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Bitcoin’s ETF BITO growing exponentially, but no spot trading yet

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ProShares launched on October 19 a long-awaited exchange-traded fund (ETF) on the New York Stock Exchange (NYSE) tied to Bitcoin futures

The ETF launch is yet another step into legitimacy for crypto  The BITO fund quickly grew to over $1 billion in assets Futures contracts are derivatives of Bitcoin, and are not directly backed by physical Bitcoin

ProShares launched on October 19 a long-awaited exchange-traded fund (ETF) on the New York Stock Exchange (NYSE) tied to Bitcoin futures, according to an initial report from The New York Times.

Bitcoin’s maiden entry into the NYSE allows investors the option to invest in the cryptocurrency without directly holding it, via conventional broker accounts.

“2021 will be remembered for this milestone,” said ProShares CEO Michael Sapir in the NYTimes report.  Entrepreneurs and traditional finance firms interested in crypto have wanted this for nearly a decade, attempting to acquire permission to launch Bitcoin ETFs in the US, but applications have been continually delayed or outright denied by the Securities and Exchange Commission (SEC).

It’s not a simple task to quote Bitcoin’s true price, according to Sapir in the report, since there is no single market reference one can rely on, and prices may appear different by up to 5% depending on which exchange one considers.  

“This is an exciting step but not the last,” said Douglas Yones, head of exchange-traded products at the NYSE, in the NYTimes report. Yones thinks a wider spectrum of ETFs tied to crypto will soon see approval.

But however long it takes for others to reach the NYSE, the ETF launch is yet another step into legitimacy for crypto, after a year of similar steps, including Coinbase, a popular crypto exchange, going public.

While critics and regulators of the digital currency remain concerned about the high volatility of Bitcoin prices, the mass interest in digital assets means digital currencies will likely become more normalized in the coming years.

BITO’s growth

Bitcoin hit the NYSE on October 19 with the introduction of a new Bitcoin-linked fund. The BITO fund quickly grew to over $1 billion in assets, becoming the quickest ETF to reach that threshold, according to Bloomberg data.

Offered by ProShares, this new ETF lets investors buy into Bitcoin without actually buying it on a crypto exchange. 

“Consumers should definitely approach it with some skepticism,” says Mike Hunsberger, owner and CFP with California-based Next Mission Financial Planning

BITO does not directly hold Bitcoin, but instead trades on Bitcoin futures. Bitcoin and Bitcoin futures are not the same thing. With futures, you agree to buy or sell the asset in the future at some specified price. You are not directly buying and selling the underlying asset (Bitcoin in this case). 

When that specified date arrives, you must buy or sell the asset at the agreed-upon price, no matter what the actual price of the asset ends up being that day. If your contract comes up and Bitcoin is worth more than what you agreed upon, as an investor, you make money. That’s called trading at a premium. If Bitcoin’s price is less than you thought it was going to be, you lose money, and it’s called trading at a discount. 

By investing in this new fund, you’re simply betting on the potential for your shares of the Bitcoin ETF to be worth (or less) more later.

BITO’s potential volatility

There are many assets that trade on futures including commodities like oil, grain, or coal. For example, you can buy a gold futures ETF instead of buying actual gold bars. 

“Futures contracts are derivatives of Bitcoin, and are not directly backed by physical Bitcoin,” says Dana J. Menard, founder of Twin Cities Wealth Strategies in Minneapolis. This may lead to a bit of confusion as the price of the ETF will not necessarily correlate with the price of Bitcoin. 

For example, if Bitcoin went up by 30%, the Bitcoin futures ETF might only rise 20%.

Whether you’re buying cryptocurrency outright or investing in a crypto-linked ETF, experts recommend never investing more than 5% of your total portfolio in speculative assets like cryptocurrency or specialty ETFs. 

Bitcoin is also still very new compared to conventional stock market investing, so it lacks the historical track record investors can use to anticipate future performance.  

Bitcoin is highly volatile, and while there might be a difference between the price of Bitcoin and the price of BITO, the ETF does not protect you from the ups and downs of Bitcoin. This year alone, Bitcoin experienced an all-time high of over $60,000 in April, before abruptly losing half of its value over the summer — though it has returned to around $60,000 in the months since. You should expect the same volatility even in the ETF.  

“BITO will open up exposure to Bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a bitcoin wallet,” ProShares CEO Michael L. Sapir said in a recent statement

BITO fees

BITO’s expense ratio is 0.95% — which experts say is very high. In other words, $95 of every $10,000 invested will go toward the fund’s operating expenses. Experts say the best low-cost index funds have expense ratios of less than 0.3%. 

“Bitcoin trades 24/7/365,” says Rockie Zeigler, a CFP with RP Zeigler investment services. “BITO will not. While you can place orders during off-market hours, the orders will not fill until the stock market opens. You won’t be able to transact with your BITO on the weekends or during evenings like you can with straight Bitcoin.”

No spot trading for BITO   

Some are frustrated about the futures asset, which adds another layer of complexity to an already complicated subject. “If the SEC really cared about individual investors they would allow for an ETF that held spot Bitcoin as opposed to a futures-based product that is confusing for most investors,” says Ryan Cole, CFP at Citrine Capital in San Francisco. “In short, I see this as a win for Wall Street that will hurt individual investors.” 

On October 12, the SEC rejected an application by fund sponsor VanEck to launch a Bitcoin Trust ETF that aimed to own the cryptocurrency directly, essentially saying no to a Spot Bitcoin ETF claiming the market can still be manipulated.

More adoption

Bitcoin reached as high as $67,000 on October 20, and traded at $64,000 during the second week of November.

Investors have cheered last October’s launch of a U.S. futures-based Bitcoin ETF and sought exposure to an asset class sometimes regarded as an inflation hedge.

Falling real yields, as traders brace for inflation, adds to the attractiveness of assets such as gold and cryptocurrencies.

In recent weeks, Australia’s biggest bank has said it will offer crypto trading to retail customers, Singaporean authorities have sounded positive on the asset class and spillover from a positive mood in stocks has also lent support.

Recently, New York Mayor-elect Eric Adams said he would take his first three paychecks in bitcoin and signaled his intention to make his city the “center of the cryptocurrency industry” after a similar pledge from Miami’s mayor.