18 Oct 2022

Happy Birthday BITO!

It’s been one year since ProShares Bitcoin Strategy (BITO), the first U.S. futures-based BTC ETF, launched. Since its launch, the fund has underperformed BTC by 1.79% and currently holds CME contracts equivalent to 32,520 BTC.
Source: ProShares
One year ago today, the first U.S. futures-based ETF launched. The launch was highly anticipated and likely a key source behind BTC’s strong rally in early October. Two days after launch, BITO became the fastest ETF ever to reach $1bn AUM.However, enthusiasm later dwindled as the SEC rejected all direct spot-based BTC ETFs. Viable criticism of the SEC’s decision to approve a less efficient tool of exposure has been prevalent in the market, leading Grayscale to sue the SEC. One criticism has been related to the rolling costs. Each month, ProShares has to roll over futures contracts from the front-month contract (current month settlement) to the next-month contract (settlement next month).
Source: Tradingview
After one year of trading, BITO has only underperformed BTC by 1.79%. While bad, the underperformance was far lower than estimated based on 2021 data, forecasting 13% annualized rolling costs. By December 3rd, BITO had underperformed BTC by 2.8%, meaning that rolling dynamics have played in investors' favor in 2022. Due to a structural market shift as BTC brutally entered a prolonged bear market after the massive liquidation event on December 4th, CME’s futures have tended to trade in a flat structure with minimal contango and periodically in backwardation, as we elaborate further below.ProShares’ long BTC ETF currently holds a long exposure on CME equivalent to 32,520 BTC, and its all-time high BTC exposure occurred on August 3rd.Since the launch, other futures-based ETFs have entered the market, gaining comparatively low traction. VanEck’s futures-based ETF currently holds an exposure equivalent to 1075 BTC, while Valkyrie holds an exposure equivalent to 1095 BTC. ProShares has also launched a short ETF currently holding a short exposure of 4525 BTC.
Source: Skew, ProShares, VanEck, Valkyrie
As we’ve previously elaborated: futures based BTC ETFs represent half the open interest on CME, and the day-to-day flow, in particular, related to the two most actively traded ETFs, both issued by ProShares, both provide directional market flavor, in addition, to directly impacting CME’s futures basis.
A flattening futures curve
Since the launch of the first U.S. futures-based ETFs, CME’s futures curve has softened, leading to less extensive underperformance of BITO versus BTC.
Source: Tradingview
One year ago, the next-month futures contract on CME traded at a 1% premium to the front-month (nearest month) expiry. However, the futures curve has flattened during the bear market, leading further-dated futures contracts to trade closer to the nearest dated contracts, leading rolling costs to decline. Throughout the year, the next-month contract has tended to trade at a slight premium to the front-month contract, but this premium has declined in recentmonths, and since September, CME’s futures structure has mostly trailed in backwardation. A state of backwardation benefits long ETFs such as BITO. Proshares sells the comparatively expensive contract (front month) to buy a cheaper contract (next expiry). Below, we illustrate the same chart since January 1st, 2019, demonstrating the unusually flat state of the CME futures curve of late.
CME in backwardation for the first time since May 2019
CME’s futures structure has trailed in backwardation throughout September. This has not happened since May 2019. Evidently, from the chart, the next-month expiry contract tended to trade at a 0.5-2% premium to the front-month contract from the summer of 2019 until April 2021.
Source: Tradingview
Simplified, a steeper futures curve (i.e., a high next-month premium over front-month expiry) indicates a bullish sentiment. Short sellers require a higher carry premium for longer-dated expiries, and longs are willing to pay a higher premium. Likewise, a flat futures curve or a downward trending curve implies the opposite – longs require compensation for the risk of exposure in further dated and less liquid BTC contracts.
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