Daily trading volume in the ProShares Bitcoin Strategy ETF has tanked since spot ETFs went live in the U.S. on Jan. 11.
Observers said BITO will remain an integral part of the market as a hedging instrument.
Activity in ProShares Bitcoin Strategy ETF (BITO), the world’s leading bitcoin (BTC) futures-based exchange-traded fund (ETF), has cooled significantly since the launch of ETFs directly investing in the cryptocurrency began trading in the U.S. on Jan. 11.
On Thursday, BITO shares worth just over $500 million changed hands on the NYSE, a 75% slide from the record $2 billion registered on Jan. 11, according to data tracked by crypto exchange Coinbase. BITO has witnessed a net outflow of over $270 million over the same period, according to data source ETF.com.
Meanwhile, 11 spot ETFs registered a cumulative trading volume of $14 billion in the first week, a tally bigger than all other ETFs launched in 2023, per Coinbase. These funds have amassed over $1.2 billion in investor money in one week since inception.
These spot ETFs invest in bitcoin, allowing investors to gain exposure to the cryptocurrency while bypassing the hassles of storing the same and are considered a better alternative to futures-based ETFs like BITO. Because BITO invests in the CME BTC futures, it must roll over expiring contracts into new ones, incurring “roll costs,” which weigh over the fund’s performance in the long run.
That said, the cash-creation structure of spot ETFs will likely ensure futures-based ETFs stay relevant, according to some observers.
ETFs are created and redeemed in two ways: In-kind and cash creation. In the former, when the ETF issuer wants to create new shares, the authorized participant (AP) buys the underlying securities comprising the ETF and delivers the same to the issuer in return for a block of ETF shares, which can be sold in the open market. The process works in reverse when the ETF wants to redeem shares.
The process remains the same in the cash-creation structure, except that APs provide cash to the issuer, and then the issuer purchases the actual asset.
That exposes APs – institutions and market-making firms – to the risk of bitcoin price fluctuations between when they receive buy orders and when issuers purchase the asset to create new shares. As such, APs are likely to hedge the same with regulated products like BITO and CME futures, according to some observers.
“It is not unusual for an AP to revert to regulated products such as BITO to hedge their positions (called deltas) as they may not have accounts with CME futures to do so. This is generally considered a good proxy if they can’t execute CME bitcoin futures or even outright bitcoin,” Laurent Kssis, a crypto trading adviser at CEC Capital and a former ETF market maker, told CoinDesk.
“The risk of being exposed or unhedged is very high, so BITO will provide decent cover, although it is not a perfect hedge as there is slippage and a decent cost to buy BITO,” Kssis added. “But many APs won’t have a choice (since they can’t buy bitcoin or are not allowed to touch them by their compliance dept) or even won’t have the infrastructure, i.e., custodian, or back office system to reconcile their positions.”
David Duong, head of institutional research at Coinbase, said in the weekly newsletter that despite the recent decline in BITO’s volume, it will remain an “integral part of the bitcoin ETF space.”
“We believe some APs (namely broker-dealers) will continue to rely on regulated means of hedging themselves, such as long CME futures or long BITO when creating shares (or short CME futures if redeeming),” Duong said, adding some APs likely bought bitcoin ahead of the spot ETF launch and sold BITO to “to hedge potential client buys and sells intraday.”
