Skip to main content

The Bitcoin ETF is finally here... (sort of) and Why it is very exciting

 On Tuesday October 19, Proshares Bitcoin ETF BITO (based on futures) began trading on the New York Stock Exchange.  Although it provides exposure to Bitcoin, it isn't as representative as buying it outright on a cryptocurrency exchange like Coinbase or Gemini.  The minor difference will not be noticeable for people using it as a trading instrument, but for those looking to buy and hold for a long time (or HODL - Hold On for Dear Life) the underlying mechanics make it less attractive as performance may deviate.

What makes BITO different than Bitcoin?

These ETFs being approved do NOT hold Bitcoin as an underlying.  They hold futures.  These futures are contracts that settle to cash on expiration date, so the fund needs to "roll them" (before the current futures contract expires, the fund will sell the current one to buy the next one to maintain exposure to Bitcoin).  From data below when or before October Futures expire it looks like it will cost 930 (selling October for $62,910 and buying November for $63,840) costing about 1.48%.

10/22/21 CME data




MonthPrior
Settle		UpdatedDifference% Difference
OCT 2021
BTCV1		$62,91022 Oct 2021

NOV 2021
BTCX1		$63,84022 Oct 2021$9301.48%




So from the market data above, it means the fund will loss almost 1.5% per month by rolling (compounding this loss would be around 16.5% annually).  

The difference between futures could change to increase or decrease based on the supply and demand difference (example, borrow rate for bitcoin, interest rates, or known upcoming event).  As an example, the Oil markets are the reverse, where the closer contracts are higher than the further contract with almost a -1.5% difference per month.

10/22/21 CME data




MonthPrior
Settle		UpdatedDifference% Difference
DEC 2021
CLZ1		$82.5022 Oct 2021

JAN 2022
CLF2		$81.3622 Oct 2021-$1.14-1.38%




So the "roll" makes it not a great candidate for holding long term, as currently it would drag the fund down around 16.5% annually.  However, by introducing this ETF it brings markets and liquidity closer together so markets don't become as wide and provides an alternative / easy way to get exposure without having to worry about private keys, theft, taxes and regulatory uncertainty.

Why I'm excited for it.

As much as people have a strong directional opinion and this provides an alternative, I'm most excited for being able to trade the Options.  With Volatility about 5 times that of S&P 500 and currently coming in around 90%, it means I can put strategic positions on bullish or bearish using Options and with high volatility it gives me more flexibility to make money.  For example, I call sell a 10% 1 month Call for close to 5%.  If I were to do this on S&P 500 it would be only 0.2%.  So if the markets don't go above 10% in month I would only get 0.2% in S&P 500 vs 5% in BITO. Trading Options can be risky, but for those that understand the mechanics, it can be creative to find profitable trades.

What's Next?

I do expect an Ethereum ETF not too far behind as there is already a US Futures market for it.  But I don't expect GBTC or any spot based ETFs to come shortly after.  The main reason is that for the US Futures based on crypto (Bitcoin and Ethereum), they have a pricing and settlement mechanism that is on a US Regulated (controllable) exchange (with mechanisms to protect market participants, like circuit breakers to pause trading if instruments move too much).  Because Cryptocurrency is decentralized, this actually works against it for having a product on the NYSE or NASDAQ.  Maybe GBTC and other Bitcoin or Ethereum based funds can figure out some way to appease regulators as it could also use the same settlement logic on the exchanges.  But without the US Futures, I don't expect Litecoin, Cardano, Solana, Polkadot, Uniswap, Dogecoin, Algorand, Shiba Inu, Polygon, or any other coin to be coming soon. 

It's very exciting to see how fast things move now, as 2 Funds launched this week, with Option Contracts Live and even Weekly Options.  I just hope more Market Makers participate to make the bid/ask spread quoted in pennies like SPY.  And maybe if futures become liquid enough, the ETFs will carry further out contracts reducing the roll effect (like USO adopted during the Covid-19 panic selling of oil).

Bitcoin Futures ETFs

ProShares Bitcoin Strategy ETF (BITO) 

The Valkyrie Bitcoin Strategy ETF (Nasdaq: BTF)

The VanEck Bitcoin Strategy ETF (XBTF) Coming October 25, 2021



Labels:

Comments

Post a Comment

Popular posts from this blog

using options to recover from a big move against me when buy a stock for shareholder benefits - RCL attempt to repair position

Shareholder Benefits Owning shares of a company can entitle you to special benefits when consuming products or services.  For example, Royal Caribbean Cruises (RCL) provides $100 onboard credit per Stateroom on Sailings of 6-13 nights.  With an upcoming cruise booked and most of my portfolio in cash, I decided to take advantage of this offer.  I've done a few cruises in the past and definitely enjoyed Royal Caribbean, especially having young children; and can imagine I will take more cruises with them in the future. The Purchase of Shares I didn't do any deep Fundamental or Technical Analysis, but looked at a 5 year chart seeing the stock priced at $135 before the COVID-19 pandemic, and during the pandemic reached a low of around $24.  When I purchased the shares it was $40 and dropped in price for the 2 preceding days.  Since I bought at the end of the day, I figured I would sell a call option (overwrite) the next day as the volatility was high around 85%....
Post a Comment
Read more

How does theta change through time when selling strangles? SPY, META, IEF

What is Theta? Theta is amount of value that an option position changes each day due to the passage of time.   For example, SPY closing at 411.99 and Implied Volatility (IVOL) 22.58% SPY 9/16/22 (47 DTE) Strike delta price theta 376P -0.15 3.12 -0.09 440C 0.15 1.97 -0.07 The above table shows that the 376 Put has a theta of -0.09.  This means the option will lose $9 a day (each contract represents 100 shares so -0.09 x 100 = -$9. To standardize, the theta/price is a ratio that can be used.  In our example  -$9/411.99 => -0.02%. Table of Theta for 15 delta Strangles for SPY, META, and IEF Information was pulled from market data on 7/31/2022 taking the initial strikes and seeing how the data changes for different upcoming Days to Expiration (DTE).  (15 delta Strangles for SPY correspond to 376P and 440C). SPY is the most active ETF for S&P 500. IEF is an ETF of 10 year Bonds. META is the ticker for the company formerly known as Facebook. Analysis 1) T...
Post a Comment
Read more

Best things about trading options

  1) Capital Efficient - Larger Potential Profit Buying options, the capital required will be at most the cost of the option contract, as owning an option can only go down to $0.  Because option contracts have a time component and strike component (unlike stocks), it means only option contracts will always be cheaper than owning shares. Selling options, the capital required will be based on Margin Requirements set by the regulators and potentially adjusted by the broker.  The main difference is that initial capital required to sell options is based on formulas trying to target a probabilistic move against the position and not based on the max value the shares could become.  This generally leads to about 1/5 the capital and potentially less if the account qualifies for Portfolio Margin. These lower capital requirements mean that options can have risk that is leveraged to the corresponding stock, meaning less capital is required to taking similar risks of buying stock ...
Post a Comment
Read more