VettaFi writer Elle Caruso recently sat down with Simeon Hyman, Global Investment Strategist at ProShares, to discuss bitcoin futures ETFs and the status of the ProShares Bitcoin strategy ETFs (BITO ). The excitement was palpable when BITO came to market last October, giving US investors exposure to bitcoin futures in a ETFs structure for the first time in history. Launched with just $20 million in seed capital, BITO hauled $550 million from investors on day one and became the fastest ETFs to reach $1 billion in assets under management.
Carus: BITO approaching a year since its launch. Let’s think about this – how has the environment and investor attitude towards Bitcoin futures ETFs changed over the past 10 months?
Hyman: It was one of the most successful launches of ETFs the story, so it was a lot of fun. I have to say, I’ve made ringtones and been on the floor of the New York Stock Exchange, but to spend BITO’s launch day on the stock exchange floor that day – it was unique.
The reception by the market was motivated by the fact that it was a solution that did not exist before. It remains to this day a little difficult to understand how to invest directly in bitcoin. Do I need a wallet? Do I need a cold wallet? Hot? Warm? Am I going to lose my disk in my town’s dumpster and not know how to access my bitcoin?
What we have discovered since launch is that a bitcoin futures product has proven to be a better solution and an even better substitute for spot bitcoin than people could have imagined. Plus, you get all the benefits of being in a ETFsthe protections of the Investment Company Act of 1940, segregated assets…
Caruso: A sense of risk aversion emerged in the first half of this year, but BITO continues to accumulate funds, absorbing more than $200 million in net flows YTD as of August 4, according to data from VettaFi. How has the volume and deal flow changed since the massive launch of the fund last year?
Hyman: BITO is the largest bitcoin-related network in the world ETFs – nothing else comes close. Today the ETFs sits at around $800 million in assets under management, which, as you noted, reflects significant inflows given how bitcoin prices have moved this year. It’s the most traded digital asset fund, so you’re looking at average daily volume well north of $150 million per day, and that’s pretty big too. We are often asked if BITO shareholders are long-term or short-term investors. It’s hard to say, but the answer is likely to be both. One thing for sure is that the ecosystem is a mix of people who have different holding periods, and that’s really, really important.
Let’s say you are going to hold bitcoin for a few years. On the day you buy it, you want that volume because you want tight spreads for your buy order. Later, whether days, months, or years from now, you might decide to sell it. And you want volume and tight spreads to be there on the day you sell as well. So this healthy mix of people with different time horizons is integral to a vehicle that works well for a wide range of investors.
Caruso: Can you remind our readers of the correlation of bitcoin futures with spot prices?
Hyman: There’s correlation, and then there’s beta, and then there’s rolling cost, so there’s really three things. The easiest is correlation. A high correlation tells you that, directionally, futures tend to move in the same direction as the spot market. But the correlation does not speak to the magnitude of the movement. Bitcoin futures might have a correlation close to one but not perform as well as spot. That’s a super low bar. But yeah, this guy almost has one.
Beta adds the measure of the magnitude of the movement, and this is the next bar. And the beta version of bitcoin futures that are used in BITO is also extremely close to one. Thus, the correlation – the directional movement, and the beta – the magnitude of the movement – are almost one.
The last big thing in bitcoin futures is the roll cost. That’s what people wanted to talk about when we launched, and it’s been a really key part of maturing the bitcoin futures market that makes BITO a first-class vehicle for bitcoin exposure.
The average annual contract premium – which translates to the cost of rolling from one futures contract to another – so far this year has been around 2%. But its impact on the performance of the ETFs is actually zero.
Here’s how it works. The premium for a futures contract, conceptually, in bitcoin or any other financial instrument, should be close to the risk-free rate for that period. Keep in mind that BITO is not leveraged. You have $1 of investment exposure for every dollar you invest in BITO. So that means you have cash to fully back the term investments, which pays something around the risk-free rate. Therefore, it is the perfect compensation for the cost of the roll. A good illustration of this in practice is to look at the performance of BITO this year, which has tracked spot bitcoin very closely.
Caruso: You’ve already mentioned that bitcoin futures contracts better reflect real market sentiment in bitcoin than spot. Can you clarify what that means?
Hyman: Volume is really, really important, and it turns out that the futures market actually generates more volume than the largest US exchange. Volume is important because when you have a lot of trading, you have a lot of liquidity. This means you find out about prices, and some academic studies have actually shown faster price realization – information turning into price – faster in the futures market than in the spot market.
Caruso: Do you expect to see a bitcoin spot ETFs soon on the market? Do you still see an appetite for this structure, or has a futures-based product filled the void and continued to gain favor with investors?
Hyman: That’s always the question people ask us, and we obviously have no crystal ball as to where regulators will go. Do we know exactly what regulators are looking at? We do not know. We know that today there is a bit of a mess in the spot market (lender bankruptcies, potentially unsegregated assets in bitcoin brokerage accounts) that will take some time to mature, and I think that it is fair to say that the futures market may have matured faster than the spot market. And I think that’s all we know at the moment.
Caruso: What’s next for ProShares?
Hyman: Innovation is essential for us, so we are always looking to find new solutions to bring to investors. If you look at what we’ve done over the past few years, you’ll see significant innovations – a short bitcoin ETFs (COCK )on the meat and potato side of the in-house dividend growth ETFs ((NOBL ), (SET )) and bond ETFs hedged in rates (High-rise ) — and a growing suite of thematic investments, including online retail (ONLN )take care of an animal (PAWZ )metaverse (TOWARDS )and clean technologies (CTEX ). We strive to be thoughtful and innovative.
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