BITO As A Complement To Bitcoin Holdings

Summary BITO offers indirect Bitcoin exposure via futures contracts, providing monthly income, unlike spot Bitcoin ETFs or direct ownership. BITO’s futures-based structure reduces risks like theft and adds yield, making it a strong complement to existing Bitcoin holdings. Performance may lag spot Bitcoin during rangebound periods or due to contango. With Bitcoin near all-time highs and poised for a potential breakout, BITO is positioned to deliver capital appreciation and substantial income. The ProShares Bitcoin Strategy ETF ( BITO ) was the first U.S. exchange-traded fund to offer exposure to Bitcoin ( BTC-USD ), and it continues to be an interesting allocation that can complement or supplement existing Bitcoin exposure. BITO does not directly hold any Bitcoin, but instead provides exposure through futures contracts that are rolled over, and which often allow its managers to distribute significant income on a monthly basis. This income generation feature makes BITO a strong addition to existing Bitcoin exposure that an investor is disinterested in selling, and which might not produce any yield. Unlike the multitude of ‘spot’ Bitcoin ETFs, such as the iShares Bitcoin Trust ETF ( IBIT ) and the Fidelity Wise Origin Bitcoin Fund ( FBTC ), which directly hold Bitcoin, BITO primarily invests in cash-settled, front-month Bitcoin futures that are traded on the Chicago Mercantile Exchange ( CME ). Such futures contracts are agreements to buy or sell a specified amount of Bitcoin at a predetermined price and future date. As a result, BITO tracks the price movements of those futures contracts. The fund actively manages its portfolio by rolling contracts, or selling expiring near-term contracts and replacing them with longer-term ones. BITO holdings (ProShares) This futures-based approach provides investors with indirect exposure to Bitcoin’s price fluctuations without the complexities of directly owning, storing, or securing the digital asset. Moreover, since BITO does not hold Bitcoin, there is no risk that it might lose its Bitcoin to theft or accident. It also provides Bitcoin investors with monthly income, where directly holding the asset generally does not, and neither do most companies in the cryptocurrency business. BITO’s 2025 distributions (ProShares) By rolling futures contracts, BITO maintains continuous exposure to Bitcoin, and also often realizes income that it distributes to investors. Of course, much of the income BITO might generate will come at the expense of capital appreciation. Therefore, BITO is likely to underperform when Bitcoin is rangebound for an especially long period of time, and especially if contango occurs. Much of this will depend upon the cost of futures contracts, which will vary along with volatility, as well as price and time. While the goal of BITO is to correspond to the performance of Bitcoin, it should not be expected to act as a perfect reflection of the spot price. When Bitcoin experiences a strong upward spike, BITO is likely to participate in that upside. The positive momentum in the underlying price of Bitcoin is also likely to outweigh the negative impact of contango (if present), or at least mitigate it. Nonetheless, it’s still possible for BITO to slightly lag the spot price of Bitcoin during rapid upward moves due to contango. In some instances of extremely bullish sentiment, as well as the type of supply squeezes that are possible with Bitcoin, the Bitcoin futures market could slip into backwardation. If this happens during a strong rally, BITO could potentially outperform the spot price due to a positive roll yield, coupled with the appreciation from Bitcoin’s price appreciation. This is uncommon, but possible. Therefore, it is generally more favorable to invest in BITO during periods when Bitcoin is expected to experience significant upward price movement. Given Bitcoin’s current valuation, which is close to its all time high after a period of rangebound consolidation, it appears highly possible that Bitcoin is preparing to make another strong move up the charts. If this is the case, BITO is likely to appreciate along with Bitcoin, while also providing substantial income in the near term. A significant portion of BITO’s assets may not be directly invested in futures contracts, due to the rolling process and pending entering new contracts. Such cash is then held in short-term, U.S. Treasury securities and other high quality, investment grade cash instruments. The interest earned on such holdings also contributes to the fund’s investment income. Risk BITO’s performance may deviate from the spot price of Bitcoin due to various factors, including those affecting futures markets, such as contango and backwardation. It also has a significant management fee of 0.95 percent. Further, since Bitcoin and Bitcoin futures are highly volatile assets, BITO’s valuation will be heavily influenced by price swings. BITO’s performance is also clearly tethered to Bitcoin, so any significant decline to the price of the underlying asset would also be problematic for the fund. Since BITO is a futures-based ETF, it can have complex tax implications compared to holding spot Bitcoin or most other ETFs. Futures ETFs are often taxed as a Section 1256 contract, where 60% of gains are taxed at the long-term capital gains rate and 40% at the short-term capital gains rate, regardless of how long you hold the ETF. This issue would be sidestepped by in tax deferred or tax-free accounts, which would also shield the significant monthly distributions from tax. Conclusion BITO provides both exposure to Bitcoin and the potential for monthly income distributions. BITO has a dividend yield of about 53%, having paid approximately $11.19 per share over the past year. While Bitcoin is likely to slightly outperform BITO, the holding of futures contracts eliminates certain risks that could present themselves, including theft via hacking. Moreover, BITO’s substantial income component makes it a compelling complement to existing Bitcoin holdings that an investor may not want to sell or expose to related risks that may arise through income generation. Given the potential for Bitcoin to spike higher in the near term, as well as later in 2025, BITO should be expected to continue to track Bitcoin reasonably closely and distribute above average income in the near term.

Source: Seeking Alpha