Bitcoin Futures ETF Brings In Beaucoup Bucks - Adviser Investments

Bitcoin Futures ETF Brings In Beaucoup Bucks

October 27, 2021

Bitcoin Futures ETF Brings In Beaucoup Bucks

After another rollercoaster year, bitcoin is back near record highs, with much of the buzz coming from the launch of the ProShares Bitcoin Strategy ETF (ticker: BITO). Since its debut last Tuesday, the fund has raked in over $1.2 billion—that’s the fastest a fund has ever exceeded the $1 billion mark.

Financial institutions have been hungry to capitalize on the popularity of the prominent cryptocurrency, and improved clarity from regulators is starting to grease the skids. While initially wary about the lack of transparency and excess of volatility associated with direct bitcoin ETFs, in August SEC Chair Gary Gensler blessed funds that hold futures contracts based on the price of bitcoin. As long as ETFs comply with the SEC rules for mutual funds, Gensler says, investors are amply protected.

By investing in futures contracts, which lock in a price to buy or sell bitcoin down the road, the ProShares option offers traders a path to possible profit without as much exposure to the potentially deep losses that can come with speculative investments like crypto.

Prices will be based on cash-settled futures contracts. Since these are derivatives that will move directionally with bitcoin, the ETF’s price won’t move in lockstep with bitcoin itself—meaning the ETF will move differently on both the upside and downside.

Still, before opting in, individual investors should be aware of the potential for “front-running” by major financial institutions. Here’s how that works: When traders invest in the ProShares ETF, its fund managers purchase bitcoin futures (usually the nearest month’s futures contracts). When that month’s contracts expire, the ETF is required to transfer those assets into next month’s futures contracts, a practice known on the Street as “rolling.” Meanwhile, big institutions jump the gun and buy the next month’s contracts before ProShares does, triggering the price increase that comes from a wave of rolling. This leaves ProShares paying higher prices and cuts into shareholders’ profits.

ProShares’ futures ETF is the first of its kind, but it’s not the only bitcoin-focused fund. The Grayscale Bitcoin Trust, which has been around for eight years, is traded over-the-counter. But you need deep pockets to access Grayscale and it carries lofty fees (currently an expense ratio of 2.00%), making it more expensive than investing in bitcoin directly.

We expect to see more futures-based funds in the coming months and years. Valkyrie Investments launched its own bitcoin futures ETF last week. And Fidelity has expanded its digital assets team to establish itself as a prominent platform for traditional investors to access the currency. In fact, Fidelity filed a preliminary registration statement with the SEC back in March for a bitcoin ETF to call its own.

The successful ProShares launch has crypto investors hoping the SEC will eventually approve ETFs that invest directly in bitcoin. We don’t deny that the rise of bitcoin has been a compelling development on Wall Street in recent years, and we’ll continue to monitor the phenomenon.

Our exclusive special report Betting on Bitcoin lays out our perspective and explains how cryptocurrencies work. Simply put, bitcoin’s volatile track record has kept traders engaged, but we remain dubious of its value as an investment. Excitement over ProShares’ ETF pushed bitcoin above April’s record highs to nearly $67,000 last week; as we go to print, it’s below $59,000 and was trading below $30,000 as recently as July. Our stance remains unchanged: Don’t invest more than you can afford to see disappear into the digital ether.

Is Inflation ‘Transitory’?

How long will elevated inflation last? Is transitory still the right way to think about it?

Portfolio Manager Charlie Toole had this to say: To say that this is a hotly debated topic is an understatement.

Many analysts and investors view today’s inflation environment as “transitory”—but what that actually means is open to interpretation. Transitory includes a timing component by definition, but is that time frame three months, six months or a lot longer?

VP and Portfolio Manager Charlie Toole's thoughts on inflation

Wall Street analysts and some Federal Reserve governors are starting to change their tune on inflation, suggesting it could remain higher longer than previously anticipated. For instance, earlier this month, Atlanta Fed Chair Raphael Bostic called transitory a “swear word” that he doesn’t like using to describe inflation. He went on to say, “I continue to believe currently elevated inflation is episodic, driven by pandemic conditions such as disruptions in supply chains and labor markets. A major caveat, though, is that the severe and pervasive supply chain issues will probably last longer than most of us initially expected.”As noted above, September CPI rose 5.4% from the same time last year. The good news is that inflation estimates for late 2022 are close to 2%, and they haven’t budged over the last six weeks.

Transitory inflation
Sources: BLS, Bloomberg, Adviser Investments.

What’s causing inflation to stick around? Logjams in the global supply chain continue to hamper economic recovery. It’s Econ 101: Demand is there, supply is not, so we’re waiting longer and paying more for goods.

Chalk it up in part to the delta variant. Even as the U.S. and Western Europe emerge from pandemic lockdowns, critical goods facilities across Asia—producers of coffee, palm oil, tin, semiconductors and more—remain beleaguered by shutdowns.

And unlike the aftermath of some previous recessions, when consumers tightened their purse strings and businesses scaled back on headcount, the pandemic recovery has been strengthened by household spending and companies competing for workers. This creates a cycle of companies jacking up prices (in part to pay higher wages in a tight labor market) and workers asking for more money and job-hopping (partly to pay for goods and services that cost more). Repeat.

Plus, housing prices remain high, something we’ve been closely monitoring as a factor that could make inflation stickier. Owners’ equivalent rent, a gauge of what homeowners estimate they could charge in rent (and a 25% component of the “headline” CPI inflation rate), rose by 0.4% last month, the most in 15 years. Actual rents rose 0.5% and may finally start catching up with soaring home prices.

It’s likely that inflation will normalize late next year. Until then, expect the debate and wordplay to be “severe and pervasive”—anything but transitory.

Chart of the Week: Americans Are on the Road Again

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative. 

Vehicle Miles Travelled vs. 2019. Chart comparing pre-pandemic vs. current miles traveled. Vehicle traffic rebounds to pre-pandemic levels.
Sources: Adviser Investments, Federal Highway Administration.

Director of Research Jeff DeMaso: This chart compares the number of vehicle miles traveled in 2020 and 2021 with miles traveled in 2019, giving us one measure of whether the economy is recovering to pre-pandemic norms. In this case it almost has. We’re seeing similar trends in restaurant seatings and retail spending. While airline passenger miles have not recovered to pre-pandemic levels, 18-wheelers are on the roll and Americans are definitely hitting the road again.

Booster Shots, Market Shocks and the End of Fed Intervention—Webinar Recap

Last week, in our live, interactive webinar, Adviser Investments’ team shared their views on the markets and what they expect for stocks and bonds in the coming months. Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on the impact of rising yields, what it means when stocks and bonds are both falling, how supply shocks may be causing inflation and whether the end of Fed intervention could doom the bull market. Jeff also took a dive into how prior debt-ceiling debates and government shutdowns have impacted investors over the last several decades.

In our Q&A segment, Chief Investment Officer Jim Lowell, Vice President Charlie Toole and Research Analyst Liz Laprade answered participants’ questions on a gamut of topics. They addressed the role of bonds in a rising rate environment, the best sector weighting for today and whether persistent labor shortages and rising rates may mean we’re transitioning into a no-growth economy. Of particular interest for the crypto-curious, Liz gave her view on the role bitcoin and bitcoin ETFs might play in an investor’s portfolio.

To hear our experts’ answers to your most pressing questions about where we go from here, watch our Fourth-Quarter Webinar now!

Adviser Investments’ Today’s Market Takeaways

There’s no shortage of hyperbolic headlines and provocative punditry in the financial media. But you won’t find such hysterics here. In Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.

Recently, Liz Laprade talked about Facebook’s earnings call and Mark Zuckerberg’s lack of remorse, while Vice President Steve Johnson discussed balancing investor optimism and vigilance.

We hope you find these episodes engaging and accessible. If there are any topics you’d like us to address, please send an email to info@adviserinvestments.com!

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