount closed, and has since liquidated almost the entire BITO position for ARKB. At one point in early January, Ark Invest had over 4.3 million shares of BITO and now has about a quarter of a million. Why Buy BITO At This Point? With a fairly large expense ratio and other ETFs currently offering better daily liquidity for traders, a question some investors may have is why buy BITO at all at this point? I don't personally have any exposure to BITO, and I've actually never owned BITO shares. But I can see a legitimate reason for longing BITO in certain situations. While the NAV rates for the spot funds are unlikely to trade at dramatic premiums, there is still a possibility that BITO could outperform the spot funds during shorter time frames if those funds do get out of hand from a NAV rate standpoint. I view that scenario as unlikely, but it's worth mentioning that if one is simply trying to make the best short-term trade possible, in a spot premium environment BITO may theoretically be the better opportunity. The more realistic reason one might entertain longing BITO may be if an investor or trader is philosophically opposed to TradFi firms controlling BTC supply. Parking BTC in ETF wrappers does take Bitcoin out of the wild in a sense. The more supply that is held by centralized entities, particularly through ETFs, the less BTC can be used on-chain for things like cross border settlement. Since BITO shares are futures-only, a Bitcoiner who wants to keep as much BTC in the market as possible may find that BITO is a better alternative than spot funds for Bitcoin price exposure in a traditional brokerage account. Risks All cryptocurrencies are risky. For Bitcoin specifically, the more supply that is held through centralized funds the less useful the network could theoretically become, which would figure to limit potential upside. I've always been of the opinion that Bitcoin is a legitimate asset for traditional investment portfolios in proper size. Everyone's risk profile is different but I maintain that the best way to own Bitcoin for large holders is directly on-chain in self-custody. Summary As of article submission, we are less than 3 months away from Bitcoin's next halving. Of course, what has happened in the past certainly doesn't mean the future is guaranteed. But we have seen through several cycles that the price of BTC rises when the new issuance in each block gets cut in half. So far, Bitcoin has held up remarkably well in what I think many would agree has been the asset's first real test in a normalized interest rate environment. I think we will see a new all-time high in BTC in the next 6 to 12 months. And if that plays out as I expect, BITO should perform very well from here.