There are signs that the Bitcoin futures market is not large enough for the expected wave of mutual funds on cryptocurrency. Since its launch last Tuesday, the Proshares Bitcoin Strategy ETF has accumulated $ 1.2 billion in investor assets, the fastest $ 1 billion ever raised.
But analysts say that success will almost certainly come at the expense of fund investors, as profits make the Proshares ETF a clear target for traders trying to capitalize on ETFs: they need to enter large futures positions in the near future, and often “roll” them into next month , Instead of receiving cash upon expiration of the contracts.
The Proshares fund, which buys Bitcoin futures instead of the cryptocurrency itself, now controls more than one-fifth of the Bitcoin futures that expired this month, and nearly a third of the contracts expiring next month. The volume of these holdings will put pressure on returns from mutual funds based on futures contracts that have already been launched, slowing the pace of further launches, analysts say.
“For us, it creates more trading opportunities,” said James Cutolas, CEO of Typhon Capital Management, a nearly $ 200 million hedge fund that trades in futures contracts, including Bitcoin.
Must roll out the contracts for next month
Proshares says the fund offers investors an opportunity to gain exposure to Bitcoin. To maintain this exposure, Proshares takes the investors’ money from the ETF purchases on the futures contracts, and uses some of it to buy futures contracts on Bitcoin, especially the futures contracts for the month of battle, since these usually offer the closest correlation to the cryptocurrency’s spot price.
This is also the point where things get complicated. When the contract expires, the fund must roll over its existing contracts for the next month. Other investors know this, so they buy next month’s futures first – a move that raises their price, allowing traders to make a profit by selling following the demand created as the fund rolls on. The higher price paid by the mutual fund comes out of the pockets of investors.
“It can cost a lot of money to roll out futures contracts on Bitcoin,” said Francisco Blanche, an analyst at Bank of America. “There’s an element of traders taking advantage of it, and investing that they could potentially lose from it.”
Another matter: CME Group’s position restrictions have already caused ProShares to invest next month, analysts said, a decision that could reduce the pressure to roll out this month’s contracts for next month, but poses a danger of widening the gap between fund and bitcoin performance. These position limitations will be doubled next month, which may ease this issue.
“This is an evolving market,” said ProShares CEO Michael Sapphire. “We expect the market to continue to grow on both sides of the aisle and become more and more efficient.”
Lack of liquidity in contracts on crypto
In its prospectus, the fund highlights the lack of liquidity in the crypto futures market, adding that large positions increase the risk of liquidity, may make it difficult to sell positions and may affect the price of futures contracts on bitcoin. Doing so “may increase the losses accrued,” the prospectus said.
The price of the basket fund on Bitcoin Proshares fell by 1.2% between the opening of the market at 9:30 last Tuesday, the first day it was traded, and between 16:00 on Wednesday. During these two days, Bitcoin fell by 2.4%.
Asset managers and futures traders say the possibility that other mutual funds will buy the same futures contracts could exacerbate the problem. The Valkyrie Bitcoin Strategy ETF launched on Friday will eventually make the contracts roll more expensive, hurting the performance of both funds, analysts say.
One of the largest mutual funds in the country issuing mutual funds, Invesco, has already announced that it is currently withdrawing from the idea of following ProShares, with a mutual fund on its own Bitcoin futures contracts. The company did not elaborate on the decision, but people familiar with the matter said that issues of capacity capability within the Bitcoin futures market were a factor in the decision.
In the past year, the roll yield of Bitcoin futures on an annual basis – reflecting the gap between next month’s futures and the price of Bitcoin – averaged 8.4%, said Charlie Morris, founder and chief investment officer at ByteTree Asset Management.
This means that an investor in a mutual fund on futures contracts would receive $ 91.6 before commissions on an annual basis for every $ 100 that Bitcoin climbs. This gap is expected to widen with the volatility, which has risen recently after there have been big price jumps in Bitcoin. On an annualized basis, the rollover return reached 17 percent on Thursday, Morris said, meaning investors in a fund based on futures contracts will receive a $ 83 refund (before commissions) for every $ 100 Bitcoin climbs.
“Terma” and its effects on trade
Such a situation is not unprecedented. A popular mutual fund called the United States Oil Fund, or USO for short, has grown so much that it often controls a significant portion of the most active futures contracts in the oil market. Although this market is much deeper and more liquid than the Bitcoin futures market, oil traders often decided to buy the futures for the next month before USO had time to do so, a practice known as front-running. This practice caused the fund to pay more for its futures contracts, and this hurt returns to investors in the fund.
This is not an isolated case. In the last ten years the USO has lost almost 80% of its value, while crude oil prices have risen and fallen sharply at times, but eventually reached about the price at which they started.
Unlike USO, the funds managed by ProShares and Valkyrie are actively managed, giving fund managers more leeway, and potentially limiting the impact of term trading. “Our goal is to reduce any possible friction in the process of rolling out contracts,” said Sapir of ProShares.
Still, both funds advertise their daily holdings, just as USO and other mutual funds do, and this gives traders a clear picture of their positions. “It’s like poker,” said Cutolas of Typhon Capital Management. “You lose an advantage when the whole market knows what your position is.”