CORRECTION (May 31, 15:05): Corrects BITO underperformance vs. BTC to 2.6% from 13.8% as K33 Research omitted monthly dividends from calculations. BITO started to pay monthly dividends to investors in February 2023.
The price of ProShares’ Bitcoin Strategy ETF (BITO) has risen 58.7% this year until May 26, trailing BTC’s 61.3% gain over the same period, ProShares noted.
The underperformance stems from the costs associated with the fund's structure. BITO does not purchase tokens, instead it holds BTC futures contracts on the Chicago Mercantile Exchange (CME). The fund must roll over the contracts every month as they expire, making it vulnerable to the price difference between terms. If next month’s contract trades at a premium to the nearest expiry – a phenomenon called contango and typical during a bull market – over a sustainable period, the fund will compound losses due to the “contango bleed.”
When BITO started trading in October 2021, several observers predicted that the fund might underperform the spot market by 10% to 13% annualized, CoinDesk reported at the time.
In its first year, the fund trailed BTC’s performance only by 1.8%, as the crypto bear market helped to mitigate the contango bleed.
This year’s market rebound exacerbated the fund’s vulnerability to rolling costs as the CME futures market returned to trade in contango. However, BITO started to distribute the fund's taxable income as monthly dividends to investors, compensating for most of the bleed. The performance gap during the year’s first five months would have been 13.8% without dividends instead of 2.6%, according to K33 Research.
Investors should expect the underperformance to ensue, K33 senior analyst Vetle Lunde said in a note. “The strong term structure remains an issue for the viability of using BITO as a tool to maintain long exposure,” he wrote in the report.
The underperformance “illustrates the shortcomings of futures-based ETFs compared to spot ETFs,” and how the “SEC's rigorous stance against direct BTC spot ETFs harms investors,” Lunde added.
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