It’s called the ProShares Bitcoin Strategy ETF (BITO).
It jumped more than 4% yesterday on its first day of trading.
And there’s a lot of fanfare over it in the mainstream press.
But before you invest a penny in BITO, pay special attention to today’s dispatch.
We’ve looked “under the hood.” And there’s a problem you need to know about… especially if you plan on holding for the long run.
Before we get to the bad news… there’s lots to celebrate about the arrival of this new exchange-traded fund (ETF).
As I type, the world’s first cryptocurrency is trading hands for $66,308.
That’s up 4% since the new ETF started trading at yesterday’s opening bell.
And it’s 2.6% higher than bitcoin’s previous all-time high of $64,859, which it set this April.
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That’s great news. But BITO is still far from the kind of ETF that’ll spark mass crypto adoption for everyday investors.
And it’s NOT the best option to get exposure to bitcoin in your portfolio.
It’s because of how this ETF is set up…
It doesn’t buy and custody the crypto on your behalf like the world’s biggest gold ETF, the SPDR Gold Shares ETF (GLD), does with gold.
Instead, it buys a type of bitcoin derivative called a futures contract.
Don’t be put off by the jargon… Futures contracts are one of the world’s oldest financial instruments. Farmers have used them for millennia to presell their crops.
As they do today, prices for grain in the ancient world bounced around all the time. To manage the risk of prices falling when it was time to go to market, farmers presold part of their harvest.
This locked in a price they could live with… and ensured they didn’t suffer a ruinous loss in a bad market when harvest time rolled around.
The problem with bitcoin futures is that the future price of bitcoin (let’s call it tomorrow-bitcoin) is typically higher than the price you can buy bitcoin for today (let’s call it today-bitcoin).
So as futures contracts expire every month, and you “roll over” into a new contract, you’re forced to buy pricier tomorrow-bitcoin and sell cheaper today-bitcoin.
This “sell low, buy high” pattern generates what’s known as roll cost. And it causes a futures ETF like BITO to underperform the price of the asset it’s tracking.
Take the United States Natural Gas Fund (UNG).
It’s an ETF that tracks natural gas prices. But it doesn’t buy and store natural gas. It relies on futures contracts to track its price.
Over the past 12 months, UNG has trailed the price you’d pay for natural gas on a given day – aka the spot price – by more than 150%.
Roll cost will likely be less extreme for BITO.
It’ll cost you between 5% to 10% more than you’d pay if you bought bitcoin directly from Coinbase (COIN) or another crypto exchange.
That’s according to Matt Hougan, the chief investment officer at crypto investment fund Bitwise Asset Management.
If you value convenience over cost, that’s not the end of the world. After all, bitcoin is up an average of 351% per year over the past five years.
But it’s not ideal, either. Because a futures ETF won’t track the bitcoin price exactly.
That’s thanks to the negative compounding effect of your roll costs.
BITO still has a place in some portfolios. But it’s for short-term traders, not long-term investors.
It’s a point our tech and digital assets expert, Jeff Brown, hammers home…
We all wanted a bitcoin ETF that would hold and custody bitcoin. This would have made it simple for all investors to gain access to this exciting asset class. What the SEC gave us is a risky ETF we can all access, but few understand.
Unless you understand how this kind of futures strategy works and can precisely time the bitcoin markets, I recommend staying away from this ETF.
Regardless of whether you should personally buy bitcoin through BITO… one thing is clear.
Bitcoin futures trading is already a regulated market in the U.S. So a futures-based ETF was low-hanging fruit for SEC chief Gary Gensler.
With BITO, Gensler doesn’t have to deal with the regulatory headache of reclassifying bitcoin as a security.
That’s something that has to happen before he can greenlight the kind of ETF that more accurately tracks the bitcoin price by holding the crypto directly – a spot ETF.
But if BITO is a success, it will pave the way for a spot ETF that won’t force investors to deal with the messy futures market.
Teeka Tiwari readers will know what I (Chris Lowe) am talking about…
Since January 2019, the world-renowned crypto expert has been spreading the word on how Wall Street adoption will trigger the mother of all rallies in bitcoin.
And an ETF that buys and custodies bitcoin on behalf of investors is a major component. Teeka…
It’s only a matter of time before we see a bitcoin ETF in the U.S. And the inflows will make the biblical flood look like a puddle.
Financial advisors control a $24 trillion pool of assets. Let’s be conservative and say 1% of that migrates to a bitcoin ETF. That’s $240 billion. That’s roughly one-fifth of the current bitcoin market cap of about $1.2 trillion.
Where will the new supply come from? Well, they’re not getting my bitcoin – at least not yet. And there’s a growing population of long-term bitcoin holders who won’t sell their bitcoin, either. Anyone who wants to buy bitcoin will have to go into the open market… and pay whatever the market is asking.
Bitcoin is the ultimate “hard asset.”
It’s hard to produce more of the crypto relative to its existing supply.
The issuance of new coins is baked into the bitcoin code. So no matter how high the bitcoin price goes, you can’t boost supply on a whim. Teeka again…
There’s no way to create more bitcoins in excess of its preprogrammed schedule. It’s not like gold. If demand for gold explodes… and gold’s price shoots up… gold miners will invest more to ramp up production. This will eventually bring prices down.
You can’t do that with bitcoin. Its supply schedule is fixed. This is what the world doesn’t understand. Bitcoin prices will go ridiculously higher as exploding demand hits restricted new supply. And as bitcoin goes higher, the whole crypto market will go higher along with it.
That makes today a great time for you to buy bitcoin. But for now, a crypto exchange such as Coinbase is the best way to do this.
In a few hours from now… colleague Dave Forest is hosting his first-ever live event here at Legacy Research.
He’ll pull back the curtain on a secret of the ultra-wealthy that has allowed him to rack up crypto-like gains in the model portfolio at our Strategic Trader advisory.
The top gains so far are 1,245%… 2,805%… and 4,492%.
And the average gain is 259%. That’s more than 16x what the S&P 500 delivered last year.
The strategy behind this astonishing set of wins has nothing to do with crypto… options… or private shares.
Instead, Dave uses an investment type that’s long been a well-kept secret of billionaires like Warren Buffett, Carl Icahn, and Jeff Bezos.
I’m running out of space here. But you can find out more about Dave’s discovery here in this message he put together for you and your fellow readers:
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Sign up for Dave’s event for free here… Then make sure to tune in at 8 p.m. ET.
And here’s a transcript from the message Dave recorded above:
Hey, it’s Dave Forest, and I’m here on Wall Street.
Now, I’m here to talk to you about what these guys, these big investors, the biggest investors in America, already know… and that is the profit power of warrants.
Warrants are a profit multiplier.
They’re often better, cheaper, and faster than buying regular stock. There’s no reason that every investor shouldn’t be using warrants. You can buy them and sell them with just a click, even from a discount brokerage account.
The thing is, these guys – the guys on Wall Street – have been keeping this a secret.
Carl Icahn, Warren Buffett, and some of the biggest investors in America – even Jeff Bezos – all use warrants.
It’s a billionaire’s advantage, and it’s something that they don’t necessarily want to share. They don’t want the secret getting out.
That’s all changing [tonight].
I’m hosting a special event to fill everybody in on warrants. [Reserve your free spot right here.]
Anyone who’s interested in the incredible profit power of this tool can tune in to find out what warrants are and how you can use them… and see a specific example of a warrant that I think is going to be terrific for the coming months.
If you get in before mid-November, I think we could use this warrant to invest alongside one of the biggest investors in America for massive gains.
If you’re interested, if you’re even a little bit curious, I hope that you’ll join me [tonight at 8 p.m. ET] for a seminar on everything you need to know about warrants.
Regards,
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Chris Lowe
October 20, 2021
Bray, Ireland