HT TECH wants to start sending you push notifications. Click allow to subscribe

First Bitcoin ETF in danger of breaching futures contracts limit

Just days after launch, the first U.S. Bitcoin futures exchange-traded fund risks becoming too popular for its own good.

By: BLOOMBERG
Updated on: Aug 21 2022, 21:16 IST
A screen displays a headline banner that reads; Bitcoin Hits Record High, as a trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S.,  (REUTERS)
A screen displays a headline banner that reads; Bitcoin Hits Record High, as a trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S.,  (REUTERS)

Just days after launch, the first U.S. Bitcoin futures exchange-traded fund risks becoming too popular for its own good. 

The Proshares Bitcoin Strategy ETF (ticker BITO) is already on track to breach a limit on the number of futures contracts it is permitted to hold by the Chicago Mercantile Exchange, according to data compiled by Bloomberg.

You may be interested in

Mobiles Tablets Laptops
Apple iPhone 15 Pro Max
  • Black Titanium
  • 8 GB RAM
  • 256 GB Storage
₹156,900
Check details
28% OFF
Samsung Galaxy S23 Ultra 5G
  • Green
  • 12 GB RAM
  • 256 GB Storage
₹107,999₹149,999
Buy now
Google Pixel 8 Pro
  • Obsidian
  • 12 GB RAM
  • 128 GB Storage
₹106,998
Check details
Apple iPhone 15 Plus
  • Black
  • 6 GB RAM
  • 128 GB Storage
₹87,900
Check details
21% OFF
Acer Swift Go SFG14 41 NX KG3SI 002 Laptop
  • Pure Silver
  • 8 GB RAM
  • 512 GB SSD
₹58,990₹74,999
Buy now
41% OFF
Acer Aspire 5 A515 57G Laptop
  • Gray
  • 16 GB RAM
  • 512 GB SSD
₹52,990₹89,999
Buy now
41% OFF
Acer Aspire 3 A315 24 NX KDESI 004 Laptop
  • Silver
  • 8 GB RAM
  • 512 GB SSD
₹34,490₹57,999
Buy now
40% OFF
Asus VivoBook 15 X515JA BQ322WS Laptop
  • Transparent Silver
  • 8 GB RAM
  • 512 GB SSD
₹31,350₹51,990
Buy now
35% OFF
Xiaomi Pad 6
  • Mist Blue
  • 6 GB RAM
  • 128 GB Storage
₹25,999₹39,999
Buy now
55% OFF
Lenovo Tab M10 5G
  • Abyss Blue
  • 6 GB RAM
  • 128 GB Storage
₹20,999₹47,000
Buy now
32% OFF
Realme Pad 2
  • Imagination Grey
  • 6 GB RAM
  • 128 GB Storage
₹19,668₹28,999
Buy now
Honor Pad X9
  • Gray
  • 4 GB RAM
  • 128 GB Storage
₹16,998
Check details

After two days trading BITO owns nearly 1,900 contracts for October, and CME rules cap the number of front-month contracts one entity can own to 2,000. 

To avoid hitting the limit, the ETF has also amassed 1,400 November contracts. But at the rate it’s adding assets -- the fund already has more than $1 billion under management -- the maximum total position of 5,000 contracts could be in view soon.

An immediate solution is for BITO to spread out its holdings into longer-dated contracts. However, that risks further distancing the fund from the performance of Bitcoin. Its ability to efficiently track the largest cryptocurrency is questionable anyway because it has to pay to roll over contracts, and the futures curve currently slopes upward.

“The end result is the ETF will start taking on potentially significant tracking error versus the spot price of Bitcoin,” said Nate Geraci, president of advisory firm The ETF Store. “The ETF is forced to obtain Bitcoin price exposure at higher and higher prices as it goes further out on the futures curve.”

A spokesperson at ProShares didn’t immediately respond to a request for comment.

The potential good news is that the CME is raising the ceiling to 4,000 front-month contracts, starting with November futures, although there will be a limit of 2,000 contracts for each subsequent month. 

While the current pace of inflows could see BITO hitting those curbs too, the launch of competing products may alleviate the pressure. Funds from Valkyrie and VanEck are both due to begin trading in the next few days. 

However, the momentum behind the ProShares ETF will be hard to stop at this point, according to Bloomberg Intelligence.

“The unprecedented early volume in BITO makes it like a snowball rolling downhill, as liquidity and assets begets more liquidity and assets,” said Eric Balchunas, senior ETF analyst at BI. “The new ones will have some selling points such as only holding the front month or being cheaper and that will help, but it is nearly impossible to steal volume in the short or medium-term.”

BITO and its peers will also have to contend with the ripple effects on the Bitcoin futures market. JPMorgan Chase & Co. strategists warned Thursday that high demand for the funds risks distorting the derivatives space, steepening the future curve even further and driving up roll costs -- at the expense of ETF investors. 

The experience with BITO may pressure the Securities and Exchange Commission to speed up approval of funds that hold Bitcoin directly, Balchunas said. 

“That certainly would do the trick in slowing down BITO and providing a release valve for futures demand,” he said.

Catch all the Latest Tech News, Mobile News, Laptop News, Gaming news, Wearables News , How To News, also keep up with us on ,Twitter, Facebook, , and Instagram. For our latest videos, subscribe to our YouTube channel.

First Published Date: 22 Oct, 00:43 IST

Sale

Mobiles Tablets Laptops
4% OFF
Samsung Galaxy S24 Ultra
  • Titanium Black
  • 12 GB RAM
  • 256 GB Storage
₹129,999₹134,999
Buy now
13% OFF
Xiaomi 14
  • Matte Black
  • 12 GB RAM
  • 512 GB Storage
₹69,999₹79,999
Buy now
10% OFF
Apple iPhone 15 Plus
  • Black
  • 6 GB RAM
  • 128 GB Storage
₹72,200₹79,900
Buy now
12% OFF
IQOO 12 5G
  • Legend
  • 12 GB RAM
  • 256 GB Storage
₹52,999₹59,999
Buy now
35% OFF
Xiaomi Pad 6
  • Mist Blue
  • 6 GB RAM
  • 128 GB Storage
₹25,998₹39,999
Buy now
38% OFF
Lenovo Tab M10 5G
  • Abyss Blue
  • 6 GB RAM
  • 128 GB Storage
₹20,999₹34,000
Buy now
38% OFF
Realme Pad 2
  • Imagination Grey
  • 6 GB RAM
  • 128 GB Storage
₹17,999₹28,999
Buy now
57% OFF
Honor Pad X8
  • Blue Hour
  • 3 GB RAM
  • 32 GB Storage
₹8,999₹20,999
Buy now
35% OFF
Asus TUF Gaming A15 FA566II HN233T Laptop
  • Fortress Gray
  • 16 GB RAM
  • 512 GB SSD
₹52,990₹81,990
Buy now
21% OFF
Asus VivoBook Pro 15 M6500QC HN542WS Laptop
  • Cool Silver
  • 16 GB RAM
  • 512 GB SSD
₹69,990₹88,990
Buy now
27% OFF
Asus ROG Strix G15 G512LI HN331TS Laptop
  • Electro Punk
  • 8 GB RAM
  • 1 TB SSD
₹79,990₹109,990
Buy now
21% OFF
Asus VivoBook Go 15 OLED E1504GA LK323WS Laptop
  • Green Grey
  • 8 GB RAM
  • 512 GB SSD
₹33,999₹42,999
Buy now
NEXT ARTICLE BEGINS