ProShares Bitcoin ETF Trading Plummets 75% Amid Spot ETF Interest

• Trading Volume Decline in ProShares Bitcoin Strategy ETF
• Significant Drop in Activity Post Spot ETFs Launch
• Impressive Results for Spot ETFs
• Role of Spot ETFs and BITO in Cryptocurrency Investment
• Creation and Redemption of ETFs
• Importance of BITO as a Hedging Instrument

Trading Volume Decline in ProShares Bitcoin Strategy ETF

The daily trading volume of ProShares Bitcoin$42,260 -0.64% Strategy ETF, also known as BITO, has seen a substantial decrease since the introduction of spot ETFs in the U.S. on January 11. Despite this, experts suggest that BITO will remain a crucial component of the market, functioning as a hedging tool.

Significant Drop in Activity Post Spot ETFs Launch

BITO, recognized as the leading Bitcoin futures-based ETF globally, has experienced a marked drop in activity post the launch of direct cryptocurrency investment ETFs in the U.S. Earlier this week, the worth of BITO shares traded on the NYSE was slightly above $500 million, a 75% dip from the record $2 billion recorded on January 11, based on data from cryptocurrency exchange Coinbase. Over the same period, BITO saw a net outflow exceeding $270 million, as per ETF.com.

Impressive Results for Spot ETFs

In contrast to BITO's performance, 11 spot ETFs recorded a combined trading volume of $14 billion in their first week, surpassing all other ETFs launched in 2023, according to Coinbase. These funds have garnered over $1.2 billion in investor funds within the first week of their inception.

Role of Spot ETFs and BITO in Cryptocurrency Investment

Spot ETFs serve as a valuable tool for investors seeking exposure to Bitcoin, offering the advantage of circumventing the difficulties associated with storing it. Therefore, they are seen as a preferred alternative to futures-based ETFs like BITO. However, because BITO invests in CME BTC futures, it has to periodically switch expiring contracts for new ones, incurring roll costs that negatively impact the fund's long-term performance.

Yet, as some market observers have noted, the cash-creation structure of spot ETFs is likely to ensure futures-based ETFs like BITO remain relevant.

Creation and Redemption of ETFs

ETFs are created and redeemed in two ways: in-kind and cash creation. With the in-kind process, when the ETF issuer wants to create new shares, the authorized participant (AP) purchases the underlying securities that make up the ETF and provides these to the issuer in exchange for a batch of ETF shares. These can then be sold on the open market. The process is reversed when the ETF wants to redeem shares.

In the cash-creation structure, the process stays the same, except that APs give cash to the issuer instead of securities. The issuer then buys the actual asset. This exposes APs to the risk of Bitcoin price fluctuations between when they receive buy orders and when issuers acquire the asset to create new shares. As such, APs are likely to hedge this risk with regulated products like BITO and CME futures.

Importance of BITO as a Hedging Instrument

Despite the recent decrease in BITO's volume, it will continue to be a fundamental part of the Bitcoin ETF space, according to David Duong, Head of Institutional Research at Coinbase. He added that some APs are expected to continue relying on regulated means of hedging, such as long CME futures or long BITO when creating shares. Further, some APs likely bought Bitcoin prior to the launch of the spot ETF and sold BITO to hedge potential client buys and sells intraday.

Edited by Jonathan Stoker