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ProShares Bitcoin Strategy ETF, BITO – When Will The Value Destruction End?

Updated 23 Jun 2022

Key points:

  • BITO is down 70% since launch last fall
  • Much of this is, of course, the bitcoin price itself
  • But also this bitcoin ETF is constructed from futures, which comes with operational costs

The ProShares Bitcoin Strategy (NYSEARCA: BITO) ETF is now something of an exemplar of value destruction. BITO is down 70% just from its introduction date back in October 2021. Which is, I think we all have to agree, pretty impressive.

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The big question though is that that is all in the past – we're interested in the future. So, when will the value destruction cease? Or even, when might value be added?

The advantage of a Bitcoin ETF is of course that it's hugely easier to trade through regular brokerage accounts than bitcoin itself. There are also fewer difficulties with folk breaking into the exchange and stealing it, or even the owners of the exchange running away with everything – things that have happened elsewhere. There are technical downsides too, clearly it's not possible to lend out ETF stock in the same way that bitcoin can be lent out to produce an income.

Also Read: How Low Can We Go? Bearish Bitcoin and Ethereum Targets

There's an important point to note though. BICO simply is not an instrument to hold. It might be one to trade, possibly, but it's not one to hold. This is because of the method of construction used by ProShares to build it. That's detailed here. The Bitcoion Strategyy ETF does not in fact hold bitcoin. Nor is it a selection of companies holding or trading bitcoin. Instead it's constructed from front-month bitcoin futures. This means that there has to be a constant turnover of exchange traded contracts to maintain the exposure. Futures contracts cost money to trade – therefore there's ongoing and continual value destruction just from the construction of the ETF. It's simply not an instrument to hold, even as it may be one to trade.

The ease of trading does mean that it's possible to trade significant price movements in the underlying, bitcoin itself. Which is great, that's what ETFs are for, it's possible to go long or short and so trade the bitcoin price either way. Even at that ongoing expense of the active management of the futures portfolio.

This is important to understand as a trader. The ProShares Bitcoin Strategy ETF is simply not to be used as a long term holding. It's for trading in and or out of the bitcoin price attempting to track short-term movements.

Which then brings us to when the value destruction is going to stop. BITO launched at $41.94 and now trades at $12.82 (up 2.81% this morning premarket). Clearly this is the result of the steep decline in the bitcoin price since the launch last fall. Plus that loss from the futures expenses of the construction of the ETF of course. If the trading position is that there's going to be an immediate and significant rise in the bitcoin price then BITO can be a part of that strategy. Or, of course, it can be sued as a hedge against holdings long or short in bitcoin itself. But it is always about short term movements.

The Bitcoin Strategy ETF therefore isn't, really, about bitcoin strategy at all. It's about bitcoin tactics – the short term. Trading positions need to be determined upon that understanding.