Reducing costs shows market maturity

Written by Simon Heymann CFAGlobal Investment Strategy Analyst, Head of Investment Strategy, ProShares

ProShares Bitcoin Strategy ETF (Beto) Enjoyed one of the most successful launches in history ETF Industry – where investors have added over $1 billion to Beto In the first two days of trading. Even after the increased activity in the first week of BITO, investors added an additional $476 million to Beto Trading remains strong, with an average daily trading volume of over $210 million and tight spreads. A welcome development boosting BITO’s value proposition is happening in the bitcoin futures market, where contract premiums, sometimes called “roll costs,” have fallen recently. Although referred to as ‘costs’, the contract premiums do not affect BITO’s expenditures, but rather BITO’s performance.

Bitcoin futures contracts began trading on the Chicago Mercantile Exchange (CME) in December 2017, and historically, their performance has been highly correlated with Bitcoin. The bitcoin futures market has grown and matured over the past four years, and one sign of that can be seen in the modest and low futures premiums, year-to-date. How and why is this relevant to Beto investors?

When the Bitcoin futures contract approaches expiration, Beto He will “roll out” the futures contract, which means he will sell the contract he holds and use the proceeds to buy a contract with a later expiration date. Since its launch in 2017, bitcoin futures prices have generally, though not always, been higher than the spot price, and longer-term futures prices have been higher than those of short-term futures. If you were to paint a picture of this, you would see an upward sloping chart of futures prices over time. Because futures prices move toward the spot price as expiration approaches, frequent purchases of contracts at a premium, relative to the spot price, cause a regression in performance – often referred to as “rollover cost.”

Upward sloping futures prices are a common characteristic of commodity futures contracts, such as oil, corn, and coffee. However, from a structural and fundamental point of view, Bitcoin futures contracts may be expected to exhibit properties more similar to financial futures contracts, such as those of stocks, Treasuries, or currencies.

There is a carry-over cost with all futures contracts, which is usually a risk-free rate (the price on short-term Treasuries) over the life of the futures contract. While the prices of financial futures contracts, such as those linked to stock indices or bonds, need to account for dividends and coupons, there are no income distributions associated with bitcoin.

Traditional commodity futures prices may be affected by factors such as storage, transportation or insurance costs, which may contribute to higher premiums in futures prices. Commodity futures may also reflect a contingent benefit, known as a favorable return, associated with holding a commodity when inventories are low or a shortage is anticipated. However, these commodity-related factors may not be directly related to bitcoin due to its digital nature. Thus, the lack of significant transportation, insurance or storage costs suggests that only a modest premium in bitcoin futures prices may be warranted.

where CME The Bitcoin futures contract was launched in December 2017, and the average annual premium between the first month contract (closest to expiration), the second month contract and the second month to third month contract was around 5%. However, from the year to date, after the launch BetoInsurance premiums have been contracted.

Lately, premiums have remained modest, with the average annual rate differentials from the second month to the first month in March showing just 2.1%. These reduced premiums reduce BITO’s roll costs and increase its attractiveness, particularly with regard to investing in the spot market that includes brokerage fees, key management, and the complexity of multiple exchanges at multiple rates. While we are reluctant to predict the premiums for bitcoin futures and may go up, the downside premiums are logical and consistent with the structure and fundamental characteristics of the bitcoin futures market.

1 Source: ProShares, 10/25/2021 – 4/18/2022

important information

The performance shown represents past performance and does not guarantee future results.

There is no guarantee of any ProShares ETF It will achieve its investment goal. This is amazing ETF It may not be suitable for all investors.

Investing involves risks, including the potential for loss of capital. Bitcoin and bitcoin futures are a relatively new asset class, and the bitcoin market is subject to rapid changes and uncertainty. Bitcoin and Bitcoin futures contracts are subject to unique and intrinsic risks, including significant price fluctuations and a lack of liquidity. Investment value in ETF It can drop dramatically and without warning, including zero. You must be prepared to lose your entire investment.

This is amazing ETF Actively manages and invests in Bitcoin futures. The ETF Do not directly invest in or own Bitcoin. The price and performance of Bitcoin futures contracts is expected to differ from the current “spot” price of Bitcoin. These differences can be significant. Bitcoin futures contracts are subject to margin requirements, collateral requirements, and other restrictions that may prevent ETF of achieving its goal. Margin requirements for futures contracts and costs associated with trading (buying and selling) futures contracts may have a negative impact on the fund’s performance and ability to achieve its investment objective.

Bitcoin is largely unregulated and Bitcoin investments may be more vulnerable to fraud and manipulation than regulated investments. Bitcoin and Bitcoin futures contracts are subject to rapid price fluctuations, including as a result of statements by influencers and the media.

This is amazing ETF Is diversified and concentrated its investments. Non-diversified and narrowly focused investments usually show higher volatility.

Carefully consider the investment objectives, risks, fees, and expenses of ProShares before investing. This and other information can be found in the ETF Summary and Full Bulletins. Read it carefully before investing.

any shares ETF They are generally bought and sold at the market price (No NAV) and are not individually redeemed from the Fund. Your brokerage commissions will reduce your returns.

The “spot” price refers to the price of bitcoin that can be purchased instantly.

ProShares is distributed by SEI investment distribution companySedco”), which is not affiliated with an advisor or sponsor of the funds. Sedco It is located at 1 Freedom Valley Drive, Oaks, PA 19456.

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