ProShares BITO ETF: A Close Contender to Bitcoin’s Spot Price Amid ‘Roll Cost’ Controversy

Amid swirling speculations in the world of crypto, ProShares has stepped forward to assert that its pioneering Bitcoin futures-based ETF has remained tightly in sync with Bitcoin’s spot price. According to the firm, concerns about trading costs causing tracking errors are simply off the mark. As the world’s largest crypto fund, the ProShares Bitcoin Strategy Fund’s performance might hold deeper implications for the evolving relationship between traditional and crypto finance.

A Brave New World: ProShares Bitcoin Strategy Fund

The ProShares Bitcoin Strategy Fund, trading under the ticker BITO on the NYSE, broke new ground in October 2021. It offered investors a way to engage with Bitcoin without the complexities of direct ownership. The BITO invests in regulated, cash-settled Bitcoin futures listed on the Chicago Mercantile Exchange (CME).

However, this trailblazing ETF drew concern from observers who feared that the costs associated with ‘rolling over’ – selling off futures contracts nearing expiration and buying the next set – might cause BITO to underperform Bitcoin itself.

Navigating the Choppy Seas of Contango

This fear is rooted in a market condition known as ‘contango’. Here, futures contracts that expire further into the future trade at a premium to those nearing expiration. Contango tends to deepen during bull markets, increasing ‘roll costs’ and potentially impacting performance.

Yet, according to Simeon Hyman, ProShares’ global investment strategist, the concerns around roll costs are unfounded. He insists that since its inception, BITO has remained closely aligned with Bitcoin’s price movements. The minor difference in their returns can be largely attributed to BITO’s annual fee of 95bps.

The BITO vs. Bitcoin Battle: Is Roll Cost the Real Villain?

As Bitcoin rallies and contango widens, concerns about roll costs have resurfaced, fuelling the demand for spot-based ETFs. These ETFs invest directly in Bitcoin, eliminating the need for rollover. Giants such as BlackRock and Invesco are already knocking on the SEC’s doors with applications for spot-based Bitcoin ETFs.

But Hyman remains unruffled. He contends that the interest income from BITO’s cash holdings offsets the roll costs. The Federal Reserve’s recent hike of the benchmark interest rate has driven the premiums, and consequently, the roll costs of Bitcoin futures. However, the same rate also drives BITO’s cash balance interests, thereby negating the impact of roll costs.

The Future of Bitcoin ETFs: Spot or Futures?

As Bitcoin’s popularity continues to surge, so does the anticipation for spot-based ETFs. But, according to Hyman, predicting the impact of these hypothetical products on existing futures-based ones remains speculative. As the ProShares ETF thrives with $1.1 billion in assets under management and year-to-date inflows of $336.2 million, it showcases the efficacy of a Bitcoin futures strategy within an ETF.