JPMorgan says its hotly new Bitcoin ETF could get too big and wreak havoc on the futures market. The launch of the ProShares Bitcoin Strategy ETF has had insane success as the fastest ETF to attract $1 billion in assets. But that success is a double-edged sword and could hurt its investors, according to JPMorgan. Detail cryptocoin.com‘in.
The fate of the Bitcoin ETF
The ProShares Bitcoin Strategy ETF saw a surge in entries when it launched last week, making it the fastest ETF to reach $1 billion in assets. But JPMorgan said in a note last week that the futures-based ETF has a major flaw that could result in lower returns for its investors if the assets in the fund grow too large. This is because the ETF does not have Bitcoin as the underlying asset. Instead, the ETF has Bitcoin derivatives that try to match the yield profile of the cryptocurrency through futures contracts. SEC Chairman Gary Gensler resisted calls for a spot Bitcoin ETF to be approved, but allowed it.
According to JPMorgan: “Contango on the BTC futures curve may bring a drop in performance for these funds due to the futures carrying cost/return on loss. This transport drag can be several times the management fees of the products, and can grow even more if these products raise significant assets.” To actively manage a BTC futures portfolio that is closely correlated with BTC’s price movements, the ETF must continually roll over Bitcoin futures contracts just before expiration into the next month. This creates various transaction costs and is less efficient than simply buying and holding BTC, similar to what most gold and silver ETFs do.
Is it the cost of the ETF?
According to JPMorgan, the average annual cost of rolling over futures contracts has been about 9% since mid-2019, about 10 times the 0.95% annual expense rate of the ProShares Bitcoin Strategy ETF. This may disappoint investors with their returns as they may lag significantly behind Bitcoin returns. The bank said that long-term volatility ETPs are a good example of how long-term returns can erode as costs associated with futures transactions increase. “The longer investors take a long position, the more expensive ETFs become to hold due to their own market influence,” JPMorgan said.
According to the bank, the ProShares Bitcoin Strategy ETF already owns about 25% of its open share in BTC futures contracts, and the fund recently requested a waiver to allow it to hold more than the 4,000 futures contract limit imposed from the CME. If the ETF does not receive its CME waiver, the fund may eventually deviate from its futures strategy and invest in crypto-exposed stocks to better track Bitcoin price, according to the fund prospectus.
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