On June 27th, the first leveraged Bitcoin strategy ETF (BITX) launched by Volatility Shares will begin trading on the Chicago Board Options Exchange (CBOE BZX), marking the advent of another financial derivative Bitcoin ETF after the US Bitcoin futures ETF was approved.
However, as early as April 16, 2021, the world’s first cryptocurrency leveraged ETF – Beta Pro Bitcoin ETF (code: HBIT) was already listed on the Toronto Stock Exchange.
For investors and market participants, the approval of leveraged Bitcoin strategy ETFs means another way and method to invest in cryptocurrencies. Today, Blocking will comprehensively sort out the specific content and profit model of 2x leveraged Bitcoin strategy ETF based on the main content of the Volatility Shares official website and the BITX prospectus.
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Bitcoin Strategy ETF Overview
2x Bitcoin Strategy ETF is a Bitcoin trust launched by Volatility Shares, with a stock trading code of BITX, which is mainly traded on the CBOE BZX exchange. The fund aims 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 Rolling Index every day.
Specifically, the fund will actively seek to deduct the 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 returns coexist, and during periods of large index fluctuations, the impact of index fluctuations on fund returns may be as large or even larger than index returns.
It should be noted that the fund does not directly invest in Bitcoin. Instead, it seeks to profit from the daily price increase of Bitcoin futures contracts.
Currently, the fund’s main expense ratio is 1.85%. Among the top ten holdings, the official only disclosed three of them, CME Bitcoin Fut Jun23, CME Bitcoin Fut Jul23, and Cash & Other.
According to the US “Investment Company Act of 1940”, the fund is classified as a “non-diversified” fund.
Return index and calculation method
The 2x Bitcoin Strategy ETF stock is mainly listed and traded on the exchange, and the specific income is calculated based on the Standard & Poor’s CME Bitcoin Futures Daily Rolling Index.
The index is an excess return index, and the Bitcoin futures contract is rolled over every day, with the rollover completed two days before the last trading day (t) of the current contract. At the close of t-2 days, the index for the expiring futures contract (rolled-out contract, which expires in two days) is 0%, and the index for the next futures contract (rolled-in contract, which expires next month) is 100%. The last trading day is the last Friday of the contract month.
The daily rollover percentage is determined on the day when the index fully rolls over from the first-month contract to the second-month contract, and remains unchanged throughout the month.
Each ER index is calculated based on the price changes of the underlying futures contract. On any trading day t, the level of each category index is calculated as follows:
ERIndext = ERIndext-1 * (1 + CDRt,t-1)
ERIndext-1 = the excess return index level on the previous business day, defined as any date on which the index is calculated.
CDRt,t-1 = daily contract return, defined as:
DCRP = daily contract reference price of the futures contract.
When the index rolls over for multiple days, CDR is calculated as follows:
where: = daily contract reference price of the i-th futures contract
wi = weight of the i-th futures contract
Main investment strategy
1. Index tracking
The index is the performance of the rolling long position in the two most recent expiring Bitcoin futures contracts traded on the Chicago Mercantile Exchange, built and maintained by S&P Dow Jones Indices LLC. The index consists of Bitcoin futures contracts and is included in the terms of the contract for the future replacement of the index futures contract.
2. Bitcoin futures contracts
In order to obtain twice the daily exposure of the index, the fund plans to invest in cash-settled Bitcoin futures contracts. When there are long futures contracts with rollover spot premiums, the fund will close out by selling shorter contracts at relatively higher prices and buying longer contracts at relatively lower prices, thereby improving the fund’s performance in multiple ways.
In addition, the fund will also invest in Bitcoin futures contracts through affiliated subsidiaries.
However, if the price of the Bitcoin futures market is difficult to obtain, the Fund will evaluate the fair value of its Bitcoin futures contracts based on its pricing and valuation policy.
3. Collateral Investment
The Fund will invest in collateralized investments. Collateralized investments consist of securities with higher credit ratings, including: (1) US government securities, such as bonds, notes, and bonds issued by funds supported by the US; (2) Money markets; (3) Corporate debt securities, such as commercial paper and other short-term, non-principal-bearing debt issued by companies rated investment grade or determined by subadvisers to have comparable quality.
Collateral investments are intended to provide liquidity, serve as collateral for margin or otherwise collateralize investments in Bitcoin futures contracts at the next level.
4. Repurchase Agreements
In order to achieve the Fund’s investment objective of double the return, the Company will enter into repurchase agreements. By selling portfolio securities to financial institutions and agreeing to repurchase these securities at agreed-upon dates and prices, and using the proceeds to invest in purchases.
5. Invest in other companies
The Fund will invest in other companies in order to maintain the required daily index leverage exposure level, maintain its status as a regulated investment company for tax purposes, and achieve its stated investment objectives during and around the end of each quarter.
Due to the high risk inherent in Bitcoin itself as a cryptocurrency, it has been closely scrutinized 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 has certain risks. The value of fund shares will fluctuate, and clients may incur losses from investing in the fund. As a leveraged ETF, the risks associated with Bitcoin and Bitcoin futures are particularly strong.
1. In the investment target is unstable
Bitcoin futures contracts are relatively new investments and carry significant risks. The investment value of the Fund may drop significantly without warning, including dropping to zero. Users may lose the entire investment value in one day.
2. Leveraged risk
Market factors may affect the fund’s and index’s ability to realize leveraged (2x) profits, including expenses, expenditures, trading costs, financing costs associated with the use of derivative products, income items, valuation methods, accounting standards, and Bitcoin market interruptions or lack of liquidity in futures contracts invested by the fund, all of which may cause losses that users cannot bear due to double leverage.
3. Management risk
As an actively managed investment portfolio, the fund faces management risk. The sub-adviser will apply investment technology and risk analysis to develop the fund’s investment decisions, but cannot guarantee that the fund will achieve its investment objectives.
In addition, there are risks such as compound interest risk, commercial information disclosure risk, liquidity, and counterparty risk.
The SEC has previously approved Bitcoin futures ETFs but has not yet approved spot ETFs. In the past week, companies including WisdomTree, Invesco, and BlackRock have submitted applications for Bitcoin spot ETFs. Now, the approval of leveraged Bitcoin futures ETFs is undoubtedly a positive signal for the cryptocurrency industry.
However, as a way to amplify investment returns in Bitcoin using leverage, leveraged Bitcoin ETFs increase their investment scale and potential profits, and risks are also multiplied. Therefore, remember to keep your capital safe while in the cryptocurrency market.