The largest US bank, JPMorgan said that although the ProShares Bitcoin futures ETF traded $1 billion in the first days, it would be more profitable for its investors to buy bitcoin directly.
The bank explains that the bitcoin futures ETFs have a big drawback, which can lead to a decrease in its profitability.
JPMorgan explained to the business insider:
“Contango in the BTC futures curve can impose a drag on performance for these funds due to the futures carry cost/roll yield. This carry drag can be several times the products’ management fees, and could become even larger if these products gather substantial assets, due to their market impact.”
According to JPMorgan, this will happen because the ETF does not own bitcoins as an underlying asset. Instead, the ETF owns bitcoin derivatives that attempt to match the profitability profile of the cryptocurrency through futures contracts. In order to actively manage a portfolio of Bitcoin futures, which are closely related to cryptocurrency price movements, the ETF must regularly roll over Bitcoin futures contracts to the next month just before they expire. This approach creates different trading costs and is less efficient than simply buying and storing bitcoin.
According to JPMorgan, the average annual rollover cost of futures contracts since mid-2019 has been around 9%, nearly 10 times the ProShares Bitcoin Strategy ETF’s annual spending ratio of 0.95%. This metric over time can disappoint investors as they will lag significantly behind in terms of returns from direct investors in bitcoin.
The bank said ETFs with time-stretched volatility is a good example of how long-term profits can be curtailed as the costs associated with trading futures increase. Because the more long-term investors there are, the more expensive it becomes to hold them due to the impact of the ETFs themselves on the market.
Not all investors are looking to invest in Bitcoin Futures ETF. Catherine Wood said the company will be looking into Bitcoin futures ETFs until it sees a move with decent two-way liquidity and smaller contango.
At the same time, Tom Lee, co-founder of Fundstrat Global Advisors, believes that the demand for Bitcoin ETFs will remain high, it will last for a long time and the fund will attract up to $50 billion.