Bitcoin Will Outperform Its Futures ETF By 8%, Says Analyst
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Bitcoin Will Outperform Its Futures ETF By 8%, Says Analyst

As of now, experts believe the US BITO Bitcoin futures ETF is underperforming spot prices by 17%.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Last week, the US Securities and Exchange Commission (SEC) greenlit the first “Bitcoin-linked” ETF. It was not exactly what the crypto community was waiting for, but attracted over $1 billion of inflows on its first trading day nonetheless.

However, analyst Charlie Morris predicted the ETF would underperform spot BTC by a wide margin. Some financial advisors have also urged retail investors to stay away from it, as there is a risk of significant losses.

Contango Bleed: How a Futures ETF Will Underperform Spot Market

The first Bitcoin-linked ETF by ProShares is now trading on the New York Stock Exchange (NYSE) under the ticker BITO. Contrary to a physical BTC ETF, the Bitcoin futures ETF tracks contracts that speculate on the future price of the flagship cryptocurrency. 

In late September, SEC Chair Gary Gensler reiterated his support for a BTC futures ETF, claiming that such a product registers under the so-called ‘40 Act, and provides “significant investor protection.” However, what he didn’t mention was how a futures ETF could make investors miss out on gains in Bitcoin’s spot price. 

Since BITO is backed by futures contracts, “contango bleed” is a huge issue that could affect investors. Contango is when the futures price of a commodity is higher than the expected spot price. Unlike spot-based ETFs, futures ETFs have to regularly renew, or roll, their future contracts. 

In contango, if longer-dated futures contracts are trading at higher prices than shorter-dated contracts on the date of renewal, the ETFs would incur a loss, dubbed “contango bleed.” In simple terms, investors would pay a premium for exposure to Bitcoin, but in return get the familiarity of a regulated ETF without direct exposure.

Contango losses can be enormous for commodities. Professional traders can also use contango to make money and close the gap in the larger markets. However, given the Bitcoin market is dominated by retail traders, these gaps (roll costs) could be sizeable.

Charlie Morris of ByteTree Asset Management believes the roll cost on BTC futures could be 17%. He expects the futures ETFs to underperform spot by 8.4% annually in the longer term. 

The fact that futures ETFs can underperform spot prices is true for all assets. For instance, this chart demonstrates the underperformance of three oil futures ETFs compared to the West Texas Intermediate (WTI) spot price since 2016.

Image Courtesy of Kaiko

The charts reveal that oil futures ETFs have significantly underperformed spot prices. “While spot oil prices have risen 124% since 2016, the United States Oil Fund (USO), one of the largest oil futures ETFs, declined by 35%,” according to a report by Kaiko.

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Experts: Retail Investors Need to Avoid Future ETFs

BITO, the US Bitcoin futures ETF, has become the fastest ETF in history to surpass $1 billion in assets under management (AUM). Comparatively, BITO already has a larger net asset value (NAV) than two Canadian Bitcoin ETFs, which is remarkable considering the fund has been around for less than a week.

Image Courtesy of Kaiko

All of this suggests that BITO is quite popular among US traders. However, experts warn retail traders should avoid futures ETFs. Tyrone Ross, CEO of Onramp Invest, told CNBC:

“This is not something for retail investors to buy, in my opinion. There’s plenty of outlets to buy bitcoin directly. Buying a futures ETF, where the average retail investor does not understand ETFs or futures, which are complicated, is not the best product for retail investors.”

Even before a future-based ETF got approved, experts noted that there are various concerns around such products. Matthew Sigel, head of digital assets research at VanEck, said back in September:

“We see Bitcoin futures-based funds as inferior products that have consistently underperformed the Bitcoin price and bring additional complexities in regards to how they must be managed, at a higher cost than ETFs. Simply put, they are substandard vehicles.”

CME Interest in Futures Contracts Up by 265%

Following the launch of BITO, Bitcoin open interest in CME futures contracts witnessed a huge spike, rising by $3.95 billion. This represents a growth of 265% for October, according to data by Glassnode.

The heightened interest in CME futures coincides with an overheating derivatives market. Last week, as Bitcoin recorded new all-time highs, funding rates for Bitcoin perpetual futures spiked to a 6-month high. As per data by Kaiko, funding rates on Bybit experienced the most dramatic spike, increasing from around 0.01% to over 0.10%.

Image Courtesy of Kaiko

All this suggests that when BTC price performs well, derivatives also follow suit. Moreover, considering that open interest is quite high, it is fair to conclude that overall Bitcoin health is also high. 

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What is your preferred way of getting exposure to Bitcoin? Investing in futures ETFs or buying a physical currency? Let us know in the comments below.