Many investors seeking crypto exposure would prefer not to deal with the complexities of buying cryptocurrencies. While a handful of Bitcoin ETFs offer exposure from within a conventional portfolio, the SEC limits them to investing in Bitcoin futures contracts. And generally, futures contracts are costly to long-term buy-and-hold investors.
Imagine you’re visiting a city for a few days and decide to rent a car to get around. In this case, renting the car for just a few days makes sense, as it provides flexibility and convenience at a reasonable cost. But now, let’s say you’ll live in the city for several months. In this case, renting day-to-day or week-to-week would be far more costly.
These same dynamics apply when trading futures contracts: Strategies that make sense for short-term investors may not be optimal for long-term investors. But fortunately, Bitwise recently launched a new ETF, called the Bitwise Bitcoin Strategy Optimal Roll ETF (BITC), to solve these issues until the SEC permits a physical Bitcoin ETF.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
Finding the Right Balance
Many futures funds use a front-month methodology, which involves investing rolling over futures each month. While that provides more liquidity, minimizes time delay and lowers carry costs for short-term traders, it often results in high costs for long-term investors due to higher transaction costs and abnormal market conditions like contango.
For example, rolling over futures contracts involves selling an expiring contract and buying a new one, incurring transaction costs and paying the bid/ask spread. Like returning and renting a new car, these costs can quickly add up if done frequently. By rolling over less regularly, investors can reduce these transaction costs while providing exposure.
Futures contracts may also experience contango, where futures prices are higher than the spot market. Like trying to rent a car in peak season or high demand periods, these dynamics can lead to unnecessarily high costs. By strategically choosing futures contracts, experienced fund managers can avoid these problems and become more cost-efficient.
Long-term futures investors often leverage an “optimal roll” strategy to address these issues. They can efficiently maintain exposure to an underlying asset while considering factors like trading costs, liquidity, market conditions and the term structure of futures contracts. For example, they may diversify across contract maturities.
Better Long-Term Bitcoin Exposure
Most Bitcoin ETFs use a front-month methodology, but Bitwise Asset Management’s Bitwise Bitcoin Strategy Optimum Roll ETF (BITC) leverages an “optimal roll” strategy that long-term investors may find more suitable. And historically, “optimal roll” strategies in other commodities have outperformed their forward-month counterparts.
“We believe this same strategy can apply to the Bitcoin futures market as it continues to deepen and evolve,” says Bitwise CIO Matt Hougan. “With the Bitwise Bitcoin Strategy Optimum Roll ETF, we’re excited to cater to long-term-oriented investors looking for regulated vehicles to gain directional Bitcoin exposure.”
For tax reporting purposes, the “1940’s Act” ETF will issue a Form 1099 rather than the longer and more complex K-1, making it easier for long-term investors to manage.
Bitwise also offers several adjacent ETFs, including:
The Bottom Line
The SEC doesn’t permit physical Bitcoin ETFs yet, pushing many crypto ETFs toward futures contracts for direct exposure. While most futures contracts use front-month methodologies favoring short-term traders, the newly launched Bitwise Bitcoin Strategy Optimum Roll ETF (BITC) leverages an “optimal roll” strategy better suited for long-term investors.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
