Five months in, bitcoin ETFs are down big but showing signs of staying power

Published Thu, Mar 24 20223:07 PM EDTUpdated Thu, Mar 24 20227:09 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The exchange traded funds that track bitcoin futures have been pummeled in their first few months of existence, but there may be reasons to be optimistic about what's ahead. The bitcoin futures ETFs launched in the fourth quarter of 2021, right around the high-water mark for the crypto market. The price of bitcoin is down more than 30% since the launch of the ProShares Bitcoin Strategy ETF on Oct. 19, and the bitcoin futures ETFs have predictably suffered. The three funds have fallen worse than spot bitcoin since inception, according to data from Coin Metrics, but not by much. Since the end of November, when all three were operational, each fund has dropped more than 27%, compared with a 26.4% decline for spot bitcoin. Source: FactSet, Coin Metrics Because the ETFs are allowed only to hold bitcoin futures contracts instead of the cryptocurrency itself, the funds are not a true way to track bitcoin. The futures funds can also be hit with transaction costs and pay market premiums that come from rolling one month's futures contracts over to the next. Aniket Ullal, head of ETF data and analytics at CFRA, said he was positively surprised by how well the funds have tracked spot bitcoin and that the early results suggest that the funds should be viable long term. "I think there's certainly value in the products, especially given how they've tracked the spot. I think eventually if we see a spot ETF, there's going to be a lot more interest in that. … but structurally, given how these products have performed, I don't see an issue," Ullal said. He said that one potential reason that the funds have only slightly lagged spot bitcoin is that the sharp pullback in the crypto market also dragged down expectations, helping to shrink the premium between futures contracts. However, Simeon Hyman, head of investment strategy at ProShares, said that the roll costs for futures contracts have declined in recent months because the futures market itself is gaining more traction and operating well. "The decline in the spot market doesn't have any specific implications for the shape of the futures curve. … We really do think that is indicia of the maturing of the market and the greater efficiency of the way the futures are being traded," Hyman said. Fund flows There is a big gap between the assets under management in the space. The ProShares fund, which hit the market first , has more than a billion dollars in assets, while the other two lag far behind. Ullal said that there did not appear to be a structural reason for the difference, attributing it to the time of launch and marketing success. The large early wave was particularly helpful for the ProShares fund, which saw the overwhelming majority of its assets enter in the two months after launch. "It would almost be disingenuous to not say you're surprised when you bring in a billion dollars in a week," Hyman said about the ProShares fund. "This is one of the biggest ETF launches of all time. But we did think there was an unmet need." The Valkyrie fund , meanwhile, has $44 million in AUM, according to FactSet. It saw a large outflow earlier this year, which Valkyrie CIO Steven McClurg attributed to year-end rebalancing, but the fund has since seen a return to positive inflows. He said that the decline in crypto markets overall has hampered interest, and he noted that the mix of clients was different from what was expected. "We do continue to get new creates and new clients into the fund. When you kind of take a look and see who is buying it, it is a little bit more hedge fund, more institutional in nature, which is a little bit surprising. We thought it would appeal more to retail clients, and it did in the very beginning, but as time has gone on the new clients have been more institutional in nature," McClurg said. The VanEck fund was the last to market, launching in November, and has about $26 million in assets. "In the world of ETFs, speed to market does matter. I think that's been displayed many times in the past. However, for being third to market and having a unique structure," said Kyle DaCruz, director of digital assets product at VanEck. "I think we're pretty satisfied with the flows so far. I would guess we will see increased flows this year." DaCruz said that VanEck believes the fund being structured as a C corporation ⁠— as opposed to a regulated investment company or "RIC" like its two competitors and most other ETFs ⁠— could help it win over clients long term, due to potential tax benefits. The fund also has a lower expense ratio than its competitors. Even though the initial rush of interest has slowed, all three funds have registered net positive fund flows over the past two months, according to FactSet. What's next The main question related to cryptocurrencies in the ETF world is when, if ever, will the Securities and Exchange Commission approve a fund that tracks spot bitcoin. SEC Chair Gary Gensler has signaled that agency wants to be cautious on approving crypto investment products , while the futures contracts⁠ — handled by CME Group ⁠— fit more cleanly into existing regulations. There is little optimism in the ETF industry that a spot bitcoin product will be approved soon. However, even with the uneven fund flows and potential for a more direct ETF in the years ahead, the futures funds have proven themselves as viable in their first few months, according to CFRA's Ullal. "They've not been failures. That part is clear. They've certainly performed well. They've attracted some assets. I think it's more a function of us being early in the cycle as opposed to the products aren't working," Ullal said.

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The exchange traded funds that track bitcoin futures have been pummeled in their first few months of existence, but there may be reasons to be optimistic about what's ahead.