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ProShares Defends First Bitcoin Futures ETF Against ‘Backwards’ Narrative on Pricing

“This is really a robust way to get bitcoin exposure. And it’s convenient and regulated, so it's a powerful combination,” Simeon Hyman, head of investment strategy at ProShares, told RIA Intel.

In the days leading up to the ProShares Bitcoin Strategy ETF debuting on an exchange Tuesday, opinions about it were mixed.

The price of bitcoin climbed to more than $62,000, the highest since April — investors seemed to think the coming ETF was a positive development for the most popular cryptocurrency. Meanwhile, some said they would rather invest in an ETF based on bitcoin’s spot price, not futures contracts. Others warned about possible disconnects between the ProShares ETF and the derivatives they are based on, or that it benefitted the asset manager, not retail investors.

ProShares refutes concerns about the ETF.

“We really think people have the narrative a little backwards. This is not, from our perspective, the second-order choice. This is really a robust way to get bitcoin exposure. And it’s convenient and regulated, so it's a powerful combination,” Simeon Hyman, head of investment strategy at ProShares, told RIA Intel

The ETF launched on the New York Stock Exchange under the ticker BITO and finished its first session up 4.8 percent to $41.94. It was one of the most-traded ETF debuts, with $984 million in volume and $570 million in assets. Bitcoin and bitcoin futures also gained more than 4 percent Tuesday. 

Open interest bitcoin futures contracts trade on the derivatives giant Chicago Mercantile Exchange and are valued at roughly $3.6 billion, a small market compared to others.

Until now, financial advisors haven’t been able to invest in, or get the same type of exposure to, cryptocurrencies as easily as they can other securities. Some wealth managers advise clients on crypto assets in held away accounts at Coinbase or other brokerages. Advisors can also get clients exposure to crypto by investing in trusts — like the Grayscale Bitcoin Trust (GBTC) — that trade over the counter. New platforms, like Onramp Invest, Gemini, or Flourish Crypto, are also enabling RIAs to directly manage clients’ digital assets. But the ProShares ETF is a distinctly different solution.

“If you want to manage crypto directly, whether through Gemini or Onramp, etcetera, you're going to be introducing a whole new process in new accounts into the client relationship,” said Steve Larsen, president of Columbia Advisory Partners. He is also the co-founder of the Certified Digital Asset Advisor designation.

Larsen said new Bitcoin ETFs, like the one by ProShares, could be a good introduction to bitcoin for investors and advisors.

“I can go buy the Bitcoin futures ETF right in their Charles Schwab accounts, and [I] don't have more paperwork. We don't have to have a whole new process, a whole new procedure. I can log in starting tomorrow and just place those trades,” Larsen said Monday.

However, Larsen acknowledged that because the new ETF will not own bitcoin or be based on its price directly (instead the fund will invest in bitcoin futures), there is another layer of volatility added to an already volatile asset class, which can be both good and bad depending on the investors. “When somebody buys the ETF, they're not necessarily buying the price of Bitcoin, they're buying what people think the price of Bitcoin will be in the future,” Larsen said.

Ben Cruikshank, founder of Flourish Crypto, said the ProShares ETF is a small expansion of the types of exposure advisors and investors can already get through other digital platforms or trusts and that the fund comes with significant drawbacks. He views the disconnect between the price of bitcoin futures and bitcoin itself an unnecessary complication of exposure to bitcoin. (In the afternoon Wednesday, the day after the ProShares ETF debut, bitcoin futures were trading at $67,255 and bitcoin was trading at $66,519.)

“It is a less efficient form of ownership than owning directly. They know they are losing money relative to investing or spot bitcoin or something like that,” Cruikshank said.

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The BITO prospectus notes the potential issues with pricing raised by Cruikshank.

“In order to maintain exposure to bitcoin futures contracts, the Fund must sell its futures contracts as they near expiration and replace them with new futures contracts with a later expiration date. This is often referred to as ‘rolling’ a futures contract. Futures contracts with a longer term to expiration may be priced higher than futures contracts with a shorter term to expiration, a relationship called ‘contango.’ When rolling futures contracts that are in contango, the Fund will sell the expiring contract at a relatively lower price and buy a longer-dated contract at a relatively higher price,” the prospectus says

Hyman disputed that a price gap between bitcoin futures and its current price was a problem for investors. “The futures market is perhaps the best place for price discovery and the leading place to get to get a price for bitcoin,” Hyman said. 

“On average, in the month of September, the difference between the immediate futures price and the next one, so that's the one you have to invest in as you quote-unquote roll the strategy, this is the cost of rolling. That price difference was on average about 20 basis points. So, in other words, one-fifth of one percent,” said Hyman. September’s annualized price gap equals about 2.5 percent. 

BITO has a 0.95 percent annual management fee, which Hyman said is comparable to other products that give investors exposure to bitcoin. Larsen noted the fee was high for an ETF, but low for a regulated investment in cryptocurrency. 

“We’re very fee sensitive, but in an asset class that can go up and down 80 percent in a day, we don't want to get hung up on an extra 1 or 2 percent in fees. These assets are so volatile but also have so much potential,” Larsen said. 

Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.

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