BITO vs. GBTC: What’s The Best Buy In The Crypto World Right Now? (NYSEARCA:BITO) | Seeking Alpha

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produced by ryan wilday with jason appel and avi gilburt

Reading: Bito vs bitcoin

On October 15, 2021, the SEC approved the proshares bitcoin etf (nysearca:bito) strategy. There has been a lot of pent up demand and excitement for a Bitcoin ETF since the heady days of 2017. That day has finally arrived. The assumption was that an ETF would attract funds parked on the sidelines into the crypto asset class because it alleviates some of the regulatory issues and user experience challenges of trading bitcoin spot.

The day finally comes, four years later than the market expected, but bitcoin prices have since dropped. however, our team expects much higher bitcoin prices, maintaining our expectation of bitcoin breaking above $100,000. If you are an investor who is not interested in using crypto exchanges but wants crypto exposure in your stock account, should you add bito to your portfolio?

Before you buy bito, you need to understand how this etf is built. you don’t have real bitcoin. Rather, it holds bitcoin futures contracts, which are traded on the Chicago Mercantile Exchange. while this means that the fund loosely tracks bitcoin prices, it is affected by what is called a balance decline.

Bitcoin futures are traded in contango, which means the next month is priced higher than the previous month. Every time the fund launches expiring futures contracts, it sells a cheaper contract to buy a more expensive one. that balancing process drags or decays the bottom navigation, resulting in a slightly lower yield than bitcoin spot.

I have read and heard that this decline can cost bito investors 10%-15% a year, on top of their 0.95% management fee. in reality, the roll drop will fluctuate as the spread between the futures contracts fluctuates.

We can see the first four months of bito’s price. i took bito, overlaid the bitcoin spot price on orange and indexed them to 100 at the starting point. At the time of writing on Feb 14, bito was down nearly 35%, while bitcoin was down just over 32%. that’s an annualized drop of about 9%, assuming this historical drop remains constant.

BITO vs. Bitcoin, indexed to 100

BITO vs. Bitcoin, indexed to 100 (Tradingview)

See also: Bitcoin Rush – Jak zarobić 1000/dzień? Recenzja [TEST 2022 ]

Given the strong drag of the balance decline, I want to consider strategies for capturing the return of bitcoin in standard brokerage accounts. I won’t leave grayscale bitcoin trust (otc:gbtc) out of this discussion. But first, let me recap our team’s outlook for bitcoin in the coming months.

our bitcoin update

In February 2019, avi and I made a prophetic call for bitcoin to reach $65,000. this level was reached. however, the extension from late 2020 to early 2021 was larger than predicted by elliott wave theory and fibonacci pinball. this extension generated calls for more than $100,000. the market has chosen to frustrate us a bit by staying in corrective mode for almost a year, after being rejected on its first breakout attempt in November 2021.

but honestly, this correction is a very standard wave four flat. waves four are usually extraordinarily choppy and limited in range. because we are talking about volatile bitcoin, that range implied about a 50% decline and double the low to make the first breakout attempt. however, since bitcoin has not retraced 50% of its third full wave this cycle, our six-figure expectation is intact. below $24,000 would be questionable.


Bitcoin’s Daily Chart (Motivewave Software)

The question is whether we have hit rock bottom. we have a nice 30% move from the lows, which has pushed through the resistance. however, the structure is corrective from the lows, leaving some uncertainty as to whether the low will hold. you’ll notice I’ve added the blue triangle to my chart. if we have bottomed out, wave c was shorter than usual, compared to wave a. this usually indicates that a triangle is in play.

Regardless of whether the final end of this wave four has been seen, a reversal appears to be in the works, so scaling into bitcoin or assets with underlying bitcoin is a reasonable strategy. The question, again, is what you should do with your stock portfolio. you have a few options.

should i use grayscale?

given bito’s inherent deterioration, if i could buy only bito or gbtc stock, i would prefer gbtc. As of Friday, February 11, GBTC was trading at a 24% discount to bitcoin held in the fund. The problem with this preference is that the discount keeps growing. By owning GBTC, you may continue to underperform Bitcoin. but you can call me a fool for an asset for sale.

Grayscale has expressed interest in converting GBTC from a trust fund to an ETF. that would instantly convert the 24% discount to 0%, as the market makers manage the bottom navigation. part of me prefers gbtc because there’s a slim chance of catching that instant move at par.

That said, I’m honest with myself. The SEC has rejected application after application for spot bitcoin ETFs, believing that bitcoin is too vulnerable to manipulation. I find that position illogical, as futures prices are based on a benchmark price derived from exchange prices. Deep in my heart I hope that the sec realizes her madness. Of course, my hopes for bureaucratic repentance are probably in vain.

so we have established that buying bito stock is guaranteed to underperform bitcoin. And buying GBTC stock will likely result in similar or worse underperformance compared to bito, with a very small chance of outperformance should GBTC become a spot ETF. So what should investors do?

the third ‘option’

See also: Trademarking of Cryptocurrency

My answer to this dilemma is a third strategy. While bito is a distinctly inferior product to a spot ETF, it has provided investors with a significant gift they can use: standardized fund-based options. A carefully executed bito-selling plan can offset the fund’s poor performance. A bito option plan might sell put options to receive a payment for entering the stock. and one could sell out-of-the-money call options for income, in order to recoup some of the underperformance versus spot.

but be careful. I just started implementing this strategy in my portfolio and have not fully systematized it. I will talk about my experience so far.

let’s look at the sell side of the trade. bito closed today, February 14, at $26.53. the $26.50 put option, which expires on March 11, was sold at $1.90 or $190 in premium. that would be a 7% premium and would go a long way towards offsetting the fund’s underperformance.

At the other extreme, if we want to sell calls, $34 calls (10 deltas) are sold at $22 (0.8%). If by any chance you could sell them every 30 days, all else being constant, you could make a 9% return, making up for the poor return. At time of writing, 30-day options are selling at 63%, which is low for options with a bitcoin underlying. Typically implied volatility in bitcoin-related options fluctuates between 60% and 90% over the course of a year. therefore, the premium harvest numbers discussed are conservative.

I chose 10 delta calls because they have a theoretical 10% chance of hitting the money, causing you to sell your shares at a profit. The opportunity cost of losing your stock profitably, but before the market tops out, is one of the risks of using this strategy.

Bitcoin-based options have a unique feature compared to other options. In stock index options, implied volatility tends to increase as prices fall and fear sets in. In many commodity options, including metals, the options implied volatility increases during strong rallies as fomo sets in.

However, bitcoin-related options tend to be bidirectional. Implied volatility, particularly on calls, tends to increase when bitcoin rallies. Implied volatility, particularly on put options, also tends to increase when bitcoin prices are declining. based on the range above, options tend to be overpriced in the 75% region, underpriced in the 60% range, and overpriced in the 90% range. By taking into account the implied volatility in your premium harvest, you can improve results. and, to some extent, inflated implied volatility can be used to indicate the risk of the market turning.

BITO Implied Volatility

BITO Implied Volatility (Think or Swim)


Unfortunately, the sec has not given us investors uninterested in using crypto exchanges a very direct way to invest in bitcoin prices. bito is a flawed product that breaks down as fund managers have to launch bitcoin futures on contango. GBTC, on the other hand, has a high expense ratio with unpredictable fluctuation in discount and premium. however, for those investors with some options experience, or a willingness to learn, bito options provide an opportunity to recoup some of the underperformance, encoded in the fund’s structure.

Editor’s Note: This article discusses one or more securities that are not traded on a major US stock exchange. exchange. be aware of the risks associated with these actions.

See also: What Is a Crypto Wallet? How It Works & If You Need One

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