The Proshares Bitcoin Strategy ETF (BITO) is already approaching the limit on the number of futures contracts it is permitted to hold by the Chicago Mercantile Exchange.
Since debuting earlier this week, BITO owns nearly 1,900 contracts for October. However, CME regulations limit the number of front-month contracts to 2,000.
The ETF has already collected 1,400 contracts for November to avoid broaching the monthly limit. Despite these efforts, with the current demand, the maximum total position of 5,000 contracts could soon be reached regardless. The fund already has over $1 billion under management.
Pushing out bitcoin contracts
In the short-term, BITO could continue to spread out its holdings into longer-dated contracts, but this could distance the fund even further from the performance of bitcoin. Since it has to pay to roll over contracts, and currently the futures curve slopes upward, the fund’s actual ability to efficiently track is already questionable.
“The end result is the ETF will start taking on potentially significant tracking error versus the spot price of bitcoin,” said Nate Geraci, president of the advisory firm The ETF Store. “The ETF is forced to obtain bitcoin price exposure at higher and higher prices as it goes further out on the futures curve.”
Meeting demand
Fortunately for BITO, CME is raising the ceiling to 4,000 front-month contracts with November futures, but a limit of 2,000 will return for subsequent months. Although BITO is on track to approach those limits as well, the introduction of competing products could stem the tide. Approval for bitcoin futures-based ETFs from Valkyrie and VanEck is already underway, and the assets are set to list next week.
According to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, the demand surrounding BITO may influence the Securities and Exchange Commission to expedite the approval of funds directly holding bitcoin. “That certainly would do the trick in slowing down BITO and providing a release valve for futures demand,” he said.