The demand is out there, the sec just needs to open the doors to it.
Until then, there will be an inferior service to investors, who will need to buy inferior ways to obtain bitcoin exposure.
Topic: Everything you wanted to know about a future Based ETF and were afraid to ask! - page 2. (Read 536 times)
April 12, 2022, 04:28:44 AM
Eric Balchunas drops another good one:
The demand is out there, the sec just needs to open the doors to it.
Until then, there will be an inferior service to investors, who will need to buy inferior ways to obtain bitcoin exposure.
The demand is out there, the sec just needs to open the doors to it.
Until then, there will be an inferior service to investors, who will need to buy inferior ways to obtain bitcoin exposure.
April 06, 2022, 06:33:06 PM
The sec is heating up the competition in the Future Based ETF, admitting a new fund:
Also there's an insight that, given the looser regulation, the Graal of a Spot ETF approval might happen sooner that later.
Also there's an insight that, given the looser regulation, the Graal of a Spot ETF approval might happen sooner that later.
March 18, 2022, 01:19:42 PM
In the meantime BITO is slowly grinding share issuance, and broke new records:
Shares are at historical maximum. Of course AUM is lagging behind due to BTC trading at lower level compared to issuance.
But they are accumulating dry powder.
Role positions are consequently at historical maximum: they have almost 5550 lots in position, controlling a record 27,720 bitcoins.
Shares are at historical maximum. Of course AUM is lagging behind due to BTC trading at lower level compared to issuance.
But they are accumulating dry powder.
Role positions are consequently at historical maximum: they have almost 5550 lots in position, controlling a record 27,720 bitcoins.
February 23, 2022, 03:10:05 PM
Future expiry has been nearing and BITO is already rolling their positions. February CME future will expiry on February 25, so they started selling against March, and as they are nearing the 4,000 contracts limit, they will soon roll into April.
Well, even if their open interest position is at historical maximum (5,486 futures equivalent to 27,430 contacts), they have been quite efficient, and the current future curve is also in tiny backwardation!
The annualised contango is at 2%, which is a very low number for a date so close to the future roll. Also the Bleed index, measuring the cost to roll a position between the second and third future, is close to historical lows, and particularly low just before a future roll:
I will put in the to-do list how the bleed evolves into and after a roll.
Well, even if their open interest position is at historical maximum (5,486 futures equivalent to 27,430 contacts), they have been quite efficient, and the current future curve is also in tiny backwardation!
The annualised contango is at 2%, which is a very low number for a date so close to the future roll. Also the Bleed index, measuring the cost to roll a position between the second and third future, is close to historical lows, and particularly low just before a future roll:
I will put in the to-do list how the bleed evolves into and after a roll.
February 09, 2022, 07:30:08 PM
A little update on our mutual Futures Based Friend.
They are running hot.
Their share count is at maximum since inception.
Of course their AUM in Dollar terms is quite depressed, as the value per single bitcoin has somewhat decreased.
Their NAV has however being lagging since launch the underlying BRR Index.
Whey weren't able to fully replicate they are looking at.
The BTC line is the orange on the above graph, while the blue line is the theoretical price without the management fees, who in theory should be a "mere" 2% per annum.
The green light represent the NAV of the fund. We see that they are lagging the future based index because their strategy of using future is quite a dangerous and risky .
So the more the curve is flat, the more buying spot and selling future is profitable.
On the other side it happens the curve is flat:
You see the contango is at the lower band hence the arbitrage community will have little incentive to play their part selling the future.
For these reasons was surprised to see the curve so flat, given the amount of the buying in the ETF, I would have expected to see more contango, and again more sellers in the future vs buying in the spot.
They are running hot.
Their share count is at maximum since inception.
Of course their AUM in Dollar terms is quite depressed, as the value per single bitcoin has somewhat decreased.
Their NAV has however being lagging since launch the underlying BRR Index.
Whey weren't able to fully replicate they are looking at.
The BTC line is the orange on the above graph, while the blue line is the theoretical price without the management fees, who in theory should be a "mere" 2% per annum.
The green light represent the NAV of the fund. We see that they are lagging the future based index because their strategy of using future is quite a dangerous and risky .
So the more the curve is flat, the more buying spot and selling future is profitable.
On the other side it happens the curve is flat:
You see the contango is at the lower band hence the arbitrage community will have little incentive to play their part selling the future.
For these reasons was surprised to see the curve so flat, given the amount of the buying in the ETF, I would have expected to see more contango, and again more sellers in the future vs buying in the spot.
February 07, 2022, 06:01:33 PM
Dude, there should be way to be able to subscribe for such threads. You deserve every single merit you earned!
I'll have something to read in my free time (I don't even remember what free time actually means but anyway, hopefully sometime this year lol).
Make a table of content with all the "Everything you wanted to know and were afraid to ask" threads, please
I'll have something to read in my free time (I don't even remember what free time actually means but anyway, hopefully sometime this year lol).
Make a table of content with all the "Everything you wanted to know and were afraid to ask" threads, please
I have one of those table. Do you think it would be useful?
If you want to know something about something (pun intended) you would easily discover my thread.
I find it hard that you want to discover everything on the Volcano bond because I wrote a thread about this!
February 07, 2022, 04:20:07 PM
Dude, there should be way to be able to subscribe for such threads. You deserve every single merit you earned!
I'll have something to read in my free time (I don't even remember what free time actually means but anyway, hopefully sometime this year lol).
Make a table of content with all the "Everything you wanted to know and were afraid to ask" threads, please
I'll have something to read in my free time (I don't even remember what free time actually means but anyway, hopefully sometime this year lol).
Make a table of content with all the "Everything you wanted to know and were afraid to ask" threads, please
December 30, 2021, 07:17:19 PM
My email didn't get any answer so far, but I see that future hedges are back to a normal level.
Bito is now holding 5,060 futures, just ahead of their first roll into February futures.
The strange thing is that, despite the massive roll, the futures curve is extremely flat:
Actually, the first future is in a slight backwardation versus spot.
The bleed index, or the cost of rolling future position, is back to zero: this allows BITO to be super-efficient at rolling their positions:
Bito is now holding 5,060 futures, just ahead of their first roll into February futures.
The strange thing is that, despite the massive roll, the futures curve is extremely flat:
Actually, the first future is in a slight backwardation versus spot.
The bleed index, or the cost of rolling future position, is back to zero: this allows BITO to be super-efficient at rolling their positions:
December 29, 2021, 07:13:45 PM
Something strange happened today.
I was updating (yes, I still manually updated this spreadsheet, as I am not able to scrap the website for the moment), the fund holdings.
I noticed that the futures under custody dropped from a total of 5,048 to 4,368. This is a gap of 680 lots or 3,400 BTC.
I immediately checked the outstanding shares and I saw the ETF actually created 200K shares.
This means I would have expected an increase of the futures used to hedge, not a decrease.
This means that they are actually short the spot market.
Weird.
I sent an email to their support, asking for clarifications.
I will keep you updated!
I was updating (yes, I still manually updated this spreadsheet, as I am not able to scrap the website for the moment), the fund holdings.
I noticed that the futures under custody dropped from a total of 5,048 to 4,368. This is a gap of 680 lots or 3,400 BTC.
I immediately checked the outstanding shares and I saw the ETF actually created 200K shares.
This means I would have expected an increase of the futures used to hedge, not a decrease.
This means that they are actually short the spot market.
Weird.
I sent an email to their support, asking for clarifications.
I will keep you updated!
December 29, 2021, 09:11:06 AM
If these laws are passed tax savings from ETFs would disappear, and we probably wouldn't have as many proposals for crypto based ETFs in the USA.
I am not an accountant buy it doesn't make any sense to me: either capital gains are taxed at institutional level, taxing capital gains when the ETF realizes them, or they are taxed at investors level, when the investor realizes capital gains selling their ETF. It cannot happen at both levels!
I am no accountant either, even I did study some basic accounting 100 years ago, but that seems perfectly possible. For example, any company that has an economic activity will be usually taxed at many levels: salaries will require a contribution to Social Security and other systems, profits will be taxed at whatever rate is in place and then the dividends will be taxed on the receivers as capital gains. An ETF that represents and economic activity may follow a similar structure I would say.
December 28, 2021, 04:26:39 AM
Bito has just started rolling their future position from DEC to JAN:
They sold the first batch of 950 DC contracts, buying at the same time the JAN expiry.
Soon, they will need to open FEB positions too.
It's going to be an interesting roll this one, given the concurrent End of YEar (a period with usually less liquidity than usual) and a very big option expiry with more than 6B of Open Interest overall in the Street.
They sold the first batch of 950 DC contracts, buying at the same time the JAN expiry.
Soon, they will need to open FEB positions too.
It's going to be an interesting roll this one, given the concurrent End of YEar (a period with usually less liquidity than usual) and a very big option expiry with more than 6B of Open Interest overall in the Street.
December 12, 2021, 01:15:10 PM
If these laws are passed tax savings from ETFs would disappear, and we probably wouldn't have as many proposals for crypto based ETFs in the USA.
I am not an accountant buy it doesn't make any sense to me: either capital gains are taxed at institutional level, taxing capital gains when the ETF realizes them, or they are taxed at investors level, when the investor realizes capital gains selling their ETF. It cannot happen at both levels!
December 11, 2021, 07:00:28 AM
As I understand it, ETFs are similar to mutual funds. Except ETFs offer greater tax savings.
Some in the united states have recently proposed closing this avenue of tax savings.
If these laws are passed tax savings from ETFs would disappear, and we probably wouldn't have as many proposals for crypto based ETFs in the USA.
Some in the united states have recently proposed closing this avenue of tax savings.
Quote
Democratic plan would close tax break on exchange-traded funds
September 16 2021
Senate Finance Committee Chairman Ron Wyden, D-Ore., has floated a new levy on exchange-traded funds to help pay for the Democrats' $3.5 trillion budget package.
Exchange-traded funds, or ETFs, are baskets of assets — such as stocks or bonds — and can be bought or sold throughout the day like stock. While everyday investors don't directly own the shares, a fund manager may buy or sell the underlying assets to financial institutions.
Regular investors typically avoid taxes while owning the fund because financial institutions can swap the underlying assets for others, known as an "in-kind" trade, which doesn't trigger capital gains.
Wyden has called for ending the tax break for these in-kind transactions, according to the proposal, which may affect all investors across the $6.8 trillion U.S. exchange-traded fund industry.
The plan aims to crack down on the financial institutions that bypass capital gains taxes.
https://www.msn.com/en-us/money/markets/democratic-plan-would-close-tax-break-on-exchange-traded-funds/ar-AAOwqNf
September 16 2021
Senate Finance Committee Chairman Ron Wyden, D-Ore., has floated a new levy on exchange-traded funds to help pay for the Democrats' $3.5 trillion budget package.
Exchange-traded funds, or ETFs, are baskets of assets — such as stocks or bonds — and can be bought or sold throughout the day like stock. While everyday investors don't directly own the shares, a fund manager may buy or sell the underlying assets to financial institutions.
Regular investors typically avoid taxes while owning the fund because financial institutions can swap the underlying assets for others, known as an "in-kind" trade, which doesn't trigger capital gains.
Wyden has called for ending the tax break for these in-kind transactions, according to the proposal, which may affect all investors across the $6.8 trillion U.S. exchange-traded fund industry.
The plan aims to crack down on the financial institutions that bypass capital gains taxes.
https://www.msn.com/en-us/money/markets/democratic-plan-would-close-tax-break-on-exchange-traded-funds/ar-AAOwqNf
If these laws are passed tax savings from ETFs would disappear, and we probably wouldn't have as many proposals for crypto based ETFs in the USA.
December 10, 2021, 11:27:16 AM
My spy in the financial world sent me a good graph:
Here you can see how BITO fared against the BRR Index, which is the underlying of the CME futures.
The fund lost 27.97% against the bitcoin losing 22.12%, with a Dow performance of -5.85%.
On a side note, I added the BTCE in USD, that lost 1.24% only.
Why the difference? The contango, or the cost of rolling the position.
Once again, future ETF are a nonsense.
Here you can see how BITO fared against the BRR Index, which is the underlying of the CME futures.
The fund lost 27.97% against the bitcoin losing 22.12%, with a Dow performance of -5.85%.
On a side note, I added the BTCE in USD, that lost 1.24% only.
Why the difference? The contango, or the cost of rolling the position.
Once again, future ETF are a nonsense.
December 09, 2021, 07:42:17 PM
What about the contrarian?
How many naysayer use BITO to express their view?
Well, not so many, apparently:
Bear in mind that the amount of those short interest, or the amount of shares someone borrowed only to sell it, is quote reduced, even if we consider datas are released every week. We have seen that higher amount of short sellers can be detriment of basically any share.
How many naysayer use BITO to express their view?
Well, not so many, apparently:
Bear in mind that the amount of those short interest, or the amount of shares someone borrowed only to sell it, is quote reduced, even if we consider datas are released every week. We have seen that higher amount of short sellers can be detriment of basically any share.
December 01, 2021, 07:20:12 PM
Futures-Backed Bitcoin futures have demonstrated themself a dramatically successful product, even if they have some very peculiar drawback that makes them a subpar instrument compared to cash backed Bitcoin ETF’s, which, for the moment, aren’t allowed (or going to be allowed) by the regulator.
The First Futures Bitcoin futures blacked ETF to launch has been Proshares’ Bitcoin Strategy ETF (BITO), which managed to hoard more than 1 Bln Assets Under Management in less than three days: the fastest ETF to reach this threshold.
Let's analyze how it works.
Website
Prospectus
Factsheet:
Here there is the Fund-s factsheet, describing his mean features:
https://www.proshares.com/media/fact_sheet/ProSharesFactSheetBITO.pdf?param=1637843142072
From these few lines we can highlight the main feature of the fund:
ETF Basics: Shares issuance/Destruction
Bitcoin ETFs trading is facilitated by Market Makers, subjects that provide the market with liquidity, or continuously updated prices and quantities for the investors to buy and sell the ETF. When an investor wants to buy an ETF share, will put in competition the prices of the various market makers on the exchange. Each market Makers continuously quote a pair of bid/offer prices for the ETF, that will be provided according to their peculiar models regarding underlying price and liquidity, willingness to reduce their inventory, and any possible other price-sensitive factors. When an investor decides to buy an ETF share and trade with the best pricing market maker, he will transfer the cash to the market maker, that in return will transfer the ETF in case of a buy (vice versa in case of a sell, the investor will transfer the ETF share against the cash). This simplified version of the trade requires the share already being issued and in possession of the market makers, to be transferred to the buyer through the exchange. In the event this is not the case, the market maker will have to go to the ETF issuer in order to obtain a new ETF share, against the corresponding cash amount. This process is called “share creation” or “share issuance”, and happens when the number of shares bought exceeds the available shares sold. Of course, the opposite phenomenon can happen, and it is called “shares destruction”. Please note that this creation/destruction process always happens “in-kind”, or against cash, not against futures as market makers transfer cash to the ETF issuers rather than futures.
As the share creation/redemption process is not instantaneous, or actually is quite slow, each market maker will maintain a certain quantity of shares in their account, maybe also hedging their value against the underlying market, in order to timely provide liquidity to the market. Looking at shares creation/destruction we can have a precise idea of funds flowing into and out an ETF, as the AUM is a misleading guide, as it can grow bigger without new fund inflow, being influenced by the underlying price dynamics (something like GBTC reaching record AUM without new subscribers being fund’s subscriptions being closed since the beginning of this year).
Future Backed ETF. How they Work
The main Feature of Bitcoin ETFs approved by SEC so far, is the fact that they track the future underlying price, or the CME reference Index in case of BITO. According to the SEC, approving ETFs under the 1940 Act, limiting approval only to future based ETFs means more protections for investors. Also, in their opinion, this is the only possible approval, as the fact that Bitcoin isn’t a security, makes it impossible for them to approve a physical bitcoin ETF under the less stringent 1933 act.
As the ETF has to replicate an index tied to CME futures market, the most effective way to do so is to buy the Futures quoted on that index, with a specific ratio in order to match the exposure given by the shares.
The problem is there is a huge cost in this kind of strategy. While the underlying index is continuous, futures have a designed maturity, and when this maturity nears, the issuer has to roll their exposure to the next expiry month. Rolling the exposure means selling the front month (the future with shorter expiry) to buy a longer maturity one (back month future). The price difference between the two contracts is actually a transaction cost.
In particular, given the peculiar microstructure of the Bitcoin market, the future price structure is upward sloping. Something called contango, as we explained in the thread:
Everything you wanted to know about BTC futures but were afraid to ask!
Each dot in the above graph, bar the one in the left which is the current spot level, represents a future expiry: as you can see going further on longer maturities the price increases. Just remember this has nothing to do with the expected future price of bitcoin, but it's something intrinsically determined by the market microstructure, as explained in my Future thread: future prices are not an unbiased prediction of the future spot market.
Being the future curve in contango, this means that every time the issuer rolls the position to longer futures, he has to sell the shorter, lower priced future, to buy the longer, higher-priced future. The whole operation imposes a loss, that will be passed to the investor, as a reduction to the NAV.
This cost is not constant, but depends on the shape of the futures curve structure being higher with steeper curves, and lower with flatter curves.
Since the launch of the ETF we have seen the future curve move quite a lot, as we can appreciate from this graph:
The First Futures Bitcoin futures blacked ETF to launch has been Proshares’ Bitcoin Strategy ETF (BITO), which managed to hoard more than 1 Bln Assets Under Management in less than three days: the fastest ETF to reach this threshold.
Let's analyze how it works.
BITCOIN STRATEGY ETF
Website
Prospectus
Factsheet:
Here there is the Fund-s factsheet, describing his mean features:
https://www.proshares.com/media/fact_sheet/ProSharesFactSheetBITO.pdf?param=1637843142072
From these few lines we can highlight the main feature of the fund:
- QuoteThe fund seeks capital appreciationThis vague statement is quite different from what you would find on a standard ETF term sheet. Those documents usually report something like:
Something like:QuoteThe Fund ProShares X seeks investment results, before fees and expenses, that track the performance of the X Index.This means they adopt a purely passive approach (bar a very few highly specialized actively managed ETF’s).
The fact that they don’t clearly state this “track” statement in the objective fund is indicative of the fact that they surrendered to the fact that tracking is quite a difficult objective to achieve, even before fees and expenses. - QuoteThe fund holds exposure to Bitcoin futures contracts onlyThe fund invests in Bitcoin futures to hedge their exposure to Bitcoin. They have the theoretical possibility to use other instruments, like equities of other instruments, but this is on a last-resort basis. Using futures instead of the underlying spot bitcoin means that the position must be actively managed, to say the least, roll the position each future expiry. This has implications on the expenses of the fund, as we will see.
- QuoteThe fund doesn’t invest directly in BitcoinThe future is not allowed, due to regulatory constraints, to directly invest in “physical” bitcoins. As the future is cash-settled, even if they somehow take delivery of the future, they will never end up with physical bitcoins in their portfolio.
ETF Basics: Shares issuance/Destruction
Bitcoin ETFs trading is facilitated by Market Makers, subjects that provide the market with liquidity, or continuously updated prices and quantities for the investors to buy and sell the ETF. When an investor wants to buy an ETF share, will put in competition the prices of the various market makers on the exchange. Each market Makers continuously quote a pair of bid/offer prices for the ETF, that will be provided according to their peculiar models regarding underlying price and liquidity, willingness to reduce their inventory, and any possible other price-sensitive factors. When an investor decides to buy an ETF share and trade with the best pricing market maker, he will transfer the cash to the market maker, that in return will transfer the ETF in case of a buy (vice versa in case of a sell, the investor will transfer the ETF share against the cash). This simplified version of the trade requires the share already being issued and in possession of the market makers, to be transferred to the buyer through the exchange. In the event this is not the case, the market maker will have to go to the ETF issuer in order to obtain a new ETF share, against the corresponding cash amount. This process is called “share creation” or “share issuance”, and happens when the number of shares bought exceeds the available shares sold. Of course, the opposite phenomenon can happen, and it is called “shares destruction”. Please note that this creation/destruction process always happens “in-kind”, or against cash, not against futures as market makers transfer cash to the ETF issuers rather than futures.
As the share creation/redemption process is not instantaneous, or actually is quite slow, each market maker will maintain a certain quantity of shares in their account, maybe also hedging their value against the underlying market, in order to timely provide liquidity to the market. Looking at shares creation/destruction we can have a precise idea of funds flowing into and out an ETF, as the AUM is a misleading guide, as it can grow bigger without new fund inflow, being influenced by the underlying price dynamics (something like GBTC reaching record AUM without new subscribers being fund’s subscriptions being closed since the beginning of this year).
Future Backed ETF. How they Work
The main Feature of Bitcoin ETFs approved by SEC so far, is the fact that they track the future underlying price, or the CME reference Index in case of BITO. According to the SEC, approving ETFs under the 1940 Act, limiting approval only to future based ETFs means more protections for investors. Also, in their opinion, this is the only possible approval, as the fact that Bitcoin isn’t a security, makes it impossible for them to approve a physical bitcoin ETF under the less stringent 1933 act.
As the ETF has to replicate an index tied to CME futures market, the most effective way to do so is to buy the Futures quoted on that index, with a specific ratio in order to match the exposure given by the shares.
The problem is there is a huge cost in this kind of strategy. While the underlying index is continuous, futures have a designed maturity, and when this maturity nears, the issuer has to roll their exposure to the next expiry month. Rolling the exposure means selling the front month (the future with shorter expiry) to buy a longer maturity one (back month future). The price difference between the two contracts is actually a transaction cost.
In particular, given the peculiar microstructure of the Bitcoin market, the future price structure is upward sloping. Something called contango, as we explained in the thread:
Everything you wanted to know about BTC futures but were afraid to ask!
 | |
| Fig.1. The Bitcoin Future Curve exhibits a steep contango. This has been true since its inception. |
Each dot in the above graph, bar the one in the left which is the current spot level, represents a future expiry: as you can see going further on longer maturities the price increases. Just remember this has nothing to do with the expected future price of bitcoin, but it's something intrinsically determined by the market microstructure, as explained in my Future thread: future prices are not an unbiased prediction of the future spot market.
Being the future curve in contango, this means that every time the issuer rolls the position to longer futures, he has to sell the shorter, lower priced future, to buy the longer, higher-priced future. The whole operation imposes a loss, that will be passed to the investor, as a reduction to the NAV.
This cost is not constant, but depends on the shape of the futures curve structure being higher with steeper curves, and lower with flatter curves.
Since the launch of the ETF we have seen the future curve move quite a lot, as we can appreciate from this graph:
 | |
Fig.2. Contango curve has been quite traded since ETF inception, and reached its' maximum on the same date of the future roll.
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