ProShares claims Bitcoin ETF closely tracks BTC price, dismisses concerns about roll cost.

ProShares claims Bitcoin ETF closely tracks BTC price, dismisses concerns about roll cost.

The Rise of Blockchain: A Comprehensive Overview of the Industry

The blockchain industry has witnessed significant growth and innovation in recent years. One notable development is the emergence of bitcoin futures-linked exchange-traded funds (ETFs), which provide investors with exposure to bitcoin without the need to own the cryptocurrency. ProShares, the issuer of the first U.S. bitcoin futures-linked ETF, known as the ProShares Bitcoin Strategy Fund (BITO), has addressed concerns about potential tracking errors and demonstrated how closely the ETF has mirrored bitcoin’s spot-price performance since its inception in October 2021.

Understanding Bitcoin Futures and the Contango Effect

To appreciate the significance of this achievement, it is essential to understand the mechanics of bitcoin futures and the potential impact of contango. Bitcoin futures contracts allow investors to speculate on the future price of bitcoin without owning the underlying asset. These contracts have expiration dates, and as they approach expiration, investors must roll over their positions by selling expiring contracts and buying new ones.

Typically, longer-dated futures contracts trade at a premium to those closer to expiry, resulting in a condition known as contango. During bullish market conditions, contango tends to steepen, leading to higher costs and what is referred to as contango bleed. Many observers initially worried that the costs associated with rolling over futures contracts would cause futures-based ETFs like BITO to underperform bitcoin significantly.

ProShares Addresses Concerns

However, ProShares has successfully debunked these concerns, as BITO has closely tracked bitcoin’s price since its inception. Simeon Hyman, the global investment strategist at ProShares, emphasized that concerns about roll costs are misguided, as BITO has returned only slightly less than bitcoin itself (-54.5% for BITO compared to -51.5% for bitcoin). Hyman attributes over half of this modest difference to BITO’s annual fee of 95 basis points.

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Hyman explains that BITO’s ability to closely track the spot price is due to the fund’s interest income from cash holdings, which offsets the roll costs. The roll costs are closely tied to the level of interest rates in the U.S. economy. As a financial future with no storage costs, the premium of the futures contract should align with the term-equivalent interest rate. The Federal Reserve’s raising of the benchmark interest rate by 500 basis points since March 2022 has driven these premiums and the associated roll costs of a bitcoin futures strategy.

The Role of Interest Rates and Cash Holdings

One critical component of futures prices is interest rates, and the recent increase in the U.S. Federal Reserve’s target range to 5%-5.25% reflects efforts to control inflation. Since the CME bitcoin futures are cash-settled, there are no storage costs involved. BITO takes advantage of this by earning interest from its cash holdings, which are driven by the same term-equivalent interest rates. This interest income is paid out in monthly dividends, effectively covering the roll decay in the fund. In fact, BITO has paid dividends six times this year.

Spot-Based ETFs and the Future of the Industry

The recent rally in bitcoin and the resulting widening of contango have reignited concerns about roll costs and prompted calls for spot-based ETFs. Unlike futures-based ETFs, spot-based ETFs would invest directly in bitcoin, eliminating the need to roll over positions. Traditional finance giants like BlackRock and Invesco have already filed applications with the U.S. Securities and Exchange Commission (SEC) for such spot-based bitcoin ETFs.

However, Hyman cautions against speculating on the impact of potential spot-based ETFs. He believes that BITO’s track record of performance and investor interest serve as a testament to the effectiveness of a bitcoin futures strategy within an ETF. As of July 18, BITO had $1.1 billion in assets under management and has seen year-to-date inflows of $336.2 million, accumulating $2.2 billion in investor money since its inception.

The market expects that the potential launch of spot-based ETFs will unlock a floodgate of institutional money, further propelling the growth of the blockchain industry.

As of July 20, ProShares held Treasury bills, along with other assets and CME futures contracts expiring on July 28 and Aug 25.

In conclusion, the blockchain industry continues to evolve rapidly, with bitcoin futures-linked ETFs like BITO demonstrating their ability to closely track bitcoin’s spot-price performance. ProShares has effectively addressed concerns about tracking errors by leveraging interest income from cash holdings to offset roll costs. While spot-based ETFs may represent the future of the industry, the success of BITO underscores the viability and investor interest in bitcoin futures strategies within ETFs. As the industry continues to mature, the launch of spot-based ETFs is expected to attract substantial institutional investment, driving further growth and innovation within the blockchain industry.