The first Bitcoin ETF, ProShares’ BITO, is reportedly already in danger of breaching a limit on the number of futures contracts that it is allowed to hold. This is under the current Chicago Mercantile Exchange rules.
BITO already owns almost 1,900 Bitcoin futures contracts that are set to expire in October. The number is dangerously close to CMEs current rule that a single entity cannot own/hold more than 2000 front-month futures contracts. This was reported on Thursday when BITO had been live for just 2 days.
The ETF has already started tackling the limit by buying futures contracts that will expire in November. The firm has amassed 1400 November contracts so far which places the company in danger, yet again, of reaching CMEs cap on holdings for next-month contracts also. The current cap is 5000 contracts per month.
The CME has said that it will increase its front-month contract cap to 4000 contracts in November. This number is also likely to be reached soon by BITO, which already has more than $1 billion under management.
One major issue that is the currency being faced by ProShares’ ETF is that futures contracts tend to trade at a higher premium the further away their expiry date. This phenomenon is known as contango in the futures market.
This means that choosing to get around the cap by purchasing longer-dated contracts will mean that the ETF has to get its Bitcoin exposure at prices that are increasingly higher than the spot. This could result in high costs when contracts are rolled over at expiry. These costs will eventually be paid by investors in the form of lower returns.
The prospect of low returns could prevent many investors from taking interest in the new exchange, which would significantly damage its launch. Nevertheless, the Bitcoin futures ETF continues to develop and tackle these problems.
