First US Bitcoin ETF Already in Danger of Breaching Futures Contracts Limit

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Bloomberg via Yahoo Finance | Katie Greifeld | Oct 22, 2021

The Proshares Bitcoin Strategy ETF (ticker BITO) is already on track to breach a limit on the number of futures contracts it is permitted to hold by the Chicago Mercantile Exchange, according to data compiled by Bloomberg.

After two days trading BITO owns nearly 1,900 contracts for October, and CME rules cap the number of front-month contracts one entity can own to 2,000.

See: The risk of not participating in crypto is now outweighing the risk of non-participation

To avoid hitting the limit, the ETF -- which already has more than $1 billion under management -- has also amassed 1,400 November contracts. Beyond the front month, holding 5,000 contracts in any other month reaches the exchange’s accountability limit, which could include certain regulatory requirements or further trading limits.

Spreading out its holdings into longer-dated contracts like this is the clear immediate solution for BITO. However, that risks further distancing the fund from the performance of Bitcoin. Its ability to efficiently track the largest cryptocurrency is questionable anyway because it has to pay to roll over contracts, and the futures curve currently slopes upward.

“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 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.”

A spokesperson at ProShares didn’t immediately respond to a request for comment.

The potential good news is that the CME is raising the ceiling to 4,000 contracts per month, starting when November futures become the front-month. However, that will be slashed to 2,000 in the final three days of each contract.

See: Bitcoin ETF option gives investors a safer and liquid way to get exposure

While the current pace of inflows could see BITO hitting those curbs too, the launch of competing products may alleviate the pressure. Funds from Valkyrie and VanEck are both due to begin trading in the next few days.

However, the momentum behind the ProShares ETF will be hard to stop at this point, according to Bloomberg Intelligence.

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