ETFs closely tied to the price of bitcoin served investors reasonably well as crypto proxies during a volatile week, even as losses for long-term holders continue to build. The ProShares Bitcoin Strategy ETF (BITO) and Short Bitcoin Strategy ETF (BITI) both saw their largest daily trading volumes on record last week. Smaller funds from Valkyrie and VanEck also saw spikes in volume. All four funds saw slightly larger moves than the roughly 21% decline in spot bitcoin over the course of the week. “It is the proof point of getting the benefit of exposure through futures, but it’s also indicative of the strong demand from investors on both sides,” bullish and bearish, said Simeon Hyman, global investment strategist at ProShares, said of the performance of his firm’s funds. Applications for a true spot bitcoin ETF have been consistently rebuffed by the SEC , but the agency did allow bitcoin futures ETFs to launch. Those futures trade on the CME exchange, giving regulators more comfort. Bitcoin futures do not perfectly track spot bitcoin and the ETFs can carry additional costs for investors, such as the potential for roll costs when the fund swaps out expiring futures for new ones. The ProShares short bitcoin futures ETF is also a daily inverse fund, meaning its performance is likely to diverge if held over a long period of time. However, bitcoin futures are also financially settled, meaning there is no bitcoin that changes hands or is held in an account. This reduces the risk that actual bitcoin can be lost by an owner or misused by a counterparty, as appears to have happened with the crypto exchange FTX. “There were real central benefits of gaining exposure to bitcoin through the futures … compared to the challenges one might find getting exposure utilizing the exchanges, which just aren’t quite mature yet,” Hyman said. He added that the roll costs for bitcoin futures have come down sharply since the ETFs launched. The dramatic declines for crypto raise long-term questions about the space, which had already sold off sharply from its peak late last year. ProShares’ long futures fund is down roughly 75% since its debut in October 2021. There is a chance if not a likelihood that the recent price action, plus the high-profile collapse of FTX — and Terra in May , damage confidence in the sector, driving away users and hurting liquidity for all aspects of crypto, including bitcoin futures. “The bitcoin bear market started almost a year ago and it has been mostly institutions selling assets; we think that retail investors are still holding onto positions (on average at a loss). … From data on market participation over recent years, bitcoin breakeven levels and trading psychology, we think that retail investors may start to sell if BTC trades below $10k,” Morgan Stanley head of cryptocurrency research Sheena Shah said in a note to clients on Friday. But Hyman said that he doesn’t think the dramatic decline in crypto prices and the implosion of FTX “is the end of anything” and that the industry will continue to mature over time. “We should be looking a little bit past this week, and for those who are looking past it, we think we put together a solution that did its job this week,” in providing bitcoin exposure in both directions for many investors, Hyman said. — CNBC’s Michael Bloom contributed to this report.
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