Bitcoin futures ETFs have started to be traded with the excitement associated with an easy method for investors to access bitcoin price activity; however, these instruments are not linked to the cash market but rather to bitcoin futures. This feature has significant implications for investors because these ETFs will be subject to roll risk. If the underlying futures market is in backwardation, long trades will gain from the roll-up the futures curve, but if the market is in contango, there is a negative cost from holding the long futures.
So, what is the cost from holding bitcoin futures ETFs? The bitcoin futures market is in contango which creates a return drag. If the cash price does not move, the investor will lose on the roll cost.
The cost of this contango effect is significant. The drop from second to first month bitcoin futures is over 11% on an annual basis on November 22. The futures are listed monthly. The cost is over 7% for third to second futures and 6% for fourth to third futures. Unfortunately, the liquidity for the back months is significantly lower than the front month, so trading is concentrated in the front two contracts. Volume in the front month is averaging a few thousand contracts while five months out the volume is less than 30 contracts.
To make money, the ETF investor has to overcome management fees that are close to 100 basis points, pay the transaction costs associated with the trading, pay brokerage on their transaction, and pay the roll costs which means that the hurdle necessary to make a positive return is well over 10% for trading the most liquid futures.
There have been similar high costs associated with trading crude oil ETFs associated with the futures contract when the market is in contango; however, more liquid back months have allowed trading along the crude oil futures curve. Investors need to be aware of the market's structural costs before entering into these investments.
No comments:
Post a Comment