Investors whose fear of missing out on bitcoin’s meteoric rise are also buying shares of the first two bitcoin futures ETFs, making one of them—ProShares ETF (BITO)—the second largest ETF introduction in history.
But financial advisors might want to exert more discipline when it comes to managing client expectations and assessing investment risk of the funds, given the tampant arbitrage in bitcoin futures, which don’t track the actual price of bitcoin, Randy Frederick, managing director of Schwab Center for Financial Research, told advisors during a company market update this week.
“It’s only been a couple of weeks since the bitcoin futures ETFs have launched, but there have already been problems. Within a matter of days ProShares ETF held a very large position in the front month and next month in bitcoin futures. In fact, the CME Group where they trade already has to raise position limits in order to make them big enough,” Frederick said.
“So as this thing gains popularity and new products launch there’s going to be problems with the size of this market, which is not big enough,” he said.
ProShares Bitcoin Strategy ETF (BITO), which launched October 19, is down $1.54 to launch and was trading at $39.69 a share, after hitting a high of $43.95. The Valkyrie Bitcoin Strategy ETF (BTF) is trading down a little over a dollar a share since launch at $24.41 on November 5. Bitcoin itself was trading at $61,000 in morning trading.
“What that does is create this interesting scenario where you have arbitragers, people just simply looking for opportunity, who will go out [and] buy the second month of futures contracts ahead of time knowing that when the front month contract expires and it has to be rolled out, the ETF managers are going to have to purchase the next month and they’ve already run the price up. So it creates distortions in the market,” Frederick said.
Specifically, Frederick said, arbitragers who buy future months of bitcoin futures create contango—a situation where the futures price of a commodity is higher than the spot price. Contango tends to cause losses for investors in commodity ETFs that use futures contracts, but these losses can be avoided by buying ETFs that hold actual commodities. Unfortunately, because of their charters, these ETFs are not allowed to hold actual bitcoin, he said.
“That’s a problem that we’re already starting to see in just a couple weeks, so you can imagine what will happen when more ETFs come on line. Those types of distortions are going to get worse and it creates a problem we’ve all known that exists in some of the other ETFs out there,” he said.
It’s true that “demand for the ProShares ETF has been strong since its launch as investors with a preference for ETFs have the ability to gain exposure to the returns similar to that of Bitcoin,” Todd Rosenbluth - Head of ETF & Mutual Fund Research CFRA told Financial Advisor magazine.
“While some might prefer to invest directly in a bitcoin ETF, there are currently none that are listed in the U.S. and we expect the absence to persist into 2022,” Rosenbluth added.