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The New Bitcoin ETF BITO

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I haven’t anticipated the launch of a security quite as much as the first Bitcoin exchange-trade fund (ETF), ProShares Bitcoin Strategy ETF (BITO). And when it finally hit two weeks ago, it was a ton hotter than even the most fervent enthusiasts expected.

But before you take a dive into this ETF, make sure listen up for a sec. BITO is not all rainbows and unicorns.

What is an Exchange-Traded Fund?

Before we get into the nitty-gritty surrounding BITO from ProShares, let’s take a step back and revisit what an ETF is under the hood.

An ETF is a type of security that tracks an index, asset, sector, or other asset. They can be designed to track a wide and diverse collection of assets or a narrower basket. They can also be created to track investment strategies.

In fact, if it’s an asset or index out there, there’s likely an ETF that can track it and let you invest in it.

ETFs trade on exchanges, like a regular stock. Hence the name “exchange” traded fund. But unlike mutual funds they are traded throughout the day like a stock. And when you buy and sell them, you deal directly with another investor, not a mutual fund company. ETFs also tend to be less expensive than their mutual fund counterparts.

The New Exchange-Traded Fund: BITO

Ok, we went under the hood of an ETF. Now, let’s get under the hood of the new Bitcoin ETF, the ProShares Bitcoin Strategy ETF (BITO).

First off, unlike stock ETFs, BITO invests in Bitcoin futures contracts, not the underlying asset Bitcoin itself.

What does that mean?

When you buy a stock ETF, the ETF buys the underlying asset, in this case stock. So, if you shell out bucks for the S&P 500 SPDRs (SPY) you’re buying a small part of the stocks that make up the index.

Not so with futures-based ETFs like BITO. In this case, instead of buying the underlying asset, the ETF will buy futures contracts on the asset. By buying futures contracts, BITO will be obligated to buy Bitcoin at a specified price in the future. But instead of taking delivery of Bitcoin, BITO will settle its trades in cash and roll over positions in subsequent months.

While this might sound strange, this type of futures-based ETF is nothing new. There are loads of commodity focused ETFs that don’t buy the underlying asset. Rather, they buy the futures contracts just like BITO. The United States Oil Fund LP (USO) is a huge oil-focused, futures-based ETF that comes to mind.

While Bitcoin enthusiasts may side-eye this structure, the fact is a futures-based Bitcoin ETF was really the only way regulators were going to let this crypto ETF game get off the ground. So, it’s sort of take it or leave it.

Plus, there’s not doubt in my mind that a spot Bitcoin ETF — one that actually invests in the underlying asset — will come to market. It’s just not likely going to happen this year. And so, with the futures-based version, we can get our foot in the door.

As I write this BITO is trading at $39.54 with volume of about 3M shares. It trades on the NYSE and should be widely available on most platforms.

BITO Has Issues

These types of synthetic variant ETFs like BITO have issues. First off, there’s not an easy way for new investors to track what BITO does in relation to the spot or cash price of BTC. With the S&P 500 SPDRs for example, investors can clearly see what SPY does in relation to the S&P 500. Just move a decimal place and you’re basically there.

Not so with BITO. The ETF managers will do their best to mimic the price movement of BTC, but it won’t be exact. If you buy BITO, you may see a swing in your investment that is greater or less than the swing in BTO. It should be approximate, but there are no guarantees.

BITO is also expensive. It carries an expense ratio of 0.95% or 95 basis points. Fact is you can pretty much find ETFs all-day, every-day with expense ratios at a third of that or less. But, these costs could moderate as adoptions accelerates.

And finally, BITO doesn’t have a track record. And that means you’re in the dark as far as performance and fees are concerned — at least for now. So, only time will tell how well the managers do and how efficiently they can keep costs low.

Record-Setting Reception

When I heard that a Bitcoin ETF was going to (finally) be in the offing, I thought the demand was going to be big.

Well, I was wrong: The demand for BITO had been absolutely mind-boggling.

BITO is the fasted exchanged traded fund to reach $1 billion in assets under management (AUM). It did it in just two days. The prior record was set a whopping 17 years ago by GLD, the SPDR Gold Shares ETF.

In my book, this is just the start. There is already a second ETF that recently began trading, the Valkyrie Bitcoin Strategy ETF (BTF). So, far its volume is a fraction of BITO, but is worth a look. Word is VanEck is going to launch a Bitcoin ETF as well.

ProShares CEO says…

“We believe a multitude of investors have been eagerly awaiting the launch of a bitcoin-linked ETF after years of efforts to launch one,” said ProShares CEO Michael L. Sapir. “BITO will open up exposure to bitcoin to a large segment of investors who have a brokerage account and are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a bitcoin wallet or are concerned that these providers may be unregulated and subject to security risks.”

Invest Only 1% to 2%

Before you dive headlong into BITO, keep in mind that it’s not going to soften the underlying volatility and uncertainty that drive Bitcoin. Certainly, there have been a slew of adoption provoking events recently, including Coinbase’s IPO, bullish research reports, and favorable-leaning regulation. But the fact remains that Bitcoin and crypto are still highly speculative and uncertain. So, if you take the plunge, keep your entire crypto exposure to no more than 1% to 2% of your portfolio.

But don’t forget: More coverage by Wall Street won’t make the sector’s volatility vanish. It’s still going to be hammered by uncertainty and wide price swings. That’s why it’s a good idea to keep your allocation to no more than 1% to 2% of your portfolio.

Disclosure

Burritt Research, Inc. includes its employees and agents. We may earn a commission if you click on links in this post. This commission comes at no additional cost to you. We may hold positions in investments mentioned in this post. We are not an investment adviser and do not give individual investment advice. We emphasize that trading in securities and other assets is risky and volatile. We emphasize that hypothetical results and actual results may be significantly different. We believe our information is accurate but we do not guarantee it. We are not liable for any claims that may arise from this post.

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Wayne Burritt

Wayne Burritt

CEO of Burritt Research. YouTuber, writer, developer, analyst. Passionate about investments, cryptocurrency, blockchain and data science. burrittresearch.com