This week will be the two month “birthday” of the launch of a Bitcoin ETF. Well, actually on the 18th to be precise (the Pro Shares Bitcoin ETF launched October 18th). And, actually, the ETF holds only futures not actual spot Bitcoin. AND, actually ACTUALLY, it’s not going well. To be fair, it has not been a good two months for the actual “physical” spot Bitcoin either. But a futures based ETF will always underperform a product that directly holds physical assets. Thank you, SEC.
Cutting right to the chase, as it were, the Pro Shares Bitcoin ETF is currently (Monday, Dec 13) down roughly 24% (from launch) while spot Bitcoin is down 22% (same date). So, pretty close huh? Well that’s just a two month picture. Should that performance gap become persistent (and it probably will) then, over time, an investor in the ETF would be looking at 12% (or more) performance gap. It is NOT an aberration but a systemic flaw in how ETFs that hold futures work. Again, thank you, SEC.
So what’s the big flaw? Or, big flaws? Specifically, it’s in the actual Bitcoin ETFs. Bitcoin futures settle in cash (not “physical/actual” delivery) so they must be “rolled” (replaced) each month. These Bitcoin ETF-held futures, probably the most liquid “front” month contracts, would need to be “rolled” twelve times (once every month). Each time a contract is rolled (sell expiring month, buy next month) the fund will be paying a consistent premium which will dilute returns. There is also the cost (commissions) of both buying/selling the futures and the potential of execution/market risk. More built in performance dilution.
Of course, if the Bitcoin futures ETF is using any leverage, there will certainly be more performance dilution. Additionally, if there is very active trading, the commissions will really cut into returns. These are not factors in holding physical/spot Bitcoins (or any actual asset for that matter) which makes it more puzzling as to why the SEC didn’t just go with an actual Bitcoin-holding ETF. I guess protecting investors must be more detailed that I realize (sic).
One thing for certain, don’t expect the Bitcoin futures ETFs to match the performance of spot Bitcoin. It doesn’t matter if Bitcoin goes up or down, there appears to be a systemic 12% (or more) annualized loss built in to the Bitcoin futures ETF.
Thanks again, SEC.
