Does the Bitcoin ETF’s Str ucture Explain Its Success?

Insights, news and analysis for the professional investor

By Marc Hochstein, Executive Editor

October 24, 2021

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You know we’re in a bull market when a pension fund buys bitcoin and ether, and the crypto community, and the rest of the world, barely notice.

Overshadowed by the ETF launches and all-time-high news this week, the Houston Firefighters' Relief and Retirement Fund announced the purchase, which was facilitated by NYDIG, the same outfit that inducted MassMutual into the institutional digital assets club. This appears to be the first time a public pension fund in the U.S. has disclosed such an investment, though Ivy League university endowments were already known to be buying.

Three or even two years ago, a pension fund buying crypto directly, even just $25 million or 0.45% of its assets, would have been the story of the week. Now it’s just a blip. That shows how far things have come from, say, February 2019, when a Virginia county pension fund had to reassure anxious stakeholders it was not investing in any scary currencies, just a blockchain venture capital fund.

On the other hand, it’s important to keep a measured, sober view of a market notorious for hyperbole and noise. In this week’s briefing, Lawrence Lewitinn cautions not to read too much into an apparently bullish signal in the futures market. Slow your roll.

– Marc Hochstein, executive editor

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The Briefing

Last week’s launch of the ProShares Bitcoin Strategy ETF (BITO) was a smash hit by any measure. Yet it may be that at least part of its success could in part be the result of how the instrument is structured rather than pure demand from buyers hoping for bitcoin exposure.

In just a few hours, the exchange-traded fund (ETF) amassed $570 million in assets under management (AUM), making it one of the most successful debuts of an ETF in history. Within a few more hours, that number just about doubled.

BITO's assets are mostly invested on the Chicago Mercantile Exchange (CME), which saw an expected increase in both open interest and volume for bitcoin futures. One question is whether some of that volume could be the result of traders positioning for profit from the way this particular ETF is structured.

Currently, for every dollar it takes in, ProShares allocates 40.2% to buying CME bitcoin futures contracts that settle in October and 31.2% for futures that settle in November. The remaining 28% or so is put in U.S. Treasury bills. Reminder: On the CME, bitcoin futures are settled in cash, meaning no actual bitcoin changes hands. It’s basically a side bet on the price of the asset.

So if by Wednesday there were $1.108 billion in AUM, $791 million of it was bitcoin futures on the CME. That’s the equivalent of 13.8% of the CME’s bitcoin open interest of $5.745 billion.

From Monday to Wednesday, open interest soared to $5.745 billion from $4 billion, an increase that was more than double the ProShares ETF’s holdings.

Meanwhile, volume was up, too, to levels never seen before on bitcoin futures: Tuesday saw $5.9 billion in futures change hands on the CME, and Wednesday’s figure was north of $7.5 billion. In the 19 trading days prior, the average was $2.5 billion per day.

Higher volumes? Higher interest? Why, of course that’s bullish, right? Perhaps, but maybe not 100%.

Here’s where it gets interesting.

Read the full column here.

– Lawrence Lewitinn

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Chain Links

FTX raised $420 million from 69 investors, including firms as notable as BlackRock and Tiger Global. TAKEAWAY: Just THREE months ago, FTX raised $900 million in a Series B at an $18 billion valuation. This week, FTX announced a $420 million raise from 69 investors (get it?) in a funding round that valued the exchange at $25 billion, up 38.8% from July. The company plans to make “potentially sizable” acquisitions as it continues to expand into the U.S. market.

Pimco’s chief investment officer revealed that the firm's hedge fund portfolios are already trading crypto-linked securities. TAKEAWAY: The investment firm has over $2 trillion in AUM and is beginning to take delta neutral positions, protected against small price movements, throughout crypto. Large investors may continue to find passive income strategies throughout crypto, from futures cash-and-carry trades to DeFi lending and liquidity provision.

The Grayscale Bitcoin Trust (GBTC) continued to trade at a 19% discount to net asset value (NAV) as multiple bitcoin futures ETFs launched in the U.S. this week. TAKEAWAY: Grayscale is waiting for regulatory approval of a spot bitcoin ETF that could hold the underlying asset. The trust currently does not allow for redemption, forcing investors to either hold or sell shares on the open market for a 20% loss. Digital Currency Group, the parent company of Grayscale (and CoinDesk), bought $1 billion worth of GBTC shares, letting the firm gain exposure to bitcoin at a discount and attempting to close the discount to NAV.

Tesla’s earnings report revealed the trillion-dollar company kept all of its bitcoin holdings throughout Q3. TAKEAWAY: Prominent CEOs Elon Musk of Tesla and Michael Saylor of MicroStrategy have expressed their faith in bitcoin through continuing to hold the asset for their shareholders. The long-term investments could either signal that the duo believes the asset has more room for growth or they philosophically align with crypto’s world-changing potential.

– Teddy Oosterbaan

What will 2022 bring? Crypto 2022 is CoinDesk’s ambitious effort to scope out what’s next. This week it's Policy Week, a week devoted to exploring the complex ways governments are interacting with the cryptocurrency ecosystem, and how policy decisions or lack thereof will affect the year ahead. Read more here.

Podcast episodes worth listening to:

Balaji Srinivasan: Bitcoin and the Search for Truth – Michael J. Casey and Sheila Warren, “Money Reimagined.”

Paul Tudor Jones: ‘Inflation … [Is] the Single Biggest Threat to Financial Markets and Society in General’ – Nathaniel Whittemore, “The Breakdown.”

Is Crypto Really a Threat to Financial Stability? – Ben Schiller, Anna Baydakova and Danny Nelson, “Opinionated.”

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