An analysis of the first leveraged bitcoin strategy ETF in the United States

Author: Climber

On June 27, the first leveraged bitcoin strategy ETF (BITX) in the United States launched by Volatility Shares will open for trading on the Chicago Board Options Exchange (CBOE BZX), which is another financial derivative following the approval of the US bitcoin futures ETF A bitcoin-like ETF is born.

But as early as April 16, 2021, Beta Pro Bitcoin ETF (code: HBIT), the world’s first cryptocurrency leveraged ETF, was listed on the Toronto Stock Exchange.

For investors and market participants, the approval of the leveraged bitcoin strategy ETF means that there is another way and way to invest in cryptocurrencies. Today, Jinse Finance will comprehensively sort out the specific content and profit model of the 2x leveraged Bitcoin strategy ETF based on the Volatility Shares official website and the main content of the BITX prospectus.

Introduction to Bitcoin Strategy ETF

2x Bitcoin Strategy ETF is a Bitcoin trust launched by Volatility Shares, the stock trading code is BITX, and it is mainly traded on the CBOE BZX exchange. The fund seeks to achieve its investment objective by investing its assets in cash-settled bitcoin futures contracts and will seek to double the performance of the S&P CME Bitcoin Futures Daily Roll Index each day.

Specifically, the Fund actively seeks daily investment results, before fees and expenses, equivalent to twice (2x) the single-day return of the S&P CME Bitcoin Futures Daily Rolling Index. However, risks and benefits coexist. During periods of high index volatility, the impact of index volatility on fund returns may be as large or greater than index returns.

It should be noted that the fund does not directly invest in Bitcoin. Instead, seek to gain from a single-day rise in the price of a bitcoin futures contract.

Currently, the fund’s prime expense ratio is 1.85%. Among the top ten holding positions, the official disclosed only three of them, namely CME Bitcoin Fut Jun23, CME Bitcoin Fut Jul23, and Cash & Other.

The Fund is considered a “non-diversified” fund under the Investment Company Act of 1940 in the United States.

Return Index and Calculation Method

The 2x Bitcoin Strategy ETF shares are primarily listed and traded on exchanges, with returns calculated based on the S&P CME Bitcoin Futures Daily Roll Index.

The index is an excess return index. Bitcoin futures contracts are rolled over daily, and the rollover is completed two days before the last trading day (t) of the current contract. At the close of t-2 days, the expiring futures contract (transferred out of the contract, which expires in two days) has an index of 0% and the next futures contract (transferred into the contract, which expires next month) has an index of 100% . The Last Trading Day is the last Friday of the contract month.

The daily rollover percentage is determined on the day the index is fully rolled over from the first-month contract to the second-month contract and remains constant throughout the month.

Each ER index is calculated based on the price change of the underlying futures contract. On any trading day t, the level of each sub-index is calculated as follows:

ERIndext = ERIndext-1 * (1 + CDRt,t-1)

ERIndext-1 = Excess Return Index level for the previous business day, defined as any date on which the index is calculated.

CDRt,t-1 = contract daily return, defined as:

DCRP = Daily Contract Reference Price for futures contracts.

When the index rolls over multiple days, the CDR is calculated as follows:

Where: = the daily contract reference price of the i-th futures contract

wi = weight of the ith futures contract

Main investment strategy

1. Index tracking

The index, which refers to the return performance of a rolling long position in two recently-expiring bitcoin futures contracts traded on the Chicago Mercantile Exchange, is constructed and maintained by S&P Dow Jones Indices LLC. The index is made up of Bitcoin futures contracts and is included in the terms of the contracts future replacement index futures contracts.

2. Bitcoin futures contracts

To gain 2x daily exposure to the index, the fund plans to invest in cash-settled bitcoin futures contracts. When there is a long futures contract that is rolled over in backwardation, the fund will close the position by selling the shorter-term contract at a relatively high price and buying the longer-term contract at a relatively lower price, that is, through a variety of methods Fund performance improved.

In addition, the fund will also invest in bitcoin futures contracts through affiliated subsidiaries.

However, if it is difficult to obtain the bitcoin futures market price, the Fund will conduct a fair value assessment of its bitcoin futures contract according to its pricing and valuation policy and fair value determination plan.

3. Collateral investment

The fund will invest assets in mortgage investments. Debt-collateral investments consist of higher-credit securities, including: (1) U.S. government securities, such as bonds, bonds, and bonds issued by U.S.-backed funds; (2) money markets; and (3) corporate debt securities, such as those issued by Commercial paper and other short-term non-promissory notes issued by companies rated investment grade or determined to be of comparable quality by the sub-advisor.

Collateralized investments are intended to provide liquidity, serve as margin, or otherwise invest in Bitcoin futures contracts next level of collateralization.

4. Reverse repurchase agreement

In order to achieve the fund’s investment goal, that is, double the return, the company will sign a reverse repurchase agreement. By selling portfolio securities to a financial institution and agreeing to repurchase those securities at a mutually agreed date and price, using the proceeds for investment purchases.

5. Invest in other companies

In order to achieve its stated investment objectives by maintaining daily required levels of index leverage exposure and maintaining its tax status as a regulated investment company, the Fund invests in other companies on and around the end of the quarter.

Possibility Risk

Due to the high risk of Bitcoin itself as a cryptocurrency, it has been under severe scrutiny by the US SEC. Therefore, in the prospectus, the fund listed multiple risk types in detail to ensure that fund investors have sufficient risk awareness of the product.

Like all investments, the 2x Bitcoin Strategy ETF carries some risk. The value of the Fund’s shares will change and the Client may suffer losses from investing in the Fund. And as a leveraged ETF, the risks associated with Bitcoin and Bitcoin futures are even more powerful.

1. Unstable investment targets

Bitcoin futures contracts are relatively new investments that carry significant risk. The value of the Fund’s investments could drop significantly, including to zero, without warning. Users may lose the entire value of their investment in one day.

2. Leverage risk

Market factors may affect the Fund’s and Index’s ability to achieve leveraged (2x) profitability, including fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methods, accounting standards, and disruptions in the Bitcoin market Or the futures contracts invested by the Fund with insufficient liquidity, these may cause unbearable losses to users due to double leverage.

3. Manage risk

As the Fund is an actively managed portfolio, it is subject to management risk. The Sub-Advisor will apply investment techniques and risk analysis to make investment decisions for the Fund, but cannot guarantee that the Fund will achieve its investment objectives.

In addition, there are risks such as compound interest risk, business information disclosure risk, liquidity, counterparty risk and so on.

Conclusion

The SEC has previously approved a bitcoin futures ETF, but not a spot ETF. In the past week, companies including WisdomTree, Invesco, and BlackRock have all submitted applications for bitcoin spot ETFs. Now, the leveraged Bitcoin futures ETF has been approved, which is undoubtedly a positive signal for the encryption industry.

However, leveraged Bitcoin ETF is a way to use the leverage mechanism to magnify the income of investing in Bitcoin. While increasing their investment scale and potential profits, the risk has also been multiplied. Therefore, in the currency circle, remember to protect your capital.