Activity at ProShares Bitcoin Strategy ETF (BITO), the world's leading Bitcoin (BTC) futures-based exchange-traded fund (ETF), has cooled significantly since ETFs investing directly in the cryptocurrency began trading in the U.S. on January 11 was introduced .
On Thursday, just over $500 million worth of BITO shares changed hands on the NYSE, a 75% decline from the record $2 billion set on Jan. 11, according to data from crypto exchange Coinbase emerges. According to data source ETF.com, BITO experienced a net outflow of over $270 million during the same period.
Meanwhile, according to Coinbase, 11 spot ETFs recorded $14 billion in cumulative trading volume in the first week, a figure higher than any other ETF launched in 2023. These funds have accumulated over $1.2 billion in investor money in a week since their launch.
These spot ETFs invest in Bitcoin and allow investors to gain exposure to the cryptocurrency while avoiding the hassle of storage. They are considered a better alternative to futures-based ETFs like BITO. Because BITO invests in the CME BTC futures, it must convert expiring contracts into new contracts, thereby incurring “roll costs” that affect the fund's performance in the long term.
However, according to some observers, the cash creation structure of spot ETFs will likely ensure that futures ETFs remain relevant.
ETFs are created and redeemed in two ways: in-kind and cash deposits. In the first case, if the ETF issuer wants to create new shares, the authorized participant (`) purchases the underlying securities that make up the ETF and delivers them to the issuer in exchange for a block of ETF shares that are sold openly can market. The process works in reverse if the ETF wants to redeem shares.
The process remains the same in the cash creation structure, except that APs provide cash to the issuer and the issuer then purchases the actual asset.
This exposes APs – institutions and market making firms – to the risk of Bitcoin price fluctuations between the receipt of buy orders and the issuer's purchase of the asset to create new shares. Therefore, according to some observers, APs are likely to hedge the same with regulated products such as BITO and CME futures.
“It is not uncommon for an ` to resort to regulated products such as BITO to hedge their positions (called deltas), as they may not have accounts in CME futures to do this.” This is generally considered a good proxy “If they can’t execute CME Bitcoin futures or even direct Bitcoin,” Laurent Kssis, crypto trading advisor at CEC Capital and former ETF market maker, told CoinDesk.
“The risk of being exposed or unhedged is very high, so BITO provides adequate protection, although it is not a perfect protection as there is slippage and the cost of purchasing BITO is reasonable,” Kssis added. “But many APs have no choice (since they cannot purchase Bitcoins or are not allowed to come into contact with them by their compliance department) or do not even have the infrastructure, i.e. custodian or back office system, to reconcile their Bitcoin positions. “
David Duong, head of institutional research at Coinbase, said in the weekly newsletter that BITO will remain an “integral part of the Bitcoin ETF space” despite the recent decline in BITO volume.
“We expect that some APs (namely broker-dealers) will continue to rely on regulated means of hedging, such as: “For example, long CME futures or long BITO when creating shares (or short CME futures when redeeming),” Duong said, adding that some APs likely bought Bitcoin before the spot ETF launch and sold BITO to “hedge potential customer purchases and sales during the day.”
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