Summary ProShares Bitcoin ETF (BITO) is structurally disadvantaged versus spot Bitcoin ETFs, with persistent underperformance due to futures costs and high expense ratio. BITO's high yield is unsustainable, NAV-erosive, and offers no tax efficiency; spot ETFs like IBIT enable more flexible, tax-advantaged payout strategies. Dividends from BITO are unreliable, mechanically driven by tax smoothing, and classified entirely as ordinary income, further reducing appeal for taxable accounts. I rate BITO as Hold, with only rare, tactical utility in backwardation regimes; long-term investors are better served by spot Bitcoin ETFs. I last covered the ProShares Bitcoin ETF ( BITO ) in May 2025 where I viewed it as a workable middle ground between direct Bitcoin growth investments and the income that BITO offered. The payout model had looked attractive despite the known inefficiencies of the futures structure. A couple of developments have led to a shift in view. The first reason is that we now have 6 more months of data, where clearer evidence of NAV erosion has emerged. Futures roll-related drag were evident in May too, but comparisons with IBIT or spot-like vehicles showed decent spot tracking for the whole year in 2024, and some material divergence had started showing up only for a few months in 2025, at that point. That trend has continued to deteriorate (as we will see in the total return charts in the subsequent section) through 2025 altering my view from one that was based on the payoff-tracking balance to that of structural and persistent disadvantage that limit's BITO's long term role in both income and growth portfolios. The second reason is that Bitcoin has undergone severe corrections since. This has only accelerated visible NAV erosions (As noted before). BITO is trading at half the value it did in May 2025. This keeps less left to ride a bounce back unless dividends have been reinvested (which is not tax efficient anyway). Overall, in sustained drawdowns, the fund’s distribution policy compounds NAV pressure, while futures roll costs persist. That magnifies structural disadvantages. As it stands now, BITO presents a puzzling use case for investors looking for straightforward Bitcoin exposure. Its credentials as an income tool also look redundant over spot strategies that can be used for DIY payouts with better control and tax benefits. It can tactically outperform spot alternatives, but such regimes are brief and do not stick. Overall, I find it difficult to include BITO in any crypto or income portfolio for a long term view. Methodology and Implications While BITO's goal is to track Bitcoin price movements, it implements Bitcoin exposure through futures and swaps. The collateral is kept in Treasuries, which should ideally add some stabilization and enhance returns if the core Bitcoin derivative position was tracking spot efficiently. In reality there are several potential drags to using the futures route. One, this approach involves requirements to roll contracts that increases fund operating costs. BITO's expense ratio is 0.95% - compare this with a spot Bitcoin ETF like IBIT with an expense ratio of 0.12%. This is permanent and structural drag. Secondly, futures introduce the burden of premiums (or cost of carry) in the more likely state of contango markets where longer dated futures cost more than near term ones (and spot). This can also be considered a structural drag, although episodic and rare backwardation markets can mean spot prices overtake futures prices. In the long run, the next effect is more naturally negative and often sufficient to erase the benefits of the treasury yield and some more (when expenses and rolling costs are considered). The net effect of the structure in BITO is that over time, it shows lower total returns than a spot ETF like IBIT, often significantly, as the chart tracing total returns from early 2024 shows. A 18 percentage point drag over just over two years, when the total returns are in the 75-80% range for spot prices, can be said to be material. In rare cases, the level of underperformance could be lower (when cost of carrying is lower or better still a rare backwardation regime emerges), but will almost always still underperform spot Bitcoin positions. Data by YCharts Counterparty and leverage risks also emerge because of the structure, although it does not impact day to day performance. To check for leverage (and to understand how the implementation specifics look), I downloaded current holdings from BITO's website and saw that it currently holds 5,643 CME bitcoin futures contracts expiring in February 2026, that is about $2.37b notional exposure. Plus an additional ~$77m exposure via a bitcoin futures index swap with Société Générale. These positions are backed by ~$1.50b in US Treasury bills and ~$953m in other net assets and collateral, bringing total assets close to the total bitcoin exposure - so there is no structural leverage. The February 2026 position indicates potentially rolling every month or a couple of months, depending on when this position was initiated. The number of rolls and expiration dates do matter for expenses, carry costs and liquidity. Dividends - Source, Sustainability, Reliability Since there is no option layer or dividends generated from the underlying, yields from BITO can be assumed to be fully generated and funded by capital appreciation in Bitcoin prices. So the high yield appears to be a return choice made by the ETF management, that is fully dictated by underlying income generation numbers. The headline yield numbers are mechanically affected by the underlying share prices (looking at the clear inverted relationship between BITO prices and the yield) - but whether 40% or 80%, these are quite high annual yields for an ETF that relies on capital appreciation of the underlying solely. Data by YCharts At the absolute dividend payout level too, I do not see reliability around the magnitude of payouts (can vary a lot), nor a pattern connected to Bitcoin price changes. My best guess, based on ProShares' dividend FAQs, is that the payout follows a tax-driven smoothing mechanism, spreading the ETF's estimated required annual distributions across remaining months of the year. Dividends and Spot Bitcoin Prices - BITO (Seeking Alpha) Each month, the fund estimates its total taxable income for the year, combining Treasury interest and futures income from its Cayman subsidiary. Then subtracts what it has already paid and spreads the remainder across the remaining months. Because this is tax-driven and estimate-based, payouts can vary widely and do not reliably track Bitcoin prices, as seen. The sustainability of the payouts is still a question, because BITO has not shown any inclination to stop payouts throughout the last 3 year period. That implies, the high and committed yield policy leads to NAV erosion. This is clearly visible in the chart below comparing IBIT (as a proxy of Bitcoin prices) and BITO share prices. BITO's NAV/share price have consistently gone down in a period when Bitcoin was structurally bullish overall. The NAV erosion is likely to be even more brutal in a consolidation or even worse in sustained drawdowns. Data by YCharts Tax Implications The distributions are historically labelled fully as dividends with no component classified as long term gains, short term gains, or return of capital. I also downloaded the tax supplements to verify income classification and saw that payouts are treated entirely as ordinary income. This is clearly not a tax-efficient vehicle in taxable accounts. This makes the alternative route of just investing in a spot Bitcoin ETF like IBIT a more lucrative and tax-friendly route. Given the lack of tax benefits in the BITO payouts, the IBIT-like route provides an edge to investors who can time periodic self-styled payouts by liquidating some part of the portfolio - essentially what BITO is doing anyway. That means, some gains can be classified as long term capital gains too - more tax efficient. This route also lets investors decide the magnitude of payouts - something BITO investors, even if reinvesting payouts, cannot do efficiently due to intermediate tax drags. Very Limited Use Case for BITO BITO's use case is extremely limited. And that is independent of my outlook for Bitcoin. Structurally, it is designed to underperform spot Bitcoin alternatives due to costs and futures drags. It does not offer any superior tax benefits (for taxable accounts). Dividends and yields are fully reliant on a Bitcoin rally and NAV-erosive. I rate BITO as a Hold because of its structural limitations. Although it can obviously go through periods of strong absolute total returns on the back of a Bitcoin rally, there are superior vehicles to do that better. Bitcoin's forward looking view as such does not impact BITO's Hold rating, because it is likely to underwhelm even if Bitcoin rallies. The only case for BITO emerges tactically, if we are expecting a backwardation regime. Historically, such regimes are rare and short-lived. I remember a brief period during the COVID crash where this was a theme. The likely scenario for such a regime is that of an acute stress, sharp sell-offs or when hedging demands dominate. And these sell-offs need to be acute for BITO to work out as a tactical tool. A sell-off like we have seen in the past few months is also not enough to trigger BITO's tactical use case. I don't see the odds of such a scenario as high in the near term. More importantly, such a scenario (that too short-lived), if envisioned, is best implemented by sitting on cash, rather than taking a "lesser pain" route like BITO.
