BITO invests in the nearest month bitcoin futures contract that trades on the CME, and rolls it over to the next month contract before it expires. This means that BITO is always holding the most active and liquid bitcoin futures contract available.
BITO charges an annual expense ratio of 0.95%, which is deducted from its net asset value (NAV). The NAV of BITO is calculated by dividing its total assets minus its total liabilities by its number of outstanding shares. The NAV of BITO is updated daily and published on its website.
BITO trades on the NYSE Arca, the same exchange where many other popular ETFs trade. BITO can be bought and sold throughout the trading day, just like any other stock. The market price of BITO may differ from its NAV, depending on the supply and demand of its shares, the trading volume of bitcoin futures, and the market conditions of the cryptocurrency industry.
How has BITO performed?
BITO made history as the first bitcoin futures ETF in the US, and also as one of the most successful ETF launches ever. On its first day of trading, BITO attracted more than $1 billion in assets, making it the second-largest ETF debut of all time. BITO also had a high trading volume of over 24 million shares, making it the most traded ETF on that day.
Since its inception, BITO has delivered impressive returns, outperforming both the spot price of bitcoin and the S&P 500 index. As of December 29, 2021, BITO had a NAV of $20.80, a market price of $20.82, and a year-to-date return of 141.15%. In comparison, bitcoin had a price of $47,064.67 and a year-to-date return of 66.42%, while the S&P 500 had a price of 4,769.83 and a year-to-date return of 26.88%.
BITO has also demonstrated a high correlation with the spot price of bitcoin, meaning that it moves in the same direction and magnitude as bitcoin. According to Yahoo Finance, BITO has a beta of 0.00, which means that it has no systematic risk compared to the market. However, BITO also has a high volatility, meaning that it can experience large price fluctuations in a short period of time. According to Yahoo Finance, BITO has a standard deviation of 0.10, which means that it deviates from its average return by 10% on average.
What are the advantages and disadvantages of BITO?
BITO offers several advantages for investors who want to gain exposure to bitcoin without owning it directly. Some of the main benefits of BITO are:
- Accessibility: BITO can be easily purchased and sold on a stock exchange, using a regular brokerage account, without the need for a digital wallet, a cryptocurrency platform, or a lot of technical knowledge.
- Liquidity: BITO has a high trading volume and a narrow bid-ask spread, meaning that it can be traded quickly and cheaply, without affecting its price significantly.
- Regulation: BITO is regulated by the Securities and Exchange Commission (SEC), which oversees its compliance, disclosure, and reporting standards. BITO is also subject to the rules and regulations of the NYSE Arca and the CME, which ensure its transparency, security, and integrity.
- Diversification: BITO can provide diversification benefits for a portfolio, as it has a low or negative correlation with other asset classes, such as stocks, bonds, or gold. BITO can also serve as a hedge against inflation, currency devaluation, or geopolitical risks, as bitcoin is seen as a store of value and a global reserve currency by some investors.
- Innovation: BITO is a pioneer in the ETF industry, as it is the first of its kind to offer exposure to bitcoin futures in the US. BITO can also pave the way for more cryptocurrency-related ETFs in the future, such as spot bitcoin ETFs, ethereum ETFs, or crypto index ETFs.
However, BITO also has some drawbacks that investors should be aware of before investing in it. Some of the main challenges of BITO are:
- Tracking error: BITO may not track the spot price of bitcoin perfectly, due to the differences between the futures market and the spot market. For example, the futures price of bitcoin may be higher or lower than the spot price, depending on the supply and demand of the contracts, the interest rates, the storage costs, and the market expectations. This difference is known as the futures premium or discount, and it can affect the performance of BITO. Moreover, BITO may incur costs and risks associated with rolling over its futures contracts, such as transaction fees, slippage, or contango or backwardation, which can also impact its tracking accuracy.
- Taxation: BITO may have unfavorable tax implications for investors, depending on their tax status and jurisdiction. For example, in the US, BITO is classified as a commodity pool, which means that it is taxed as a partnership, rather than a corporation. This means that BITO investors have to file a Schedule K-1 form, which reports their share of the income, gains, losses, deductions, and credits of BITO. Moreover, BITO investors may be subject to a higher tax rate of 60% long-term and 40% short-term capital gains, regardless of their holding period, as BITO is considered a Section 1256 contract by the Internal Revenue Service (IRS).
- Risk: BITO is a risky investment, as it is exposed to the high volatility and unpredictability of the cryptocurrency market. BITO may experience large price swings, due to factors such as supply and demand, regulation, innovation, competition, hacking, fraud, or technical issues. BITO may also face operational, legal, or reputational risks, such as system failures, cyberattacks, lawsuits, or negative publicity. BITO investors should be prepared to lose some or all of their investment, and they should only invest what they can afford to lose.
Conclusion
BITO is the first bitcoin futures ETF in the US, and it offers a convenient and regulated way to gain exposure to the changes in the value of bitcoin, without owning it directly. BITO has performed well since its launch, delivering high returns and a high correlation with the spot price of bitcoin. BITO also has several advantages, such as accessibility, liquidity, regulation, diversification, and innovation.
