Bitcoin ETF success may come at the expense of fundholders

Texas News Today

There are signs that the bitcoin futures market is not large enough for the planned wave of cryptocurrency exchange-traded funds.

However, analysts say that success will almost certainly come at the expense of fundholders. Instead of receiving cash at maturity, we “roll” the futures over and over again the following month.

The ProShares ETF, which buys bitcoin futures contracts rather than the cryptocurrency itself, manages more than a fifth of the outstanding bitcoin futures contracts expiring this month and about one-third of the following month. According to analysts, the launch of these holdings will impact the returns of futures-based ETFs and slow further adoption.

“For us, this creates more trading opportunities,” said James Koutoulas, CEO of Typhon Capital Management, a $200 million hedge fund that trades futures, including bitcoin.

ProShares says the fund will provide investors with an opportunity to gain exposure to bitcoin. To hedge his exposure, the investor receives cash from ProShares ETF purchases and uses some of it to purchase bitcoin futures, mostly futures contracts to the nearest month. This is usually to provide the closest relation to the spot price of the cryptocurrency.

It’s time to get complicated. When the contract expires, the fund must withdraw the existing contract the following month. Other investors know this, so buy next month’s futures first. It is the act of allowing traders to profit by raising the price and selling the demand created when the fund is rolling. A higher price than the fund payout comes out of the investor’s pocket.

“Bitcoin futures can be very expensive to roll out,” said Francisco Blanche, an analyst at Bank of America. “There is a trader element that takes advantage of this, and investors are potentially losing out.”

Another wrinkle: Position limits imposed by CME Group Ltd.

According to analysts, ProShares is already investing next month. The decision is that while it may ease the stress of passing this month’s contract to next month, it risks widening the gap between the fund’s performance and bitcoin’s performance. This limit will double next month, which may ease some of the problem.

“It’s an emerging market,” said Michael Sapir, CEO of ProShares. “We expect the market to continue to grow and become more efficient on both sides of the business.”

In the prospectus, the fund emphasizes the lack of liquidity in the bitcoin futures market, and the increased risk of liquidity in large positions, making it difficult to sell positions and potentially affecting the price of bitcoin futures. I would add that there is. Doing so “may increase the damage caused,” the prospectus added.

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Prices of the ProShares ETF fell 1.2% between the market opening at 9:30 a.m. on Tuesday and the closing price at 4 p.m. on Friday. Bitcoin is down 2.4% in the same period.

Asset managers and futures traders say the prospect of buying similar contracts by other ETFs only exacerbates the problem. Analysts said Friday’s launch of the Valkyrie Bitcoin Strategy ETF will eventually drive up roll costs and hurt the performance of both funds.

Invesco is one of the largest ETF issuers in the country Ltd.

IVZ 0.48%

He has already said that he is currently withdrawing from following ProShares on its own bitcoin futures ETF. The company did not elaborate on the decision, but people familiar with the issue said it was due to capacity issues within the bitcoin futures market.

Charlie Morris, founder and chief investment officer of Bytetree Asset Management, said that the average annual roll yield on bitcoin futures (reflecting the price difference between futures and bitcoin in the past month) has averaged 8.4% over the past year. I am

This means that futures ETF investors will net $91.60 in a year before deducting commissions for every $100 of bitcoin profits. The gap will widen with volatility. The volatility has recently increased after a significant increase in the price of bitcoin. He said Thursday’s annual roll yield was as high as 17%. This means that investors in a futures-based fund will have a net amount of $83 for every $100 in bitcoin profits.

Bitcoin mining facilities in northern New York use electricity from a local hydroelectric plant operated by the Niagara River. The company is part of a group of miners trying to make the industry more environmentally and economically sustainable. Illustration: Alex Kuzoian / WSJ

It is not unprecedented. The popular ETF, better known as the US Oil Fund, has grown so large that it often manages a significant portion of the most active oil futures contracts. Although the market is much darker and more liquid than the bitcoin futures market, oil traders are now buying futures for the next month on a regular basis before buying the USO. To penalize returns for its futures and fund investors.

This is not a stand-alone issue. Over the past decade, the USO has lost about 80% of its value. Crude oil prices, on the other hand, fluctuated sharply but basically ended up where they started.

Unlike USOs, both ProShares and Valkyrie-managed funds are actively managed, giving fund managers more freedom and potentially limiting the impact of front-running transactions. “Our goal is to reduce the potential for friction that can occur when rolling,” said Sapir of ProShares.

Nevertheless, both ETFs, like the USO and most other ETFs, publish their daily holdings, giving traders a clear picture of their positions.

“It’s like poker,” said Koutoulas of TypicalHones Capital Management. “When the whole market knows your position, you lose your profit.”

write in [email protected] Michael Wursthorn

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