What is BITO?

The first bitcoin focused ETF made its trading debut last week. The ProShares ETF, BITO, climbed most of it’s opening day with almost a $1billion worth of shares changing hands over the opening session. Based on its first day’s volume, BITO is the second most highly traded ETF debut ever. If there was ever a doubt on whether cryptocurrency was here to stay or not, this move just might be the final nail in the coffin for those that predict its demise. 

For most of our readers, an ETF that holds bitcoin futures contracts rather than the cryptocurrency might not seem like much of a benefit. Many of you already own the cryptocurrency along with additional altcoins. But the reality is, there are a lot of annoying roadblocks to getting started in crypto, starting with choosing a brokerage and going through the process of opening an account. Meanwhile, there are a lot of ordinary folks who already have stock brokerage accounts, and are perfectly comfortable buying stocks and ETF’s. For them, BITO will be an attractive way to trade the price swings of bitcoin without having to be responsible for ownership, or having to open a separate account just to be able to purchase it.

As more stock brokerages offer cryptocurrency exchanges, the need for an ETF is less urgent than it was before one became available, but the increased trading that will likely take place should aid in liquidity and tighten the spread between the bid and the ask, which will make cryptocurrency even more attractive to traders of all time frames.

The ETF finally came online after an eight year effort by asset managers to offer a fund that holds actual bitcoins. That effort has failed, and the SEC has made clear it would not support that approach because of concerns that bitcoin trading isn’t transparent enough to guard against fraud and manipulation. Unlike digital currencies, futures trade on regulated venues like the CME.

This hybrid approach of having an ETF track the price of futures contracts instead of the actual price of bitcoin will probably work well for short-term trading. An options market will likely develop as well, enabling retail traders a convenient way of shorting bitcoin. The downside is that futures contracts have an expiration date, requiring the fund to exit expiring contracts and roll them forward into the future. With each roll, the fund will incur minor expenses, causing it to decay in value slightly compared to if it held the actual bitcoin, instead of contracts for future delivery of bitcoin.

Futures vs Spot

Although bitcoin futures and bitcoin are not technically the same thing, they will always have an extremely tight correlation because if the price of the future veers too far from the price of the cryptocurrency, it will present a trading opportunity for arbitrage traders. 

You and I usually have to make a directional bet on a stock or an ETF in order to make a profit. But large, sophisticated players will often take trades that profit from the difference between the spot market and the futures market. 

Let’s assume for a minute that the BITO is such a hit, that demand for it far outstrips demand for the actual coin. Absent arbitrage traders, the price of bitcoin futures would be pushed higher, eventually costing more for bitcoin in the future than what it would cost to purchase outright today in the “spot” market.

But with enough size, even a small discrepancy between the physical price and the future price can provide a profitable trade setup. If the demand for futures exceeds demand for bitcoin, the futures market will begin to rise higher than the price of the underlying coin. This incentivizes traders to sell a futures contract while simultaneously purchasing an equivalent amount of bitcoin in the spot market. By doing so, they profit from the spread between the two markets, without making a directional bet. 

In a declining market, speculators may push the price of the futures contract lower, relative to the underlying bitcoin, which may be held by long term HODLERS. This would be the equivalent of offering bitcoin at a discount in the future, incentivizing traders to sell their actual bitcoin in the spot market and purchase an equivalent amount of bitcoin futures. Once again, they lock in a risk-free profit without making a directional bet.

Despite the popularity of images displaying Bitcoin as a physical coin, these do not exist.

So, can I just buy BITO and ride the Bitcoin wave for years to come?

Unfortunately, no. While it should work great for trading the short-term market swings, it is a lousy long-term investment. That small bit of decay that we discussed earlier can lead to significant losses over the long-term. For an example, take a look at a longer term weekly chart of Natural gas below. Notice it just made all time highs for the chart?

Now let's look at the same period of time, but with a fund tied to the price of the futures. Notice that although it still fell when natgas was falling and rose when natgas was rising, it did a lousy job of tracking the underlying commodity on a long-term basis. There is no way of getting around this problem other than to use the fund as a short-term trading vehicle only.

Is BITO Right For Me?

If you are an active trader looking to capture relatively short-term price fluctuations, then BITO may be a good option.

But should you buy this in your IRA and forget about it? Unfortunately, that isn't going to work. Until the SEC approves an ETF that is backed by actual Bitcoin, long-term buying and holding of a bitcoin etf is not an option. If you want to buy Bitcoin, and be a HODLER (crypto-speak for a buy-and-hold trader), you're probably just going to continue needing to jump through the hoops to buy Bitcoin yourself.

Keep Up With the Wanderer Crew No Matter Where We Are


I've been trading and traveling my entire adult life. I'm currently trading from my boat in the Caribbean. Over the years this has gotten easier and easier to do. Drop the anchor, tether your phone to your laptop, browse some charts, and trade. At Wanderer we first began investing in Bitcoin in 2017 when it was worth $2,500. Fortunately, we recognized its potential, unfortunately, we didn't realize it even earlier. Today it is worth about $60,000, and we believe it is here to stay. Bitcoin will have its ups and downs along the way, but years from now we expect it will be much higher, and we'll still be bopping around in the islands.

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