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The Bitcoin ETFs: An Instrument to be Reckoned With

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The tumbling bitcoin is hardly a piece of news anymore; the peaks and troughs are almost inherent to digital currencies. With tightening regulations and growing institutional skepticism, the bitcoin ETF was a revolutionary offering. Pent-up demand was awaiting an alternative passage to gain bitcoin exposure without actually owning one. Yet, two months down the line, it seems barely any different from the sharp movements in the broader crypto market itself. The question stands: what would be the ultimate ingress of cryptocurrencies in the mainstream world of investment funds.

The ProShares Bitcoin Strategy Exchange-Traded Fund – listed under the ticker ‘BITO’ – was launched as the most successful publicly-traded fund for any issuer on the New York Stock Exchange (NYSE). Exhibiting a prohibitive turnover of over $1 billion (plus an additional $1 billion in assets) in merely two days of trading, BITO was a dream debut for a fund solely based on pre-seed investments. While bitcoin continually vacillated in valuation, the BITO ETF clearly underscored the blooming demand for bitcoin exposure in the market of risk-averse institutional investors. It was the perfect bypass for investors looking to emulate movements in bitcoin without direct exposure to the volatile market of cryptocurrencies. However, two months forward, the BITO ETF has registered another record: from the most lucrative debut ever to the worst-performing ETF.

In two months, the fund has dropped by 30%: making it one of the ten worst performers with respect to returns after a public listing. Over the same timeline, even bitcoin has lost roughly 34% in value. While the analysts still believe that this roadblock isn’t necessarily a pitfall to the long-term transition of digital currencies to the world of investment funds, the year 2022 doesn’t really exude optimism either.

Since the start of this year, bitcoin is roughly down by 10% despite broader acclaim from investment banks and even multiple governments around the globe. Falling in tandem, BITO ETF is down nearly 9% this week alone. To gauge the slipping popularity from its apex, in the past two weeks of this year, BITO ETF has failed to report net inflows for any single day. According to Athanasios Psarofagis, an ETF analyst for Bloomberg Intelligence, the timing is unfortunate, yet not unforgiving. He stated: “You can see some other ETFs had a rough start out of the gate but can still raise assets.” Thus, the prime aspect is timing. As the Federal Reserve gears to taper bond purchases and hike interest rates, the broader plunge in cryptocurrencies is driving the worsening performance of the ETFs. While the fund is based on bitcoin futures contracts – a bitcoin derivative instrument traded on the Chicago Mercantile Exchange (CME) – the negative movement in the cryptocurrency itself is dictating the downfall in the futures: ultimately pushing the ETF into regression.

All is not gloomy for the world of Crypto finance. Recently, a renowned US-listed ETF – named WisdomTree Managed Futures Strategy Fund (WTMF) – allocated an estimated 1.5% of the mandated 5% of its assets to bitcoin futures. The firm reasoned that bitcoin’s ‘potential for absolute returns’ and ‘a unique role of a diversifier to traditional asset classes’ makes it an attractive asset. Their website added: “Our objective is to provide investors with this exposure [Bitcoin futures] in a risk-controlled manner via a systematic long-flat trend-following strategy that reacts quickly to changing market conditions.”

Ultimately, while the performance of ETFs is disappointing and regulatory frameworks are still restricting funds from directly linking to bitcoin instead of the futures, roadblocks have clearly not dented the growing desire for bitcoin exposure. And, in my opinion, this lack of correlation and unsusceptible swing in valuation would make a fundamental proposition for other institutional investors to follow suit in the forthcoming years: gradually shaping a digital revolution in the world of investment funds.