Michael Sapir, CEO of ProShares, rang the opening bell at the New York Stock Exchange on Tuesday. He spoke with Barron’s beforehand.
The ETF, whose ticker is BITO, holds Bitcoin futures that are traded on the Chicago Mercantile Exchange . The CME Bitcoin futures are a large, liquid market, but the ETF has been criticized for some of its unique features.
One of the biggest criticisms is about the cost of “the roll.” The futures contracts it holds expire every month, and the ETF is forced to buy the next month’s contract, rolling its exposure forward.
Currently, the market is in contango, meaning that current Bitcoin prices are lower than prices in the future. If the dynamic holds, the ETF will be selling low and buying high, leading to underperformance when compared with spot Bitcoin over the longer-term. Sapir addressed the roll and other topics in the interview. Here are some highlights:
Barron’s: It sounds as if other Bitcoin futures ETFs could launch before the end of the month. Is there a first-mover advantage with ETFs?
Michael Sapir: Based upon history, we believe that there’s an enormous advantage to coming to market first. There’s a perception about the first-of-its-kind products to be launched. I’ve been around the ETF industry for quite some time, and there are numerous instances where two products have launched in proximity to each other. And almost uniformly, it’s the first launch that ends up being the most successful product.
Critics say that an ETF based on a futures contract is problematic for several reasons, including the cost of the roll. How do you respond to those kinds of statements?
We think they’re wrong. In fact, there are many advantages that flow from the fact that we’re using Bitcoin futures to get exposure to Bitcoin. First of all, there’s a fairly uniform belief among people who have looked at the futures market and the spot market that the futures market is the best price-discovery venue out there for Bitcoin right now. They come to the conclusion that the trading in the futures market ends up being the leading indicator of value, and that the trading on the exchanges is a lagging indication of value. There’s a lot of reasons for that. [The futures market attracts] the big smart money who’s really taking the most amount of information to account when trading Bitcoin. The futures market is actually the most liquid venue for trading. The notional trading on the CME is generally over 40% greater than the largest U.S. Bitcoin exchange. And then you combine that with all the market integrity features of the exchange that among other things guard against market manipulation, and there’s also price stabilization rules in place. So it’s a much more highly structured venue to try to promote fair and efficient price discovery.
But what about the argument that investing in a product that’s in contango is expensive?
People will have to make up their own mind, but right now, the way things are, you’re talking about 20 basis points to roll from the current contract to the next contract. In the context of Bitcoin performance, I don’t think a lot of investors will look at that and go, “Oh, my God, that’s overwhelming and I won’t consider the product as a result of that.”
Given your experience with this, do you think that there’s going to be a spot Bitcoin ETF available sometime in the next year?
As you know, the SEC has expressed concern on spot Bitcoin ETFs over valuation, liquidity, and custody. And this fund BITO addressed those concerns. If the industry can come up with answers to those concerns that satisfy the regulators, you would think that they could go forward. But this isn’t the first rodeo for trying to get a spot Bitcoin ETF to come to market, and the regulators have consistently had concerns over those. So is it possible? Sure. But I wouldn’t put odds on it. There’s a lot of factors here.
Other historic ETFs like the SPDR Gold Shares
(GLD) have gathered tens of billions of dollars in assets. Do you see this as clearly a multibillion-dollar ETF?
I’ve been around this business so long that I don’t make predictions. I let the market speak for itself. As an aside, one interesting feature of this ETF being in the marketplace is that people with retirement accounts that have brokerage windows for the first time in the vast number of cases will be able to access Bitcoin exposure in their retirement account.
And you’re confident Bitcoin will be around when people in their 20s today hit retirement?
You know what, most experts suggest the potential for a small allocation of cryptocurrency in people’s portfolios. Many people think that there’s a high potential for different cryptocurrencies, but we certainly wouldn’t recommend that a large portion of one’s portfolio be invested in cryptocurrency through our ETF or any means.
Because of the volatility?
Diversification is the first rule of investing. An allocation to cryptocurrencies is being advised by many advisors. I don’t think most advisors would suggest a very large allocation.
Write to Avi Salzman at [email protected]