BITO sees outflows of $270 million, crowding out effect after Bitcoin spot ETF listing?

According to a report by CoinDesk, the first Bitcoin futures ETF BITO in the United States has seen outflows of over $270 million recently due to the launch of a Bitcoin spot ETF. With the introduction of the US Bitcoin spot ETF, not only has it impacted Grayscale's GBTC and the higher management fee spot ETF in Europe, but has also left the earlier launched futures ETF BITO as a victim.

Spot ETF vs. Futures ETF

ETFs that track the price of Bitcoin can be divided into two types: those investing in Bitcoin spot and those investing in Bitcoin futures.

Bitcoin spot ETFs are quite intuitive, using a trust structure to buy and sell Bitcoin, allowing investors to benefit from the appreciation of Bitcoin's price. On the other hand, futures ETFs track the trend through Bitcoin futures on exchanges, meaning the futures ETF is trading cash-settled futures contracts. Therefore, there may be some differences in returns between the two.

The Bitcoin Strategy ETF with the trading code BITO is the first Bitcoin futures ETF in the U.S. market. It began trading on the New York Stock Exchange in October 2021, issued by the fund management company ProShares, with a management fee of 0.95%. According to information from their website, it tracks the value of Bitcoin through investing in Bitcoin futures on the Chicago Mercantile Exchange (CME). BITO allocates about 50% to futures contracts expiring in January and 40% to contracts expiring in February. This means that BITO needs to continuously roll over its positions, which involves closing out existing futures before the January expiration and buying new futures for March or April to continue holding Bitcoin futures. Rolling over incurs trading costs, and there can also be price differences between futures contracts with different expiry dates. Therefore, the cost of ETFs tracking futures is generally higher than that of simply holding spot positions.

However, futures ETFs have another advantage. Since futures trading involves margin trading, it allows for leverage in holding Bitcoin. This is why we see BITO holding around $600 million in U.S. Treasury Bills in the image below. Considering the current U.S. Treasury Bills' yield of over 5%, it is also a decent source of income.

Is BITO Really the Victim of Bitcoin Spot ETF Listing?

According to a report by CoinDesk, BITO hit a record drop from $2 billion on 1/11, with net outflows exceeding $270 million during the same period. However, is BITO really a victim of the Bitcoin spot ETF listing? Looking at the asset size observed when BITO was reported previously:

• 10/29/2023: $990 million
• 12/1/2023: $1.47 billion
• 1/23/2024: $1.84 billion

Since various asset management companies competed to apply for Bitcoin spot ETFs, the market anticipated the launch of BITO, leading to the rise in BITO and Bitcoin's prices. Now, with the official listing of Bitcoin spot ETFs, some retracement is also normal. For instance, Cathie Wood's ARK Invest sold 757,664 shares of BITO (valued at around $15.84 million) on 1/16 through ARKW and bought 385,427 shares of their own Bitcoin spot ETF ARKB, valued at around $16.77 million.

However, management fees are also crucial. Due to the fierce competition among asset management companies, up to 6 issuers offered significant initial fee waivers. BlackRock also proposed a discount of 0.12% for the first 12 months or first $5 billion, which will then revert to 0.25%, much lower than Grayscale's GBTC at 1.5% and BITO at 0.95%. Whether the situation of capital outflows will continue due to management fees and more competition remains to be seen!

Cash Mode in Bitcoin Spot ETFs Will Benefit BITO

The cash mode currently used by Bitcoin spot ETFs will also benefit BITO, as it exposes Authorized Participants (APs) to Bitcoin price fluctuations between receiving buy orders and issuing new shares by purchasing assets from the issuer. Therefore, according to some observers, APs may hedge using regulated products like BITO and CME futures.

Laurent Kssis, a former ETF market maker at CEC Capital, told CoinDesk:

It is not uncommon for APs to re-use regulated products like BITO to hedge because they may not have CME futures accounts to do so. If they can't execute CME Bitcoin futures or directly buy and sell Bitcoin, this is often considered a good way.

David Duong, Coinbase's Head of Institutional Research, also stated:

Despite the recent drop in BITO's trading volume, it will still be an "essential part of the Bitcoin ETF field."

Bitcoin spot ETF: Goldman Sachs also wants a piece, cash mode favors more traditional financial institutions to join

In addition, ProShares, the issuer of BITO, has recently proposed multiple leveraged Bitcoin ETF products.

Bitcoin spot ETF trading volume approaches $10 billion, ProShares submits five more leveraged Bitcoin ETFs