The first Bitcoin futures ETF is facing various problems, but the situation could ease as more ETFs go live, and the CME raises contract limits.
The first Bitcoin exchange-traded fund (ETF) in the US market is gaining more popularity, so much popularity that it is now at risk. After releasing on the New York Stock Exchange (NYSE) on Tuesday, the ProShares Bitcoin Futures ETF is in danger of hitting a cap on the number of futures contracts allowed.
The fund, Proshares Bitcoin Strategy, which gets traded under the symbol BITO, receives back-up from futures contracts from the Chicago Mercantile Exchange (CME).
CME, one of the first financial derivatives exchanges in the world, imposes a limit of 2,000 contracts that an entity can have for the first month; however, as reported by Bloomberg, the ProShares ETF already has nearly 1,900 contracts for October and is very close to breaking market rules.
Exchanges impose limits on positions to prevent a single entity from setting up unilateral power and control over the market and prices, According to Pankaj Balani, CEO of Delta Exchange.
Popular Equal Risk
According to the report, the ETF has also gathered 1,400 November contracts, with more than $ 1 billion of assets under management. This gathering took place as a way of solving to get around the established limit. However, the fund’s accelerated growth rate has awakened fears on the product reaching a maximum total position of 5,000 open contracts.
One of the solutions that arise is for the ETF to distribute its shares in longer-term contracts. However, there is a risk that the fund will stray too far from Bitcoin’s performance.
A gap would thus arise between the performance of Bitcoin and the actual returns of the fund. This situation takes place because longer-duration futures contracts trade at a substantial premium over the spot price.
The fund could sell low and buy high while rolling over positions to expiration, leading to a counting bleeding.
According to Bloomberg, the fund’s current ability to track the cryptocurrency is questionable anyway, as it has to pay to renew contracts, and the futures curve is currently descending upward.
The Arrival of other ETFs Could Improve the Outlook
The good news is that the CME is raising the ceiling to 4,000 contracts from the previous month, starting with November futures, although there would still be a limit of 2,000 contracts for each month.
Experts have also highlighted that the situation could improve as other Bitcoin futures ETFs start trading. Launching competing products such as the Valkyrie Bitcoin Strategy ETF, which will begin trading today, and the VanEck ETF, which will debut on Monday, October 25, could help weaken the demand for the ProShares fund.
On the other hand, Bloomberg Intelligence Senior ETF Analyst Eric Balchunas believes the ProShares momentum will remain hard to stop at this time.
By: Jenson Nuñez
