ProShares Bitcoin Strategy ETF (BITO): What Is It and Should You Invest?

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Bitcoin had a lean start when it first appeared in 2009. Less understood the technology behind it. However, the cryptocurrency became more noticed over time and started to gain in value as more people became interested.

More than a decade later, the cryptocurrency continues to set new value records and attract more attention. On October 19, 2021, ProShares – an issuer of publicly traded funds – became the first to issue and market a Bitcoin-pegged ETF on an exchange.

Here is a brief overview of this historic ETF, how it trades and what it means for Bitcoin and investors.

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What is ProShares Bitcoin ETF (BITO)?

BITO is an exchange traded fund linked to the price of Bitcoin futures contracts. It is important to understand that while BITO calls Bitcoin and is loosely based on price, it is not a cryptocurrency.

The fund does not consist entirely of bitcoin futures contracts. It can also use money market instruments such as US Treasury bills and repurchase agreements to minimize risk and raise capital to buy more futures contracts.

What are the pros and cons of BITO Pros?

Historically, Bitcoin has been relatively volatile in price. However, as financial institutions and investors continue to look for ways to gain exposure to cryptocurrency, it has become increasingly popular and valuable.

Pros

Investors can gain exposure to Bitcoin without buying or purchasing expensive equipment to mine. Investors can purchase ETF shares from a brokerage or on ProShare’s website. There is a possibility of huge returns if Bitcoin prices continue to rise

cons

The fund is actively managed with a high operating expense of 0.95%. There are excessive risks compared to ETFs linked to stocks. Investors can lose a lot if Bitcoin prices fall. The managers can use leverage to fund future contract purchases.

Is Bito a safe investment? Risks involved

BITO is linked to an underlying asset, so it inherits a lot of the risks Bitcoin has. In addition to the market, liquidity and management risks, this ETF carries significant risks in the form of:

Leverage risk: The fund may borrow if necessary to buy Bitcoins.
Bitcoin risk: There are many risks that Bitcoin itself poses to the fund, such as network changes, fraud, theft, manipulation and security breaches.
Diversity Risk: BITO is classified by the US Securities and Exchange Commission as non-diversified, meaning it can concentrate its holdings in one or a few types of assets or companies. Since the fund only invests in Bitcoin futures contracts, investors are taking a huge gamble when buying shares of BITO.

How does BITO affect the price of Bitcoin?

Initially, the ProShares Bitcoin Strategy ETF was greeted with effusive investors. BITO was listed on the stock exchange on October 19, 2021. Prices had already risen in anticipation of the ETF’s listing, but by the end of the day on October 20, 2021, Bitcoin prices had jumped to $66,021 – up nearly $2,000 in a day. BITO itself brought in more than $1 billion in two days, a new record for first offerings.

As word spread around the market, Bitcoin’s price continued to rise, reaching $69,000 on November 9, 2021. Then, in mid-November, Bitcoin’s price fell back to its previous level. The price of Bitcoin currently stands at $45,733.89, as of March 31, 2022. There is not nearly enough information yet to say how the price of Bitcoin will be affected by BITO in the long run, but it may be safe to say that investor exuberance caused prices to spike initially and then fall.

Should You Invest in ProShares Bitcoin ETF?

By now it should be clear that buying shares of this Bitcoin EFT is not so much investing, but speculating. BITO is linked to a speculative type of investment: forward contracts. A private investor with limited assets and capital looking for a growth strategy to build a nest for retirement, or to increase their wealth, may not think this is the best purchase. However, an investor could have some extra capital to put into a Bitcoin-linked ETF if they felt it was a good investment.

To take off

BITO’s price per share is relatively low at the moment; buying a few shares may not be a bad thing for average retail or other investors looking to get involved in the Bitcoin craze; as long as it doesn’t affect the rest of their portfolio.

It’s too early to say where BITO’s price will go. Bitcoin is still relatively new to the markets – BITO is even newer. So it would be pure speculation to predict where it might end up.

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About the author

Scott Nevil spent 21 years as an infantryman in the US Marine Corps. After retirement, he completed his education and earned an MBA. Scott is now a full-time editor and part-time writer specializing in financial market, economics, stock market and career topics. He lives in North Carolina with his small family and pack of dogs.

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