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What Lies Ahead for Bitcoin Futures?
Spot bitcoin ETFs have emerged, drawing in billions and challenging existing crypto-based ETFs.
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Does this signal the demise of bitcoin futures funds? Not necessarily. ProShares is reinforcing its commitment.
For nearly 20 months leading up to January 2024, investors seeking U.S. exchange-traded bitcoin funds were constrained to the futures market.
The Securities and Exchange Commission (SEC) rejected over 30 applications for funds directly investing in the premier cryptocurrency, citing concerns about market susceptibility to manipulation.
Instead, futures-based bitcoin funds gained approval, with the ProShares Bitcoin Strategy ETF (BITO) being the pioneer in October 2021. ProShares raised over $1 billion on its debut day, marking the most successful ETF launch in history.
Despite the subsequent introduction of spot bitcoin ETFs, which have amassed $34 billion in assets, including a conversion of over $28 billion from the closed-end fund GBTC, the future of futures-based crypto funds appears uncertain.
Kyle DaCruz, VanEck’s Director of Digital-Assets Products, anticipates a shift in investor preference from products offering bitcoin futures exposure to those providing direct bitcoin exposure, asserting that spot products should closely track bitcoin prices.
VanEck has acted on this sentiment by closing its $43 million Bitcoin Strategy Fund (XBTF) futures ETF in favor of the new spot offering, the VanEck Bitcoin Trust (HODL), currently holding $176 million.
In contrast, ProShares is steadfast in its approach, expressing no intention to retire or convert its Bitcoin Strategy ETF (BITO) to a spot offering.
Instead, the company recently filed to introduce a suite of complementary futures-based ETFs that amplify leverage for indirect bitcoin investments. Despite BITO’s 0.95% expense ratio, triple that of new spot offerings, ProShares remains committed to its strategy.
The Background of Bitcoin Futures:
BITO and similar ETFs engage in cash-settled futures contracts, trading them on regulated exchanges like the Chicago Mercantile Exchange (CME) and packaging them as shares for stock market trading.
These differ from spot ETFs, which acquire physical bitcoin and offer shares representing fractional interests in bitcoin portfolios. Futures ETFs can be more complex and costly due to the need to purchase new contracts at each expiry, incurring hidden rollover costs. BITO has trailed its benchmark, the Bloomberg Galaxy Bitcoin Index, by eight percentage points since its inception, emphasizing the challenges faced by futures-based products.
ProShares’ BITO, with a 90% market share among bitcoin futures funds, witnessed a decline in assets between January 10 and February 16, potentially attributed to profit-taking and movements by institutions like Cathie Wood’s Ark Invest.
Despite facing competition from spot ETFs with lower expense ratios, ProShares emphasizes the success of BITO, anchored in an orderly, efficient, and highly regulated marketplace with custodianship by JPMorgan.
Outlook and Implications of Bitcoin Futures:
ProShares BITO maintains a robust revenue stream with its current expense ratio on approximately $2 billion in assets. Although speculation arises about potential redemptions due to the expense ratio, inertia in investment management, particularly for older ETFs, may sustain BITO’s market position. Tax considerations for existing holders, particularly regarding capital gains taxes, could contribute to this inertia.
While new money allocations into futures ETFs remain uncertain, the argument for investors choosing futures over spot bitcoin funds is challenging. Futures-based funds may outperform in a declining cryptocurrency market and during periods of backwardation when rollover costs decrease.
However, they are considered more sophisticated and tactical, contrasting with spot ETFs viewed as buy-and-hold products. ProShares, continuing to dominate the bitcoin futures ETF space, is expanding its offerings with leveraged products targeting traders seeking financial leverage, a distinguishing factor from spot ETFs.
ProShares’ recent filing includes five ETFs dealing in swap agreements, offering leveraged daily returns based on the Bloomberg Galaxy Bitcoin Index. These ETFs, pending approval, will provide varying degrees of leverage, catering to traders seeking amplified gains or risk hedging.
ProShares faces competition from other issuers, but its strategic approach seems geared toward establishing an ecosystem of leveraged products attractive to institutional investors.
In summary, despite the rise of spot bitcoin ETFs, ProShares is maintaining its foothold in the futures-based crypto market, emphasizing its success, regulatory adherence, and commitment to meeting the needs of sophisticated investors through a diversified product suite.
