Bitcoin ETF success can come at the expense of fundholders

There are signs that the Bitcoin futures market is not big 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 term futures and frequently “roll” the following month.

ProShares ETFs, which buy Bitcoin futures contracts rather than cryptocurrencies themselves, manage more than one-fifth of outstanding Bitcoin futures contracts that expire this month and nearly one-third of next month. According to analysts, these holdings will weigh on the returns of launched futures-based ETFs and slow the pace of further adoption.

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

ProShares states that the fund will provide investors with the opportunity to gain exposure to Bitcoin. To maintain its exposure, ProShares receives investor cash from ETF purchases and uses some of it to purchase Bitcoin futures, mostly futures contracts for the nearest month. This is usually to provide the closest correlation to the spot price of cryptocurrencies.

It’s time to get complicated. When the contract expires, the fund will have to roll back the existing contract the following month. Other investors know this, so first buy the next month’s futures. This is the act of raising prices and allowing traders to profit by selling to the demand created when the fund rolls. Higher prices than the fund pays come out of the investor’s pocket.

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

Another wrinkle: Position limit imposed by CME Group Ltd

According to analysts, ProShares is already investing next month. The decision is that while it can reduce the stress of passing on this month’s contract to the next month, it risks widening the gap between fund performance and Bitcoin performance. These limits will double next month, which could alleviate some of the problem.

“This is an evolving market,” said Michael Sapir, CEO of ProShares. “We expect the market to continue to grow on both sides of trade and become more efficient.”

In the prospectus, the fund emphasizes the lack of liquidity in the Bitcoin futures market, and large positions increase the risk of illiquidity, making it more difficult to sell positions and potentially affecting the price of Bitcoin futures. I add that there is. Doing so “may increase the losses incurred,” the prospectus added.

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Prices on ProShares ETFs fell 1.2% between the opening of the market at 9:30 am on Tuesday, the first trading day, and the closing price at 4 pm on Friday. Bitcoin fell 2.4% over the same span.

Asset managers and futures traders say the possibility of other ETFs buying the same contract exacerbates the problem. Analysts added that the Valkyrie Bitcoin Strategy ETF, launched on Friday, will eventually boost roll costs and hurt the performance of both funds.

Invesco, one of the largest ETF issuers in the country Ltd

IVZ 0.48%

Has already stated that it is currently retreating from following ProShares on its own Bitcoin futures ETF. The company didn’t elaborate on the decision, but those 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 the average annual roll yield on Bitcoin futures (reflecting the price gap between futures and Bitcoin last month) has averaged 8.4% over the past year. I am.

This means that futures ETF investors will net $ 91.60 a year before deducting commissions for every $ 100 of Bitcoin profits. The gap will widen with volatility. Volatility has recently increased following a significant rise in Bitcoin prices. Thursday’s annual roll yield was as high as 17%, he added. This means that investors in futures-based funds 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 power plant powered by the Niagara River. The company is part of a group of miners seeking to make the industry more sustainable, both environmentally and economically. Illustration: Alex Kuzoian / WSJ

It’s not unprecedented. The popular ETF, known as the US Oil Fund, known as the USO, has grown so large that it often manages a significant portion of the most active oil futures contracts. Although the market is much deeper and more fluid than the Bitcoin futures market, oil traders are now buying futures for the following month on a regular basis before USO buys. For punishing returns for its futures and fund investors.

This is not an isolated issue. Over the last decade, USO has lost nearly 80% of its value. On the other hand, crude oil prices fluctuated sharply, but basically ended 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 performing rolls,” said Sapir of ProShares.

Nonetheless, both ETFs, like USOs and most other ETFs, publish their daily holdings, giving traders a clear picture of how they are positioned.

“It’s like poker,” said Koutoulas of Typicalhon Capital Management. “When the entire market knows your position, you lose your advantage.”

Write in Michael Wursthorn

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Bitcoin ETF success can come at the expense of fundholders

Source link Bitcoin ETF success can come at the expense of fundholders

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