Bitcoin ETFs: Don’t Forget to Look Under The Hood

Some people hail Bitcoin as the greatest thing since sliced bread, while others consider it one’s worst enemy. Whether your conviction supports or berates the world’s most infamous cryptocurrency, it doesn’t change the fact that buzz around the crypto-space – inclusive of altcoins, blockchain, and decentralized finance – is rapidly growing. 

In fact, the Securities and Exchange Commission just approved the launch of ProShares Bitcoin Strategy ETF (Ticker: BITO), making this the first ever Bitcoin-centric exchange-traded fund. Before you take this as your cue to enter the cryptosphere, our team encourages you to take a good look under the hood.

What is there to find within BITO’s engine? First, BITO does not directly invest in Bitcoin, but buys futures contracts of Bitcoin. What’s the difference? When you buy a futures contract, you’re agreeing to buy Bitcoin at a specific price on a specific date in the future. For example, say you entered into a futures contract to buy Bitcoin on December 26, 2021 at $65,000. If the price of Bitcoin ends up higher than $65,000, say $70,000, you now lock in Bitcoin at $65,000 and are at a $5,000 profit. If the price is lower than $65,000, you will incur a loss.


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Since BITO tracks the futures price, not the spot (current) price, this can cause deviations in performance. In fact, “Solactive, an index provider, estimates futures have made about 13 percentage points less than bitcoin’s near 120 per cent rise so far this year” (Financial Times). Take for example, the United States Oil Fund (Ticker: USO), which invests in WTI crude oil futures. USO has underperformed the price of WTI crude by 70 percent this past decade. Moral of story: don’t expect a futures-based ETF to track the returns of the underlying asset one-for-one.

At first glance, buying the ETF seems much simpler: you don’t have to find a trustworthy custodian, set up an account, and deposit funds. However, there are nuances to this futures-based ETF that can make it more expensive. First, the expense ratio is 0.95%. Sure, you are paying the manager to decide which contracts to buy (these vary based on expiration dates, price, and liquidity), but this is still significantly above the average ETF expense ratio of 0.23%1. Compare that to a custodian like Gemini, where you are only paying 0.35% per transaction. 

Lastly, another hidden cost in this ETF is something called “negative roll yield.” Since you can’t hold a contract past its expiration date, the contract must be “rolled over,” or reinvested in before expiry. If you want to stay invested but front-month Bitcoin futures contracts are trading above the current spot price, you’ll have to sell your contract at a lower price and buy into the front-month contract at a higher price – generating a loss known as negative roll yield. Negative roll yield is a known culprit for negative returns in futures funds.

On a final note, Bitcoin futures aren’t absolute rubbish. When it comes to crypto assets, futures-based or not, position sizing appropriately can help provide meaningful diversification. However, we would encourage you to hold Bitcoin directly when possible. You can avoid nuanced costs such as negative roll yield and save on fees paid to intermediaries. Our team has the knowledge and tools to help you cross that bridge if and when appropriate. More importantly, the bigger takeaway here might just be: don’t forget to take a good look under the hood.

Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.


  1. ETFs vs. mutual funds: Cost Comparison