Summary ProShares Bitcoin Strategy ETF charges a higher fee compared to other ETFs and has a varying correlation with Bitcoin price over shorter timeframes. The availability of options on the ETF is unique within the traditional financial system and can be used to express bullish beliefs. The upcoming Bitcoin halving and the introduction of Bitcoin ETFs are tightening the supply of Bitcoin and potentially putting upward pressure on its price. The ProShares Bitcoin Strategy ETF ( BITO ) is a vehicle used to go long Bitcoin that is based on futures. It has been around a lot longer than the spot ETFs that were launched this year. The downside is that it charges around 0.95% which is significantly above what the new swath of ETFs is charging. The correlation of the fund with the Bitcoin price is generally very high. But if you zoom in and look at correlation over shorter timeframes, it varies quite a bit more. Data by YCharts It also lags the Bitcoin price a bit. Year-to-date that's noticeable, but it is also true since inception. I'm not sure how this is going to pan out for the spot ETFs. I'd guess they will track a little bit better. Data by YCharts What's still unique to BITO is the availability of options on the ETF. Within the Tradfi system, this is currently still the only way to get derivative exposure to cryptocurrencies. With the launch of the spot ETFs, see Bitcoin ETF Approval ; What Does It Mean For Crypto Markets, I expected demand for Bitcoin proxies like MicroStrategy ( MSTR ) to fall off. That hasn't happened, and I think one reason for that is the active options market. When traders expect prices to accelerate upward faster than they have been, call options can be an efficient way to express that belief. It can also be unfounded speculation, of course. When I looked at the options chains for BITO and MSTR, I noticed that MSTR's skew is fairly unusual for a stock. skew in MSTR (optioncharts.io) The graph shows that call options are relatively expensive compared to put options. The BITO ETF's option chain doesn't exhibit the same profile: skew in BITO (optioncharts.io) If I look at December 2024 at-the-money calls on BITO these trade at an implied volatility of 63%. An at-the-money call costs around 19.3% of the current share price. MSTR January 2025 call goes for 44.2% of the current share price. MicroStrategy is a very small software business that holds quite a lot of Bitcoin. It is often viewed as a Bitcoin fund, and traded that way, although there are important differences in tax treatment down the line. MicroStrategy is led by Michael Saylor who's an outspoken advocate of Bitcoin. In a way, the discrepancy in prices makes sense because MicroStrategy tends to issue convertible bonds from time to time and buy additional Bitcoin with the proceeds. The company levers up ( like yesterday ) as the price of Bitcoin goes up, issues debt and buys additional Bitcoin (further squeezing supply), and this continues until there is a sharp pullback in crypto markets. By my count, the company likely holds around 225k Bitcoins by now. At a Bitcoin price of $72k, that stash is worth around $16.2 billion. The legacy operating business is max worth like $1.5 billion (which is very generous IMHO). At $1703 per share, the company has a market cap of $28.75 billion. This implies the market values the power to issue debt and buy more Bitcoin (and ultimately pay taxes) at around ~$11 billion. I've thought about it, but I'm not confident it is a great idea for short MicroStrategy calls vs. long BITO calls. The difference in price action could be misguided: Data by YCharts Perhaps it isn't ultimately sustainable from a fundamental perspective. But these things aren't exactly fungible, and I doubt MicroStrategy loses its appeal in the short term. These fast run-up in the price of Bitcoin generally make me nervous. Here's what I said in Bitcoin ETF Approval What Does It Mean For Crypto Stocks: I'm not entirely sure about the effect on the Bitcoin price in the very short term. So far, things are looking good, and we could see it zoom to $50k. However, we could also see some selling during market hours as traders anticipated the event. In my view, the selling is likely to be short-lived because we're also about 90 days away from the halving. I've often referenced this event in the last year or so. I've included graphs from different sources to illustrate the perceived relationship to price surges but found a very nice one by crypto data platform Glassnode: Effect of halving on BTC price (Glassnode) You can't be certain the price goes up as a halving event approaches, or we pass it by. But I do think it is quite bullish that the fresh spot ETFs are expanding assets under management quite quickly: spot Bitcoin ETF AUM growth (Trackinsight via The Block) Spot ETFs are now rapidly crowding out the market share of futures: Spot vs Futures Bitcoin ETF market share (Yahoo Finance via The Block) Because futures are cash-settled, spot ETFs possibly have a larger impact in terms of taking real Bitcoin supply off the market. The new all-time highs attract interest and with market participants like MicroStrategy (they aren't the only one) following a procyclical strategy of buying more when prices rise, it seems likely the trend will continue for now. Diamond hands are strongest in bull markets. The market is putting a huge premium on Bitcoin within MicroStrategy vs. Bitcoin through BITO. I don't know exactly why. I could interpret it as an enormous speculative desire to be long Bitcoin. Rather than short that desire, I rather maintain my Bitcoin position. Ultimately, the money flowing toward MicroStrategy impacts the Bitcoin price as the company continues to issue debt and buy more. Theoretically, the company could even issue stock and increase its value. Miners are soon putting less supply on the market because of the halving. The ETFs make Bitcoin an even more accessible investment. Meanwhile, the price action (new highs) also drives interest and headlines. I find it hard to hold on through when prices go up this fast. In my 2023 article , I wrote: While the potential impacts of the Mt. Gox repayment and the conversion of Grayscale into an ETF present potential bearish considerations for investors, I doubt these factors will do more than stall Bitcoin's ascent. The upcoming Bitcoin halving and the launch of spot Bitcoin ETFs are pivotal fundamental events that are likely helping to drive the current price ascend. As we approach and go through the holiday season with bullish, solid narratives for crypto, it seems fitting to me to hold on, even if Bitcoin surges a little faster and harder than I think is ideal. The ProShares Bitcoin ETF is still a fine (although not preferred) vehicle to get exposure to Bitcoin. It charges a higher fee than newer alternatives, but BITO offers unique options for derivative exposure within traditional finance. The disparity in pricing between BITO and MicroStrategy illustrates great pent-up demand for leverage to Bitcoin. As Bitcoin continues to go up, amidst market dynamics like the halving and ETF flows, maintaining a position in Bitcoin still appears to be the best choice. It doesn't appear to me that we're near the end of this run.
