BIS Analyzes Mechanics and Market Risks of First US Bitcoin ETF
The Bank for International Settlements examines the launch of BITO, the first US bitcoin ETF, noting its rapid accumulation of futures market share and unique structural risks. Unlike traditional equity funds, this futures-based ETF faces specific roll costs and liquidity challenges.
The first US bitcoin exchange-traded fund, known as BITO, launches in October 2021 and quickly becomes one of the most heavily traded ETFs in market history. The fund attracts over $1 billion in assets within just a few days of its debut. By accumulating a massive position, BITO captures approximately one third of the entire short-term bitcoin futures market just 10 days after its launch.
The US Securities and Exchange Commission approves BITO specifically because it relies on regulated futures contracts traded on the Chicago Mercantile Exchange rather than holding bitcoin directly. To gain exposure to the cryptocurrency, the fund buys near-term bitcoin futures and gradually rolls these contracts over into longer-dated ones as they approach expiration. Because the cost of carry for bitcoin tends to be positive, the futures curve slopes upward, making long-term contracts more expensive than short-term ones.
This futures-based structure creates key differences between BITO and traditional equity ETFs, introducing unique implications for prices and financial risks. The necessity of constantly rolling contracts into more expensive longer-term futures generates ongoing costs that drag on the fund's performance. Additionally, the fund's rapid absorption of such a large share of the futures market raises concerns about liquidity and potential distortions in bitcoin pricing.