What you Need to Know About the Proshares Bitcoin Strategy ETF

First published
February 4, 2022
Last updated
June 21, 2022

2021 has been an eventful year for cryptocurrencies. From Bitcoin reaching its all-time high (ATH) in October peaking at $66,000 to El Salvador announcing that it would recognize BTC as legal tender, it is no secret that the year has welcomed a slew of exciting events in the cryptocurrency space. 

The cherry on top of all this? The launch of the first-ever Bitcoin ETF. Known as Proshares Bitcoin Strategy ETF, the index fund made its successful debut on the New York Stock Exchange (NYSE) in October and was reportedly the second most heavily traded ETF on the day of its launch. 

If you’re still unsure of what the Proshares Bitcoin Strategy ETF is and whether you should invest in it, we break down everything you need to know.

What is an ETF?

Exchange-Traded Funds - or more commonly known as ETFs - are baskets of assets that are traded on a stock exchange. 

To put it simply, think of it as a pre-packed box of donuts. The box would consist of pre-chosen flavors that come at a discounted price of say, $20 for a box of six donuts. This means that you would pay a fixed price of $20 for six different flavors that you can try. 

ETFs adopt a similar concept, but instead of donuts, the “box” comes with a variety of different assets such as stocks and bonds. The price of an ETF depends on the basket of assets it consists of.

With a variety of assets available in one single ETF, investors have always been drawn to this popular investment product since it allows them to automatically diversify their portfolios without actively managing and allocating their funds.

There are numerous ETFs available in the market and all have specific industries or products that they are pegged to. One of the most popular ETFs - the S&P500 - tracks 500 of the biggest companies in the US while others such as the iShares Global Clean Energy ETF (ICLN) and VanEck Pharmaceutical ETF (PPH) are focused on the clean energy and pharmaceutical sectors respectively. 

Besides industry-based ETFs, there are other types of ETFs worth nothing too.

Bond ETFs

Bond ETFs are made up of, well, bonds. However, unlike individual bonds, bond ETFs don’t have a maturity date. Hence, most investors that choose to purchase such ETFs are likely looking to generate a consistent and regular inflow of cash. These earnings come from the interest received by the individual bonds in the fund. 

Commodity ETFs 

While there are tons of ETFs that track stocks and bonds, there is also a handful that tracks commodities. Commodities refer to raw goods that can be bought or sold - think gold and crude oil. Commodity ETFs enable investors to purchase a basket of these securities. 

Though there is a vast variety of ETFs available in the market, there has not been an ETF focused on cryptocurrencies - until now. 

How Does the Bitcoin ETF Work?

Enter the Proshares Bitcoin Strategy ETF. Launched on 19 October 2021 on the New York Stock Exchange (NYSE), the ETF - its ticker symbol reads BITO - was said to be the most hotly anticipated launch, with its price rising approximately 4.9% to US$41.94 on the day of launch. 

Bitcoin beginners, here’s a key aspect of the ETF to note: It does not directly comprise Bitcoin. Instead, the fund tracks the Chicago Mercantile Exchange (CME) Bitcoin futures and contracts that speculate on the future price of Bitcoin. As such, investors should thus expect the price and performance of the shares to differ slightly from the price of Bitcoin itself.

So, What Exactly is a Bitcoin Futures ETF?

To understand what Bitcoin Futures ETF is, you would first need to know what futures contracts are. Simply put, they are agreements between two entities to buy or sell a specific asset on a specific date in the future at a specific price. 

With Bitcoin Futures ETFs, the asset refers to Bitcoin. The price will vary, but it largely is based on the Bitcoin Reference Rate - or BRR - which takes the average of Bitcoin spot prices from five key Bitcoin exchanges including Coinbase, Gemini, Kraken, Bitstamp, and itBit.

As such, while there is some correlation in price movements between Bitcoin and Bitcoin Futures ETFs, investing in Bitcoin futures is rather different from investing directly in the digital asset itself. 

Moreover, Bitcoin futures contracts - similar to all futures contracts - do expire. Bitcoin Futures ETFs will regularly sell the contracts they own and buy new ones. When the upcoming months’ contracts are trading at prices higher than the current month’s contract, the futures curve is upward-sloping. When this occurs, futures-based strategies are likely to sell relatively low-priced contracts and purchase higher-priced ones. 

On the other hand, when the following months’ futures contracts trade below the current month’s contract, the curve slopes downward. This is a positive signal since futures strategies will be selling high and buying low.

What Does it Mean for Investors and the Cryptocurrency Space? 

Though the ETF doesn’t invest directly in Bitcoin, it is still based on futures contracts linked to the cryptocurrency. This is a huge milestone for the crypto space as investing in a Bitcoin ETF would offer everyday investors the opportunity to give their portfolios exposure to cryptocurrency without having to deal with online exchanges or bitcoin wallets.

Other Methods to Earn With Crypto

While investing in a Bitcoin Futures ETF is one way to dabble in the crypto market, there are many other ways investors can choose to earn with crypto. The most obvious method is to invest directly in them. 

Another way to earn with crypto is to deposit them into interest-earning platforms like Hodlnaut. This is a prime option for existing crypto users to maximize the productivity of their assets at their convenience. It takes little effort to maintain and users can earn consistent returns of up to 7.25% APY

Final Thoughts

The Proshares Bitcoin Strategy ETF is a huge step forward and a definite milestone for the cryptocurrency space. With greater accessibility to the digital asset, it is likely we’ll see an uptick in mainstream adoption. And if you are already an existing crypto user, be sure to sign up for a Hodlnaut Interest Account to start earning more on your crypto assets. 

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