Activity in ProShares Bitcoin Strategy ETF (BITO), the world’s leading Bitcoin futures-based exchange-traded fund (ETF), has slowed significantly since the launch of ETFs that invest directly in the cryptocurrency began trading in the US on January 11. .
On Thursday, BITO shares traded worth just over $500 million on the New York Stock Exchange, down 75% from the record $2 billion set on January 11, according to data tracked by cryptocurrency exchange Coinbase. BITO saw a net outflow of more than $270 million during the same period, according to data source ETF.com.
Meanwhile, 11 ETFs recorded a cumulative trading volume of $14 billion in the first week, a larger number than all other ETFs launched in 2023, according to Coinbase. These funds have raised more than $1.2 billion in investor funds in one week since their inception.
These spot ETFs invest in Bitcoin, allowing investors to get exposure to the cryptocurrency while bypassing the hassle of storing it and are considered a better alternative to futures-based ETFs like BITO. Since BITO invests in CME BTC futures contracts, it must convert expired contracts into new ones, incurring “renewal costs,” which affects the fund’s long-term performance.
However, the cash creation structure of spot ETFs will likely ensure futures-based ETFs remain relevant, according to some observers.
ETFs are created and redeemed in two ways: in-kind and cash. In the first case, when an ETF issuer wants to create new shares, an Authorized Participant (AP) purchases the underlying securities that make up the ETF and delivers them to the issuer in exchange for a block of ETF shares, which can be sold on an open market. The process works in reverse when the ETF wants to redeem shares.
The process remains the same as in the cash creation structure, except that the access points provide cash to the issuer, and the issuer then purchases the actual asset.
This exposes access points – institutions and market makers – to the risk of Bitcoin price fluctuations between the time buy orders are received and the time issuers purchase the asset to create new shares. As such, APs are more likely to hedge with regulated products such as BITO and CME futures, according to some observers.
“It is not unusual for an AP to return to regulated products like BITO to hedge its positions (called deltas) as it may not have accounts with CME futures to do so,” said Laurent Cassis, a cryptocurrency trading advisor at CEC Capital and a former market maker. “This is generally considered a good proxy if they can’t execute CME bitcoin futures or even outright bitcoin,” ETFs told CoinDesk.
“The risk of being exposed or unhedged is very high, so BITO will provide adequate hedging, although it is not a perfect hedge as there is slippage and a reasonable cost of purchasing BITO,” Kassis added. “But many access points won’t have a choice (since they can’t buy bitcoin or aren’t allowed to touch it by their compliance department) or won’t even have the infrastructure, for example, a custodian, or back-office system to reconcile their accounts.” “Positions.”
Despite the recent decline in BITO volume, it will remain “an integral part of the Bitcoin ETF space,” David Dong, head of institutional research at Coinbase, said in the weekly newsletter.
“We believe that some access points (i.e. broker-dealers) will continue to rely on regulated means of hedging, such as long CME or long BITO futures when creating stocks (or short CME futures in the case of redemptions),” Dong said, adding that some access points Access Potential bought Bitcoin ahead of the immediate launch of the ETF and sold BITO “to hedge clients’ potential intraday buys and sells.”