{"id":2790,"date":"2021-10-26T23:27:39","date_gmt":"2021-10-26T23:27:39","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2790"},"modified":"2021-10-26T23:29:30","modified_gmt":"2021-10-26T23:29:30","slug":"beware-of-bito-the-proshares-bitcoin-strategy-etf","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/beware-of-bito-the-proshares-bitcoin-strategy-etf\/","title":{"rendered":"BEWARE of BITO, the \u201cProShares Bitcoin Strategy ETF\u201d"},"content":{"rendered":"

This is a departure from my usual blog, focusing on the newly launched ProShares Bitcoin Strategy ETF (BITO). Most ETFs analyzed in my blog articles are covered by ValuEngine with a handful of exceptions. ValuEngine does not cover any ETFs that do not hold stocks.\u00a0 Moreover being newly launched, our price-based models cannot yet be applied.\u00a0\u00a0<\/span>Therefore, viewpoints expressed here about BITO are entirely my own and do not necessarily represent the opinion of ValuEngine,Inc. or any of its owners.\u00a0\u00a0\u00a0<\/span><\/p>\n

All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated on\u00a0www.ValuEngine.com<\/a><\/strong><\/h5>\n
Free Two Week Trial to all 5,000 plus equities and ETFs covered by ValuEngine\u00a0HERE<\/a><\/strong><\/h5>\n

Let\u2019s start with some very basic facts:<\/span><\/p>\n

    \n
  1. BITO holds futures on Bitcoin listed on the Chicago Mercantile Exchange (CME).\u00a0 It does not hold Bitcoin.\u00a0 Accordingly, it irritates me that many in the investment media are calling it a Bitcoin ETF.\u00a0 My fervent hope is that any client-facing investment professional reading this will make clear to clients that this is a Bitcoin Futures ETF, not a Bitcoin ETF.\u00a0<\/span><\/li>\n
  2. Futures are derivative securities that by their nature bear many risks not inherent in stocks. These include contango, backwardation, roll risk and more.<\/span><\/li>\n
  3. Returns on gold futures vary significantly from \u201cpaper returns\u201d on the spot price of gold.\u00a0 Thus far in its history, Bitcoin has incurred a daily volatility higher than the very high volatility associated with gold.\u00a0 My expectation is that the mismatch risk between futures and \u201cspot\u201d will be even higher with Bitcoin than it is with gold.<\/span><\/li>\n
  4. There are risks associated with Bitcoin by its very nature that is not true about futures on commodities, securities indices and almost anything else on which futures are traded.\u00a0 Bitcoin is not tangible.\u00a0 It has no intrinsic usage value.\u00a0 It has no government nor deep pockets standing up to insure it during potential crashes or wipeouts.\u00a0 Presently, it is believed to be non-hackable and non-stealable, but no one knows whether that will always be the case.\u00a0 Analysts believe part of its value is from the fact that the distributed ledger technologies that keep it safe also keep it untraceable.\u00a0 It is also possible for that to change in the future.<\/span><\/li>\n
  5. BITO is expensive relative to other ETFs with an expense ratio of 0.95%.<\/span><\/li>\n<\/ol>\n

    Therefore, I recommend even more strongly something I always preach.\u00a0 Download the BITO prospectus and read it carefully before attempting to buy it or use it in a trading strategy.\u00a0 Here is the link to the prospectus from the ProShares website:\u00a0<\/span><\/p>\n

    https:\/\/www.proshares.com\/funds\/prospectus.html?ticker=BITO<\/span><\/a><\/p>\n

    All ValuEngine ETF reports updated and available:\u00a0Click HERE<\/a><\/strong><\/p>\n

    Between pages 3 and 7 you will find 21 risks spelled out in detail.\u00a0 All are important and many may not be intuitive.\u00a0 Beyond massive volatility and negative compounding, they include; negative yield roll risk; contango; backwardation; counterparty risk; liquidity risk; market capacity risk; risk related to potential scarcity of authorized participants; risks of potential increased collateral requirements; increased expense ratio risk, etc.\u00a0 None of these things should necessarily scare you away from considering the product.\u00a0 However, make certain you understand them and their implications for your potential strategies before you start trading BITO.<\/span><\/p>\n

    Bethesda-based ProShares is a terrific ETF provider that has existed for nearly 20 years.\u00a0 They have a well-deserved strong reputation as a high-quality sponsor. most of their products are derivatives-based.\u00a0 Many are leveraged or inversely weighted.\u00a0 Futures and similar derivatives are governed by the CFTC which requires investors that trade on the CME and other futures exchanges to submit documents showing that they understand the risks and are qualified to take those risks.\u00a0 The CFTC expressed many concerns about ETFs holding futures specifically because there are no such qualifications required to buy and sell ETFs.\u00a0 Therefore, the name ProShares is very apt. To me, it infers that they are designed to be used by market professionals, not novices.\u00a0\u00a0<\/span><\/p>\n

    Indeed, I have personally had to explain to a colleague how he lost about 7.5% per year holding ProShares UltraBull S&P 500 ETF (UPRO), a three-times leveraged product, during a three-year period from 2010-2012 in which the S&P 500 gained nearly 9% per year.\u00a0 The answer is daily compounding.\u00a0 Derivatives-based ProShares are designed for short term trading, the majority of it intraday.\u00a0 The fund tracks the index on a daily basis \u2013 NOT on an annual basis.\u00a0 Another example of a ProShares futures product that gave many holders and unpleasant surprise was the ProShares Short-Term Inverse VIX ETF (SVXY) that provided very good returns when stock market volatility was low but lost 96% of its value in two days when an unexpectedly sharp market downturn spiked volatility tremendously in a short period of time.\u00a0 To be clear, BITO is neither leveraged nor inverse-leveraged, so these specific unpleasant surprises are unlikely to apply.\u00a0 The lessons to be learned from these cautionary tales is that it is important to understand how futures products work before trading them.\u00a0 ProShares\u2019 material explicitly state that the futures-based products are designed for daily tracking and trading.\u00a0\u00a0<\/span><\/p>\n

    Financial Advisory Services based on ValuEngine research available: \u00a0\u00a0<\/strong>www.ValuEngineCapital.com<\/a><\/strong><\/h5>\n

    A Twitter tweet that received a lot of attention on the day BITO commenced trading stated, \u201cFriends don’t let friends buy and hold futures-based ETFs.\u201d\u00a0 I agree with this statement even though it cannot be considered impartial.\u00a0 It was made by Barry Silbert, Founder of the Greyscale Bitcoin Trust (GBTC).\u00a0 GBTC which buys and holds bitcoin at spot on coin exchanges is a closed-end trust holding bitcoin.\u00a0 It has an embedded expense ratio of more than 2%.\u00a0 Consequently, GBTC generally trades at a significant discount to Bitcoin spot.\u00a0 As Bloomberg ETF expert Eric Balchanus pointed out in reply to Barry\u2019s tweet, \u201cI don’t disagree but in all fairness, GBTC is lagging bitcoin spot by 160 percentage points in the past 12 months. That’s equivalent of 10 years of roll costs.\u201d\u00a0<\/span><\/p>\n

    BITO is fine for short-duration institutional traders used to trading futures and futures-based ETFs.\u00a0 I consider it a short-term tactical tool that should be used only by professionals.\u00a0 GBTC is high-cost and has structural design and trading platform issues that I believe most investors should avoid. \u00a0 Longtime colleague Matt Hougan, CEO of Bitwise Asset Management and an expert in ETFs and Bitcoin, believes that both products are too expensive relative to the cost of opening a cryptocurrency trading account at a secure trading platform such as Robin Hood or Coinbase.\u00a0 This advice makes sense to me for investors wishing to buy and hold Bitcoin.\u00a0<\/span><\/p>\n

    Herb Blank<\/p>\n

    Senior Quantitative Analyst<\/p>\n

    ValuEngine, Inc<\/p>\n

    _______________________________________________<\/p>\n

    All of the approximately 5,000 stocks, 16 sector groups, and 140 industries have been updated on\u00a0www.ValuEngine.com<\/a><\/h5>\n
    New: Over 500 ETF reports updated weekly.<\/h5>\n
    Financial Advisory Services based on ValuEngine research available through\u00a0ValuEngine Capital Management, LLC<\/a><\/h5>\n
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    Subscribers log in\u00a0HERE<\/a><\/h5>\n","protected":false},"excerpt":{"rendered":"

    This is a departure from my usual blog, focusing on the newly launched ProShares Bitcoin Strategy ETF (BITO). Most ETFs analyzed in my blog articles are covered by ValuEngine with a handful of exceptions. ValuEngine does not cover any ETFs that do not hold stocks.\u00a0 Moreover being newly launched, our price-based models cannot yet be … Read more<\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[4,130,39],"tags":[1619,1892,1898,1897,1895,1894,1704,1733,1896,1620,1621,1731,1893,93,1720,724,1899,1656,1659,63],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2790"}],"collection":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/comments?post=2790"}],"version-history":[{"count":2,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2790\/revisions"}],"predecessor-version":[{"id":2792,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2790\/revisions\/2792"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=2790"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=2790"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=2790"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}