Contango Bleed: ProShares’ Bitcoin Strategy ETF (BITO) Falling Behind BTC’s Exploding Price Appreciation

Bitcoin (BTC) has had a remarkable year, appreciating 60% year-to-date and reaching eight-month highs. Yet, many investors are not able to benefit from the boom in the underlying crypto asset due to the shifting dynamics of Exchange Traded Funds (ETF) based on BTC futures. ProShares’ Bitcoin Strategy ETF (BITO) is the latest example, with the fund increasingly underperforming BTC this year, leading to diminishing appeal as a vehicle for betting BTC’s price appreciation, according to digital asset research firm K33 Research’s report.

BITO Underperforms Due to Contango Bleed and SEC Regulations

BITO started trading in October 2021, with analysts predicting a potential underperformance of 10%-13% compared to the spot market. Last year’s bear market reduced BITO’s expected losses, but this year’s rebound exposed its vulnerability to “contango bleed.” The “contango bleed” happens when the fund rolls over expiring contracts, with the next month’s contract trading at a premium. In just five months of 2021, BITO’s underperformance has already matched analysts’ year-long predictions.

Vetle Lunde, K33 analyst, sees the “strong term structure” as a hurdle for using BITO for long exposure. Lunde highlights that the SEC’s strict stance against BTC spot ETFs also hampers investors.

Futures-Based ETFs Face Challenges in Crypto Industry

The entry of other firms into this area of ETFs has done little to change the situation. Valkyrie Funds applied for a BTC futures-based ETF called “BTFD” with the Nasdaq. Investing primarily in Bitcoin futures contracts on the Chicago Mercantile Exchange and offering leverage, it has joined other funds such as ProShares Bitcoin Futures ETF and Grayscale’s BTC-based fund.

Grayscale is facing a legal dispute with the SEC after attempting to convert its Bitcoin Trust to a spot ETF. The SEC rejected the attempt, citing market manipulation concerns, and the U.S. Court of Appeals for the District of Columbia Circuit has also asked the SEC to provide an explanation regarding its understanding of the connection between Bitcoin futures and the spot price of Bitcoin.

BITO’s underperformance highlights the limitations of futures-based ETFs, hindering investors from fully capitalizing on Bitcoin’s rally. Valkyrie’s BTFD project simplifies trading in BTC futures-based funds, but it’s not a complete solution. Analysts and investors remember the issues with futures-backed ETFs like the ‘contango bleed’ in the crypto industry.

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