Bitcoin Futures ETF to Underperform Spot Prices by 8% Annually

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  • Experts believe BITO is currently underperforming spot prices by 17% and will underperform by around 8% in the longer term.
  • They warn retail traders to avoid future ETFs.
  • “We see Bitcoin futures-based funds as inferior products that have consistently underperformed the Bitcoin price,” warns Matthew Sigel.

Financial experts believe BITO, the Bitcoin futures ETF by ProShares, is currently underperforming spot prices by 17% and will underperform by around 8% over the long term.

The US Securities and Exchange Commission (SEC) has recently approved a “Bitcoin-linked” ETF for the first time. The product, which currently trades on the New York Stock Exchange under the ticker BITO, is a Bitcoin futures ETF.

Unlike a “physical” ETF that would closely track BTC spot prices, a futures ETF follows contracts that reflect on the future price of the underlying asset. While this was not what the crypto community asked for, it is still an encouraging sign that the SEC might eventually greenlight an actual physical Bitcoin ETF at some point.

Futures ETF Will Underperform Spot Prices

Since futures ETFs are backed by futures contracts, they are subject to a continuous loss known as “contango bleed.” In simple terms, if longer-dated futures contracts are higher than the expiring shorter-dated contracts on the date of renewal, the ETFs would suffer a loss known as “contango bleed.”

Contango losses can be tremendous for commodities, as well as for Bitcoin. In larger markets, big players use contango to make money and also close the gap. However, since the Bitcoin market is largely controlled by retail investors, they might not be able to reduce the gap, and thus would incur a sizable loss.

According to Charlie Morris of ByteTree Asset Management, as of now, this gap is an enormous 17%, meaning the futures ETF is underperforming spot prices by that much.

.#bitcoin futures ETFs launch today. Roll yield has spiked to 17% – which means investors underperfom BTC by 17% on an annualised basis. Writing about that today in ByteTree ATOMIC. pic.twitter.com/gwht8JFszx

— Charlie Morris (@AtlasPulse) October 19, 2021

Moving forward, Morris expects this gap to shrink a little, but no more than 8%. In the longer term, he expects the futures ETFs to underperform BTC spot prices by 8.4% annually, before fees.

Experts Warn Retail to Avoid Futures ETF

BITO has become the fastest ETF to exceed $1 billion in assets under management, which suggests investors are quite excited about it. However, financial experts warn retail traders might incur a substantial loss if they invest in the futures ETF.

“This is not something for retail investors to buy, in my opinion. There’s plenty of outlets to buy bitcoin directly,” said Tyrone Ross, CEO of Onramp Invest, a company that provides access to crypto-assets for registered investment advisors. Ross added:

Buying a futures ETF, where the average retail investor does not understand ETFs or futures, which are complicated, is not the best product for retail investors.

Matthew Sigel, head of digital assets research at VanEck, even called futures ETFs “inferior products” and said they are “substandard vehicles” for getting exposure to an asset. He said:

We see Bitcoin futures-based funds as inferior products that have consistently underperformed the Bitcoin price and bring additional complexities in regards to how they must be managed, at a higher cost than ETFs. Simply put, they are substandard vehicles.

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