Why the frenzy of ETFs can bring down Bitcoin – What is “contango bleeding”


Spot prices can be directly affected by futures products

It is possible that the climate of optimism for cryptocurrencies after the approval of the first ETF gave a boost to the total market value, exceeding 2.7 trillion. dollars, according to Bloomberg, but there are serious issues that small investors need to be careful not to fall into a “bull trap”.
The rise shows how betting spreads beyond Bitcoin to other cryptocurrencies, amid enthusiasm for digital assets, following the debut on the New York Stock Exchange (NYSE) board of ProShares’ Bitcoin Strategy ETF, the first associated with bitcoin.
The question now is whether the volatile cryptocurrency will continue to write profits or correct…
Since the ETF was the catalyst, let’s look at what risks may drive the cryptocurrency market to lower levels.
In particular, since 2013, when the Winklevoss twins first filed for an Bitcoin-traded ETF (exchange-traded fund), the asset has been a noble desire of cryptocurrency lovers.
Everyone thought that such an ETF would create a huge pool of potential investors who, for regulatory or compliance reasons, could not buy Bitcoin until now.
So the time has come for ProShares Bitcoin ETF (BITO) to be traded on the New York Stock Exchange.
Investment executives rang the bell on Tuesday, October 19 under a flag that read “First US Bitcoin-Linked ETF”.
In this case, however, the word that needs to be added is “futures” because, instead of a fund that actually owns bitcoin, the ProShares ETF will offer bitcoin futures.
And indeed, it is ironic that a future ETF is approved and not a spot market ETF.
According to regulators, an ETF with futures contracts is less exposed to potential risks.
However, in the first phase, what will be missing will be the big profits…
Why? The main problem is known and… goes by the name Contango .
Investors in other futures contracts (ETFs) have been complaining about this for years, so we have a pretty good sense of how it works.
The issue arises from the fact that futures ETFs need to regularly renew their contracts.
If the higher price of futures contracts is higher than the contract expiring on the renewal date, the mutual fund loses…
In other words, Contango is a situation in which the future price of a commodity is higher than the expected contract price at the end.
This loss is known as “contango bleeding”.
(There is also a reverse phenomenon called ‘backwardation’, when the most future futures price is lower – this seems less important because it gives future ETF holders a small premium when the underlying commodity moves down.)
These losses from Contango can to be huge on conventional products and really huge on bitcoin.
According to Motley Fool, a futures ETF lost 1.5% in one month.
In larger markets, these spreads are often arbitrary – professional traders can use them to make money and thus close gaps.
But as Bloomberg puts it, the dominance of small shareholders in cryptocurrencies makes arbitrage less dynamic.
The current roll cost for BTC futures is a heartbreaking 17%, according to Charlie Morris of ByteTree Asset Management, who expects the ETF to yield long-term (8.4% year-on-year).
In other words, it’s like paying a lion for gold to cut off your face.
Tyrone Ross, a financial advisor who specializes in cryptocurrencies, says small investors should stay away from BITO.
Investors are certainly not discouraged, as the BITO ETF attracted $ 570 million in inflows and a record $ 1 billion in trading volume on their first day of trading.
But keep in mind that spot prices are influenced by Futures products.

Over $ 1 billion in turnover

Meanwhile, the trading volume of the ProShares Bitcoin Strategy (BITO) ETF exceeded all expectations on its first day of trading.
Thus, BITO was just behind, in terms of trading volume, the Blackrock US Carbon Transition Readiness ETF, which closed with $ 1.16 billion in its debut in April.
The ProShare Bitcoin-based ETF started trading on the New York Stock Exchange (NYSE) on October 19, with an opening price of $ 40.88,
according to TradingView.BITO closed the day at $ 41.94, with a total of 24.313 million shares changing hands, or a turnover of more than $ 1 billion.
Commenting on BITO, Bloomberg senior ETF analyst Eric Balchunas wrote on Twitter that the ProShares ETF was arguably the “biggest” in terms of “natural” or “popular interest”.
There were reports of $ 570 million in BITO inflows on the first day, suggesting that ProShares’ ETF could be classified as “heavyweight” in the industry in terms of net flows on an annual basis.
Also, according to FactSet, the top two ETFs are Gold and Silver, with $ 1 billion and $ 1.7 billion in cash flows, respectively.
In addition to commodities, the largest annual flow for ETP, $ 5.351 billion, was for the Invesco QQQ Trust.

Source: https://www.bankingnews.gr/

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