Summary Bitcoin's post-election rally is consolidating, with positive drivers still present and potential for further gains as Trump's crypto-friendly administration forms. The ProShares Bitcoin Strategy ETF is outdated and underperforming due to its reliance on futures contracts. New Bitcoin ETFs launched in 2024 offer superior returns and lower expenses, making them preferable for buy-and-hold investors. The launch of IBIT options in November 2024 removes BITO's last unique attraction, leading to a "sell" rating for BITO. Bitcoin is consolidating the post-election rally. This is a necessary step in building the next phase of the rally - without a rest, markets get too stretched and vulnerable to large drops. The good news is that the positive drivers that drove the 2024 gains are still present, and there is scope for further gains and good news in 2025 as Donald Trump assembles his crypto-friendly administration. There are various ways to gain exposure to bitcoin. Some are better than others, but there is one fund that sticks out for all the wrong reasons. The ProShares Bitcoin Strategy ETF ( BITO ) is an outdated and underperforming way to gain bitcoin exposure. This article explains why it has outlived its usefulness. Why BITO? Once upon a time, the only way to own bitcoin was to buy it directly on a crypto exchange. This was a risky business as wallets were often hacked and exchanges went bankrupt. The high-profile collapse of FTX in 2022 was a particularly painful episode for all concerned. Bitcoin futures were introduced by CBOE and CME in December 2017. The launch of the CME contract just happened to be on the day of the top before an -85% decline. Futures made it possible to short Bitcoin for the first time. Even though futures made it easier to trade bitcoin, derivatives contracts are largely an arena of institutional investors, and retail traders with a standard brokerage account were still excluded. BITO changed that in 2021. As the fund page states : First U.S. bitcoin-linked ETF. Familiarity, liquidity and transparency of an ETF. Available through a brokerage account-no need for a cryptocurrency exchange account or wallet. The attraction was clear, and with no alternatives (apart from the OTC-traded Grayscale Trust) until early 2024, the downsides associated with the fund's structure and methodology could be overlooked. The Downsides Due to regulatory limitations which were only overcome in 2024, BITO could not hold bitcoin directly. It therefore bought futures contracts, but this introduced a variety of problems. As the fund page states: There is no guarantee the fund will closely track bitcoin returns. Or to put it another way, BITO is almost certain to underperform Bitcoin. Data by YCharts There are several reasons for this. BITO buys front-month futures contracts and continually rolls them to the next month. As the fact sheet highlights , this can have a negative impact. This ETF is actively managed. The costs associated with rolling (buying and selling) futures and the impact of margin requirements, collateral requirements and other limits may have a negative impact on performance and prevent the Fund from achieving its objective. 2. To make matters worse, bitcoin is almost always in contango. This is more pronounced with further-out contracts, but even rolling to the next month can be detrimental. As the prospectus explains: In order to maintain its 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. BITO also enters swap agreements. As the prospectus explains, this may be due to liquidity constraints. After all, maintaining a plus $2B position in futures may be challenging. In certain circumstances, for example, if the Fund is unable to obtain the desired exposure to bitcoin futures contracts, the Fund may enter into swap agreements that provide exposure to bitcoin or bitcoin futures. Here's how the holdings look - ProShares The short-term US Treasury Bills are a cash-substitute and serve as collateral on the futures and swap positions. The Bills yield the going rate, currently around 4.5%, which is useful, but only serves to narrow the underperformance. 3. The fund is actively managed, and the expense ratio is high at 0.95%. Other Bitcoin ETFs such as the iShares Bitcoin Trust ETF have expense ratios as low as 0.12%. 4. BITO's "distributions" are seen as an attraction by some investors. Certainly, the current 61.7% yield is impressive, but it is simply a distribution of income to lower taxes for the fund. As ProShares explains: All 1940 Act registered mutual funds and ETFs are required to distribute nearly all of their taxable income by the end of each calendar year to avoid excise taxes. This effectively shifts the tax burden onto BITO holders: "Generally, the Fund's dividend distributions will be taxed as ordinary dividends, not qualified dividend income. " The distributions are monthly due to the contract rolls and are then adjusted towards the end of the year. All the profits are distributed, and when there is no profit, like in 2022 and some months in 2023, there is no distribution. Seeking Alpha This is a different methodology to the popular income-based ETFs launched in recent years. For example, the Simplify Bitcoin Strategy PLUS Income ETF ( MAXI ) provides exposure to bitcoin while simultaneously generating income by selling short-dated put and/or call spreads. Don't mix BITO's strategy with this option overlay strategy; it has no positive effect. The Alternatives The Bitcoin ETFs launched in early 2024 are far superior products to BITO, especially if your tactic is to buy and hold. Their popularity has led to a decline in BITO's AUM. Data by YCharts The total return in the new ETFs is considerably higher and the expense ratios considerably lower as the funds don't have to get involved with futures contracts and swaps. Seeking Alpha As they buy considerable amounts of bitcoin and keep it in custody, there is a risk of hacking, but these funds have gone to great lengths to secure their holdings. Nothing is 100%, but I have no concerns. The Option Angle The volatility of bitcoin means options are attractive and suitable for various strategies. Perhaps one of the last advantages for BITO was that it was the only fund with options available. However, that has recently changed. IBIT options started trading in November and their launch caused a lot of excitement with $1.9B in volume on their first day. Saxo enthused: The debut of options trading on Bitcoin ETFs, starting with BlackRock's iShares Bitcoin Trust (IBIT), isn't just another headline for crypto enthusiasts-it's a game-changer for investors everywhere. IBIT options already have open interest of around $11 billion, or 2.3m contracts. Meanwhile, the open interest of BITO options has fallen slightly to 1.1m contracts and is below the 52-week average of 1.2m. This may be the start of a switch to IBIT options and the final nail in the coffin for BITO. Conclusions BITO had an important role to play as the first bitcoin ETF. To take this position, it had to employ a complex strategy trading futures contracts, which negatively affected its total return and introduced other problems. It made sense when there was no alternative, but the introduction of new ETFs in 2024 provided much better options for buy-and-hold investors. The last attraction for BITO was that it was the only ETF to have options available. That changed in November with the launch of IBIT options, and BITO has no longer any unique attraction. I may be bullish on bitcoin, but I rate BITO a "sell." This fund has outlived its usefulness.
