CEO DailyCFO DailyBroadsheetData SheetTerm Sheet

Is the ProShares Bitcoin ETF too popular?

October 21, 2021, 10:19 PM UTC

The reception of the ProShares Bitcoin exchange-traded fund—the first Bitcoin ETF available in the U.S.—has been nothing short of seismic.

In the couple days after the fund, dubbed BITO, started trading on the stock market on Tuesday, it swelled to more than $1 billion worth of assets, making it the ETF quickest to surpass $1 billion. The fund stole that glory from GLD, the dominant gold-tracking ETF, which took an extra day, or three total, to reach the milestone back in 2004. If GLD is the Instagram of ETFs, then BITO must be the TikTok.

The ravenous appetite investors and traders have for BITO demonstrates all the pent-up demand for cryptocurrency, which many regulators have been wary of endorsing or encouraging. The closest analogy that Eric Balchunas, senior ETF analyst at Bloomberg Intelligence and co-host of the media outfit’s Trillions podcast, can muster relates, he says, to Rock ‘n’ Roll. “When the Beatles finally went on iTunes and finally younger people could buy their stuff—they weren’t gonna buy CDs—this is a little like that,” he tells Fortune

(People have long been able to buy digital coins, like Bitcoin, Ether, and others, on online exchanges like Coinbase, Binance, and elsewhere, but many prefer using more familiar vehicles, like ETFs, which can be bought through traditional brokerage accounts, like Fidelity or Charles Schwab, and added to retirement accounts that afford tax advantages.)

The demand is especially notable given that BITO is structured very differently from traditionally popular ETFs. BITO tracks Bitcoin futures contracts rather than “spot” Bitcoin, the underlying asset—an approach that has disadvantages. Foremost among them: The futures-linked fund is subject to rollover risk, meaning that when it periodically closes positions in the futures contracts it holds, it can find itself, as is the case now, repurchasing new batches of future-dated contracts for more money. The situation, known as “contango,” eats into profits. 

Despite these limitations, the Securities and Exchange Commission felt more comfortable greenlighting a Bitcoin futures ETF rather than a plain old Bitcoin one. That’s because the futures ETF comes with a bevy of investor protections that are absent in the “spot” scenario. The futures—considered securities, rather that straight up Bitcoin, a supposed commodity—can be governed under the Investment Companies Act of 1940, giving the Commodities and Futures Trading Commission additional control and oversight over the markets in which it operates.

While the futures-structure is a draw for the SEC, it can be a drawback for investors. “By saying they are focused on protecting investors, the SEC may have been doing the opposite,” says Mike McGlone, a commodities analyst at Bloomberg, who notes that regulatory foot-dragging could mean prospective investors miss out on sizable returns. Look no further than Bitcoin hitting an all-time high this week, above $66,600. (The price of the cryptocurrency has since slipped slightly to below $63,000—just under its previous all-time high of $64,863 in April. But it’s still up more than 400% year-over-year.)

The futures structure could cause other issues too. If demand keeps up, the fund could blow past the limit on the number of contracts it’s allowed to purchase. By Balchunas’s count, the fund holds more than 3,000 contracts right now and, if growth continues, it could hit the ceiling of 5,000 in the coming days. If that happens, CME Group might have to coordinate with the CFTC to raise the legal limits. Otherwise, ProShares may be forced to buy longer-dated contracts or use cash to match inflows—a kludgy approach that would lessen the ETF’s ability to track the underlying performance of Bitcoin.

This possible problem could be avoided if other approved Bitcoin ETFs come to market soon, as expected. That may help to absorb the overwhelming inbound. But the SEC could have warded off the issue by approving multiple futures-based ETFs at once, creating fairer competition among ETF providers. Instead, ProShares, which filed earliest, gained a tremendous first mover advantage. Meanwhile, there are more than 15 “spot” Bitcoin and Ethereum ETF applications pending before the SEC, along with nine futures-based filings, says Ben Slavin, global head of ETFs at BNY Mellon.

McGlone calls the futures ETFs “a baby-step” toward getting the real deal: a Bitcoin ETF that tracks a simple index of Bitcoin’s price, just as stalwart SPY tracks the S&P 500. Certainly, plenty of fund managers—like Valkyrie, VanEck, Invesco, Galaxy Digital, and Grayscale—hope that day comes soon. Spot Bitcoin ETFs already “work fine in Europe and Canada and demand is becoming overwhelming,” McGlone says. With the holdup on approving the ETFs the market really wants, “the U.S. has been looking lost in space.”

Robert Hackett
@rhhackett
robert.hackett@fortune.com

DECENTRALIZED NEWS

Credits 🚀 

FTX has raised $420,690,000 in a series B from 69 investors for a valuation of $25 billion… Bitcoin notched new record highs Wednesday, though it posted an even bigger decline Thursday… One of the biggest stocks and options exchange owners on Wall Street Cboe Global Markets has agreed to buy crypto market runner ErisX... A pension fund representing Houston firefighters says crypto is “an asset class we could not ignore anymore”… Andreessen Horowitz has invested in Meta4 Fund Management’s new NFT fund… Plaid is wading into payments after its sale to Visa was blocked by the U.S. government… Ethereum-built sci-fi card game Parallel has raised $50 million from crypto venture capitalists at Paradigm... The Associated Presis partnering with Chainlink Labs to securely provide news data and information over the blockchain... Tom Brady has added FTX’s Sam Bankman-Fried and The Weeknd to the board of his NFT company… Fanatics-owned NFT company Candy Digital has raised a $100 million Series A at a $1.5 billion valuation… Payments giant PayPal is reportedly in talks to buy PinterestWeWork is a public company.

Debits 🐻 

Bitcoin experienced a flash crash Thursday, dropping 87%. Or at least, that’s what traders on Binance’s U.S. exchange experienced thanks to a bug in one institutional trader’s algorithmTether will pay $41 million to settle allegations from the U.S. Commodity Futures Trading Commission that it lied about what was backing its stablecoin (Hint: It wasn’t all fiat currency like it said)… Nikola-skeptical short seller Hindenburg Research has put out a $1 million bounty for information about where the heck Tether’s reserves are… Officials at the Federal Reserve can no longer hold individual stocks or other securities under new rules introduced Thursday... People are agreeing to have their eyeballs scanned in return for cryptocurrency… Peter Thiel has been “underinvested” in Bitcoin. And the PayPal cofounder sees crypto’s status today as having put us “at a complete bankruptcy moment for the central banks”… Former President Donald Trump is taking his new social media company public with a SPAC… Ark Invest’s Cathie Wood says most meme stocks are “dinosaurs”… Michael Burry has deleted all of his tweets again after a strange rant covering taxing the rich, Trump, and gender.

FOMO NO MO

Wu-Tang Clan's infamous "Once Upon a Time in Shaolin" album, created by its leader RZA and producer Cilvaringz, has been on a wild ride since its initial sale in 2015. Martin Shkreli, of course, was forced to give up the album to the U.S. federal government as part of his sentencing for securities fraud in 2018. But it has now finally found a new home: A vault in New York City. The owner of the album, and entity in charge of said vault, is PleasrDAO, a decentralized autonomous organization that paid the federal government the equivalent of $4 million in cryptocurrency (through an intermediary) for "Once Upon a Time in Shaolin." Now, the DAO's 74 members, including Jamis Johnson, share collective ownership over an NFT deed that was created to act as the ownership certificate for the physical album, according to The New York Times.

From the article:

BUBBLE-O-METER

356.8%

Late Wednesday, former President Donald Trump struck a deal to take his new media company public through a merger with (it's 2021 so what else?) a SPAC. Investors naturally piled in Thursday, sending shares of the blank-check company Digital World Acquisition to $45.50, marking a more than 350% gain that at some points in the trading day reach above 400%. 

THE LEDGER'S LATEST

New IPO demonstrates why Bitcoin mining is the most stupendously profitable business on the planet right now by Shawn Tully

Why Donald Trump’s media SPAC could be the ultimate meme stock by Lucinda Shen

GameStop report from SEC sheds new light on meme stock mania—conspiracies and all by Declan Harty

Flooded with rewards points you’re not using? Bakkt’s got a digital wallet for them by Shawn Tully 

U.S. crypto companies are at the crossroads of regulation by Tor Constantino

M1 Finance’s CEO buys tiny Minnesota bank in latest financial supermarket play by Declan Harty

In Q3 earnings, Wall Street banks see glimmer of hope for lending by Declan Harty

Uranium meme-stock traders get help from a whale, triggering a mammoth rally by Sophie Mellor

In his own words: Why Snap and Affirm investor Jeremy Liew stepped back at Lightspeed Venture Partners by Lucinda Shen

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

MEMES AND MUMBLES

Former Goldman execs. They’re just like us! In a wide-ranging interview with Bloomberg’s Erik Schatzker, former Goldman Sachs CEO Lloyd Blankfein, who has defied the historical odds and not joined the federal government as Treasury secretary (because he hasn’t been asked), explained that he spends a good chunk of his day on philanthropy, swimming, and day trading. Blankfein, who left Goldman in 2018, admitted that he now trades “a lot” throughout the day, dabbling in equities, commodities, and currencies. The one-time precious metals trader is not doing it through Robinhood, though. Blankfein does most of his trading through who else but Goldman. Blankfein does not “yet” own any crypto, either, Bloomberg’s Schatzker wrote.

This issue of Fortune’s The Ledger was assembled by Declan Harty, who you can follow here.

This is the web version of The Ledger, Fortune’s weekly newsletter covering financial technology and cryptocurrency. Sign up here to receive future editions.