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BITO: Stay Away From Bitcoin ETFs

Louis Kokernak, CFA profile picture
Louis Kokernak, CFA


  • The first US Bitcoin ETF imposes a heavy penalty on investors.
  • Bitcoin futures prices are well above equilibrium.
  • Bitcoin futures have significantly underperformed the cash market.
Bitcoin cryptocurrency symbol on yellow balloon. Man hold needle directed to air balloon. Concept of finance risk

Velishchuk/iStock via Getty Images

America's first Bitcoin ETF started trading on October 19. Strong pent-up investor interest was immediate. The Proshares Bitcoin Strategy ETF (NYSEARCA:BITO) jumped 4.8% the first day. The product tracks Bitcoin by buying futures contracts on the Chicago Mercantile Exchange (CME). Within 2 days, the

This article was written by

Louis Kokernak, CFA profile picture
I have been a fee only financial advisor since 2002 and am a Chartered Financial Analyst and Certified Financial Planner. The cornerstone of the life savings strategy at Haven Financial Advisors is the investment in multiple asset classes with low cost and low turnover.The investment process is transparent.There are no "black box" funds or sudden swings in risk taking.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (42)

Mark Alexander profile picture
@Louis Kokernak, CFA

Nice article, thanks very much for sharing.
rcsam profile picture
The Dutch decided that tulip bulbs were the way too go. They were scarce in the beginning and those purple ones were very pricy. Then came mining time and the Dutch turned to making new colors. The amount of new colors was infinite and when that was realized it crashed.

Bitcoin has a finite number of coins it can issue. However the other crypto currencies have an infinite amount of new coins they can create and issue. Given that, the market has to crash when there are thousands of new coins. New coins equal new Tulip bulbs. Since every time a new coin is created the miners become millionaires--big incentive to create new coins. There are already over 2000 crypto coin types.


The coins over $50MM in value are bitcoin, ethereal, Binance coin, Solana, tether, cardano, XRP, Polkadot and on and on----
@rcsam: There are a finite number of Van Gogh paintings. But there are so many other paintings out there—and more being made all the time. I'd sell your Van Gogh right now for whatever you can get.
Mark Alexander profile picture
@Northern Song

Comparing bitcoin with Van Gogh is precious. Does that mean maybe ethereum is Gaugin, DogeCoin is Banksy, and Shiba Inu is Plastic Jesus?

People's appreciation of old art often increases over time. Old technology usually just gets junked. Sometimes it retains nostalgic value, and this will probably be true for bitcoin since it was first.
@Mark Alexander: Well, I guess those who say that no-one recognizes irony anymore were correct. Thanks for confirming this.
I can attest to the poor performance of USO. Very bad investment decision on my part.
Preferred Research profile picture
Own Bitcoins (not futures) and short BITO calls. If BITO underperforms Bitcoin, this should be a way to capture that inefficiency.
Jen-Sung Tan profile picture
@Preferred Research I have a similar portfolio allocation; trading BITO credit spreads and covered calls for the cash market on Ledger X. If anything, this gap between the ETF strikes me as an excellent opportunity for option sellers to take advantage of the implied volatility and underperformance. The tight spreads and high liquidity of BITO is prime for collecting premium although I too would not want to own this given the historical underperformance of ETFs.
Diesel profile picture
Valid point but you can always make the difference by selling out of money covered calls against your position.
yoipitydafool profile picture
Agree. Buy crypto directly from Coinbase or another source. When Bitcoin goes up 100% how is the Bitcoin ETF only go up 15%? Don't trust these Crypto ETFs.
NotARetiree profile picture
@yoipitydafool BITO is up over 9% If today is evidence that you could be wrong.
yoipitydafool profile picture
I don't know about BITO, I'm talking about Grayscale. Just buy bitcoin direct from coinbase or binance, no need for a middleman.
Herb-The-ETF-Pioneer profile picture
Louis, I completely agree and wrote a Blog two weeks ago when BITO was released. In fact, this BItcoin ETF is incorrect nomenclature. Its official name is ProShares Bitcoin Strategy ETF and as you detailed brilliantly, holds CME-traded futures, NOT Bitcoin and there is a huge difference. Personally, I am not in a big fan of the Grayscale Trust either, given its huge fee and "roach motel" design. I also will swim upstream againt consensus and say that I believe the SEC will not be approving an ETP similar to GLD that holds "physical Bitcoin" (an oxymoron term) in 2021 or in 2022 for a number of good reasons.

People who want to hold Bitcoin should just painlessly open an account with CoinBase or Robin Hood or one of the other brokers that allow you to trade Bitcoin on the Bitcoin Exchanges. They pay no fee other than implicit trading/impact fees like on any security. If you want to purchase a cryptocurrency either to hold and trade, it makes sense to do so directly. Read my blog for more details. blog.valuengine.com/...
Louis Kokernak, CFA profile picture
@Herb-The-ETF-Pioneer Thanks for these insights. Notably Invesco pulled out of its bid to launch a Bitcoin ETF at the last minute. Their public announcement was terse but they did indicate that they will continue to work on a physically backed ETF. Perhaps they saw the peril in crowding into an overpriced futures market? See Below.

We have determined not to pursue the launch of a Bitcoin futures ETF in the immediate near-term; however we will continue to work in partnership with Galaxy Digital to offer investors full shelf of products with exposure to this transformative asset class, including pursuing a physically backed, digital asset ETF,” an Invesco spokesperson said in a statement.
Diesel profile picture
<<< holds CME-traded futures, NOT Bitcoin and there is a huge difference. >>>

Unfortunately that's the only way they could get a SEC approval for an ETF so they didn't have a choice.
Wise words
Maury McCoy profile picture
Alternatively, investors could buy a closed end trust like $GBTC which is currently trading at a 16% discount to NAV.

$GBTC holds $40B of BTC and Grayscale, the company behind the trust, has already filed to turn it into a spot Bitcoin ETF which would erase that discount should the SEC approve it.

Alas, the SEC will approve a horribly structured futures ETF but has yet to approve a spot Bitcoin ETF.

There's no doubt in my mind Bitcoin will be an instrumental part of our financial future going forward. There are 180 currencies, many of them with inflation in double digits, but only one that a government can't screw up by printing more of it.

The scary thing is, smart contract platforms are likely even more disruptive...
Diesel profile picture
<<< Alas, the SEC will approve a horribly structured futures ETF but has yet to approve a spot Bitcoin ETF. >>>

That's because the SEC sucks.
@Maury McCoy: Or investors could buy one of the Canadian bitcoin ETFs, such as the Purpose Bitcoin ETF (BTCC), CI Galaxy Bitcoin ETF (BTCX), 3iQ CoinShares Bitcoin ETF (BTCQ). They all trade on the TSX. Each ETF is completely devoted to owning bitcoin, nothing else.
@Maury McCoy everyone keeps saying its disruptive but I have yet to find a single/cheap easy app to use all of this. Its always been 'in 5 years' well I have been in the space longer than that and NOTHING has happened
siriusmarine profile picture
Well this was the funniest read of the month! Thanks for putting a smile on my face! LOL
Ramy Taraboulsi, CFA profile picture
@Louis Kokernak, CFA did you consider the fact that arbitrage will push the price of the futures down or push the price of the Bitcoin up so that the difference between the spot and the future is not as large?

I am really disappointed in Seeking Alpha editors that they did not ask you to take this important concept in consideration for your article. I would be very interested in hearing your opinion about this, and how it may impact the thesis of your article.

Thanks for the effort you put in the article.
Louis Kokernak, CFA profile picture
@Ramy Taraboulsi, CFA Yes, arbitrage should ultimately push Bitcoin futures into equilibrium with the underlying cash price. In fact, I explicitly said that there was a possibility that the Bitcoin contract could move into normal backwardation (didn't use that jargon).

However, that has NOT happened. Commodities are not as easily arbitraged as financial securities. The Bitcoin futures contract is not new - it's been trading on the CME for about 4 years and its overall performance has lagged the underlying just about every year.

The current roll yield is an observable. All I'm saying is that it doesn't make much sense to dive into a product with a drag approaching 1000 basis points. Just yesterday, Coindesk reported that the nearby Bitcoin contract was a whopping 12.8% (annualized) above the underlying. Sure, the roll yield moves around but it has been consistently punishing those that go long the contract. I believe in the S&P 500 but wouldn't invest in an index fund with a 10% management fee.
Ramy Taraboulsi, CFA profile picture
@Louis Kokernak, CFA 10% above the underlying spot price is an unheard of arbitrage opportunity, and Bitcoin is a financial instrument after all (no storage space needed for delivery). Why do you think this arbitrage opportunity still exists, and when will someone capitalize on it?

The contract is only five bitcoins ($300K), which is not as high as some may think in the the whole scheme of things. I am sure that there is something that I am missing why investors are not capitalizing on this "free money".
kan2905 profile picture
@Ramy Taraboulsi, CFA are we talking about shorting the ETF and buying bitcoin ?
Ignores the possibility of reaping the large internal volatility of BITO options. Selling puts or covered calls to date look very lucrative for those nimble enough to use them.
Rob Ward profile picture
@Jirisan weekly ATM get you about 3%, this is my strategy currently
Ramy Taraboulsi, CFA profile picture
@Jirisan Can you please explain the reason you think that the volatility is high for ATM options? It is less than 100%; compare this with DWAC, AMC and GME...
@Rob Ward Sounds interesting. Would you be willing to elaborate, here or in PM? I keep reading comments by folks making steady money selling weekly options (for various stocks/funds), but I would be concerned that the occasional market hiccup could wipe out a years worth of gains.
What a terrible article doesnt
understand the structure the etfs will use at all or bitcoin at all ignore
02 Nov. 2021
The whole reason in investing in a Bitcoin ETF is because you believe in Bitcoin, so why would you state in your article you not recommend buying Bitcoin, doesn’t make any sense!!!
Do your homework and think about what you write!
PleaseJustNo profile picture
> There is a great deal of debate about the long-term utility and value of bitcoin. It exhibits a high degree of price volatility and its implementation of blockchain technology is very energy-intensive. In my view, it will make bitcoin very difficult to scale as a medium of exchange.

The quoted paragraph is complete nonsense. It is a store of value. Its volatility will asymptote and approach that of gold over a few decades. The energy-intensive nature applies to its mining, and this is the only way to tie it to the real world. Bitcoin already scales very well using various layer2 systems. The paragraph could simply be removed from the article without any loss.
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