The cryptocurrency market is renowned for its volatility and the recent decline in the trading activity of ProShares Bitcoin Strategy ETF (BITO) is a testament to this. ProShares, once the beacon of the BTC futures-based ETFs, has experienced a steep plunge in its trading volume, raising eyebrows and sparking conversations across the financial sector.
The Cooling of a Crypto Titan
After the introduction of ETFs directly investing in Bitcoin began trading in the U.S. on January 11, ProShares’ prominence in the market took a hit. The trading volume for BITO shares on the NYSE plummeted by 75%, dropping from the record $2 billion observed on its launch day to a mere $500 million. This dramatic decline was accompanied by a net outflow of over $270 million during the same period. The data, sourced from Coinbase and ETF.com, paints a clear picture of the shifting investor preferences in the cryptocurrency ETF space.
The entry of 11 spot ETFs, which directly invest in Bitcoin, has been a game-changer. These funds collectively recorded a staggering $14 billion in trading volume in their first week alone, dwarfing the figures of other ETFs launched in 2023. Attracting over $1.2 billion in investor funds in a week, these spot ETFs have outshone futures-based options like BITO. The advantage of spot ETFs lies in their direct investment approach, offering investors a more straightforward route to Bitcoin exposure without the complexities of managing the asset itself.
The Dynamics of ETF Creation and Redemption
Despite the cooling interest in futures-based ETFs, their relevance in the market remains unshaken. The construction and redemption mechanisms of ETFs play a crucial role in this. There are two primary methods for these processes: in-kind and cash creation. In the in-kind approach, authorized participants (APs) acquire the underlying securities of the ETF and exchange them with the issuer for ETF shares. This mechanism is reversed for redemption. In contrast, the cash-creation method involves APs providing cash instead of securities.
The cash-creation model exposes APs to the volatility of Bitcoin prices, leading them to seek regulated products like BITO and CME futures for hedging. According to Laurent Kssis, a crypto trading advisor at CEC Capital and a former ETF market maker, APs often turn to regulated products like BITO as a hedge, especially when direct execution with CME bitcoin futures or the cryptocurrency itself isn’t feasible. David Duong, head of institutional research at Coinbase, echoes this sentiment, highlighting that despite the drop in BITO’s trading volume, it remains an integral part of the Bitcoin ETF landscape.
This reliance on regulated hedging methods, such as long CME futures or BITO, is crucial for APs, especially when creating or redeeming shares. Some APs even strategized by purchasing Bitcoin ahead of the spot ETF launch and selling BITO to manage potential client transactions within the day.
The dynamics in the Bitcoin ETF space extend beyond ProShares. The Grayscale Bitcoin Trust (GBTC), which recently transitioned into an ETF, witnessed over $2 billion in sales, including a significant offload by FTX’s bankruptcy estate. The introduction of spot Bitcoin ETFs on January 11, approved by the U.S. Securities and Exchange Commission, has led to a shift in investor preferences away from GBTC, despite its decade-long presence as a less attractive closed-end fund.
The drop in Bitcoin’s price post-ETF approvals contrasts sharply with the high expectations many had. The selling pressure might ease now that FTX, a notable player in the crypto trading world, has liquidated its substantial holdings. However, the Grayscale trust’s conversion into an ETF, combined with the rise of new funds from BlackRock and Fidelity, signifies a shift in the landscape of cryptocurrency investments.
As we navigate these evolving dynamics, one thing is certain: the cryptocurrency market, with its ETFs and investment strategies, remains a complex and ever-changing beast. ProShares’ journey through this turbulence is a clear reminder that in the world of crypto, change is the only constant.