VettaFi writer Elle Caruso recently sat down with Simeon Hyman, Global Investment Strategist at ProShares, to discuss bitcoin futures ETFs and the state of the ProShares Bitcoin Strategy ETF (BITO ). The excitement was palpable when BITO hit the market last October, allowing US investors to gain exposure to bitcoin futures in a ETF structure for the first time in history. Launched with just $20 million in seed capital, BITO pulled in $550 million from investors on day one and was the fastest ETF to reach $1 billion in assets under management.
Simeon Hyman talks BITO and the Bitcoin Futures Market
Caruso: BITO approaching one year since launch. Let’s reflect on that – how has both the environment and investor attitudes towards bitcoin futures ETFs changed over the last 10 months?
Hyman: It was one of the most successful launches in ETF history, so it was a lot of fun. I have to say that I have rung bells and been on the floor of the New York Stock Exchange, but to spend BITO’s launch day on the floor of the exchange that day – that was unique.
The reception from the market was driven by the fact that it was a solution that had not previously existed. Figuring out how to directly invest in bitcoin remains to this day quite a challenge. Do I need a wallet? Do I need a cold wallet? Hot? Warm? Am I going to lose my drive in the dumpster in my city and not be able to figure out how to access my bitcoin?
What we have found since launch is that a bitcoin futures product has proven to be a better solution and even better proxy for spotbitcoin than people might have expected. Plus, you get all the benefits of being in one ETFthe protection of the Investment Company Act of 1940, segregated assets …
Caruso: A risk-off sentiment emerged in the first half of this year, but BITO continues to raise funds and brings in over $200 million in net flows YTD as of August 4, according to VettaFi data. How have trading volumes and flows changed since the fund’s massive launch last year?
Hyman: BITO is the world’s largest bitcoin-linked ETF – nothing else comes close. Today is ETF sits at about $800 million in assets under management, which, as you noted, reflects material inflows given the price action in bitcoin 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 very important as well. We are often asked about BITO shareholders are long- or short-term investors. It’s hard to say, but it’s likely the answer is both. One thing that is certain is that the ecosystem is a mixture of people who have different holding periods and that is very, very important.
Let’s say you’re going to hold bitcoin for a few years. On the day you buy it, you want the volume there because you want tight buy order spreads. Later, whether it’s days, months or years from now, you may decide to sell it. And you want the volume and dense spreads to be there on the day you sell too. So the healthy mix of people with different time horizons is part of a vehicle that is well-suited for a wide range of investors.
Caruso: Can you remind our readers about bitcoin futures correlation to spot prices?
Hyman: There’s correlation, and then there’s beta, and then there’s rolling cost, so it’s really three things. The simple one is correlation. A high correlation tells you that, directionally, futures tend to move in the same direction as the spot market. But correlation does not talk about the magnitude of the movement. Bitcoin futures can have a correlation of nearly one, but still not perform as well as spot. That’s a super low bar. But yeah, that guy is almost one.
Beta adds a measure of the size of the movement and that is the next bar. And the beta of bitcoin futures used in the BITO is also extremely close to one. So 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 rolling costs. It’s what people wanted to talk about when we launched, and it’s been a really key element in the maturation of the bitcoin futures market that makes BITO a prime vehicle for bitcoin exposure.
The average annual contract premium – which translates to the cost of rolling one futures contract into the next – has been around 2% so far this year. But its impact on the performance of ETF is actually zero.
This is 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. Remember that BITO is not utilized. You have $1 in investment exposure for every dollar you invest BITO. So that means you have cash with which you can fully secure your future investments, earning something around risk-free interest. Therefore, it is the perfect compensation for the roll cost. A good illustration of that in practice is to look at BITO’s performance this year, which has followed spot bitcoin extremely closely.
Caruso: You previously mentioned that bitcoin futures better reflect actual market sentiment in bitcoin than spot. Can you elaborate on what that means?
Hyman: Volume is very, very important, and it turns out that the futures market actually produces more volume than the largest US exchange. Volume is important because when you have a lot of trading, you have a lot of liquidity. That means you have price discovery, and there have actually been some academic studies that have shown faster price realization – information becomes price – faster in the futures market than in the spot market.
Caruso: Do you expect to see a spot bitcoin ETF Will it be on the market soon? Do you still see an appetite for that structure, or has a futures-based product filled the void and continued to gain investor favor?
Hyman: That’s always the question people ask us, and obviously we don’t have a crystal ball as to where the regulators will go. Do we know exactly what the regulators are looking at? We do not know. We know that there is a bit of mess going on in the spot market today (lender bankruptcies, potentially unsegregated assets in bitcoin brokerage accounts) that will take some time to mature, and I think it’s fair to say that the futures market has perhaps matured faster than the spot market . And I think that’s all we know right now.
Caruso: What’s next for ProShares?
Hyman: Innovation is at the core for us, so we are always looking to find new solutions for investors. If you look at what we have done in the last few years, you will see important innovations – a short bitcoin ETF (BITI )on the meat and potatoes side of the house’s dividend growth ETFs ((NOBL ), (RULES )) and interest rate-linked bond ETFs (IGHG ) — and a growing series of thematic investments, including online shopping (PAYMENT )animal care (PAWZ )metaverse (VERSE )and clean technology (CTEX ). We strive to be thoughtful and innovative.
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