Summary ProShares Ultra Bitcoin ETF is a 2x leveraged BTC strategy for day traders seeking amplified returns. This product may not be suitable for long-term investors. BITU uses swap agreements and cash-settled futures contracts to achieve 2x daily returns relative to spot BTC prices. Returns may be amplified during periods of sequential gains and losses in the reference BTC index, resulting in returns outside of the 2x target. ProShares Ultra Bitcoin ETF ( BITU ) is ProShares 2x leveraged BTC strategy that provides leveraged returns relative to the spot price of BTC. Given that BITU is a leveraged strategy, there are inherent risks involved that may not make this strategy appropriate for everyone. As described below, BITU is not meant to be held for longer than a single day in order to achieve a 2x return over the underlying asset and may accelerate gains or losses if held longer. As such, I cannot recommend BITU as a buy-and-hold strategy, and it is not appropriate as an asset allocation for advisors. This product should be strictly used for day traders as risks may compound over long periods of time. Because I am not a speculative BTC trader and cannot recommend a direction for the cryptocurrency, I will provide BITU a HOLD rating and recommend against this product otherwise. For those seeking 2x inverse returns, be sure to check out UltraShort Bitcoin ETF ( SBIT ). ProShares BITU was created on April 2, 2024, as ProShares' solution to providing excess returns, or losses, relative to the daily price swings as realized by BTC. As the description implies, BITU seeks to provide 2x the performance of spot BTC before fees, whether to the upside or downside. BITU is benchmarked to the Bloomberg Bitcoin Index, which is designed to track the price of BTC as a proxy for the BTC market. BITU was designed for speculative traders who seek to profit from actively trading this product on a daily basis. Adding emphasis on “daily basis,” this strategy is not meant to be bought and held for a time period longer than a single day. The “2x” performance is a daily performance metric and will not be reflected if the ETF is held for a longer period. Because of how the portfolio is structured, returns may be amplified based on higher volatility and larger daily returns when grouped together; however, losses will equivalently be amplified if sequential days of extreme losses occur. Given the riskiness of the leveraged ETF, I cannot recommend this vehicle to the general investor, especially those in advisory positions. This product is purely meant for active day traders and should not be considered otherwise. Be sure to review my two reports covering the VanEck BTC ETF ( HODL ) and the iShares BTC ETF ( IBIT ) as a primer: VanEck Bitcoin Trust ETF May Not Be The Optimal Bitcoin Fund To 'HODL' IBIT Is A Great Vehicle For BTC Investing Diving into the mechanics of the fund, BITU functions similar to other leveraged ETF products. Like the ProShares' UltraPro QQQ ETF ( TQQQ ) or their ultra-short ETF ( SQQQ ), the portfolio, BITU does not directly hold BTC within the portfolio. Instead, BITU uses swap agreements that provide the 2x daily return the portfolio management team seeks out. In certain circumstances, the management team may elect to utilize cash-settled futures contracts as a proxy if unable to obtain the desired exposure. The contracts held in the portfolio are typically traded using the shortest duration exposure, or the front month, in order to obtain the targeted 2x leverage. From there, contracts are rolled forward to the next month in order to maintain a similar level of exposure. The swap contracts are priced to the Bitcoin Reference Rate on a daily basis, meaning that cash will be owed to one of the parties in association with the swap contract at the end of each trading day. Because the BTC futures curve is in contango, or higher in future periods, the portfolio does not realize gains from the roll forward effect. In addition to market risk, derivatives inherently hold carry risk as it pertains to interest rates. Assuming the Federal Funds rate is not lowered this year, the cost of carry will be between 5.25-5.50%. To the contrary, if the cost of carry goes down, the value of the swap contract may appreciate as a result, and vice versa if rates increase. CME In addition to this, volatility drift can become an issue for the portfolio during times of extreme volatility. Given that BTC is inherently a volatile asset, drift may be more likely to occur when compared to leveraged index ETFs like TQQQ. Market Chameleon As such, with leveraged portfolios, the net asset value is a race to the bottom and shares are multiplied over time. This is a significant risk to consider when holding BITU for longer than a single day, as the multiplier effect and the declining NAV can come to haunt a long-term holder. ProShares Another major risk with this ETF is liquidity. The fund’s volumes, as reported by Seeking Alpha, average 1.2mm shares, meaning that liquidity may become a challenge in times of distress. In the instance of declining BTC prices, this must be considered prior to entering a position as there may be more sellers than buyers of BITU and lead to a trader being left with an unfilled sell order, or a sell order below their intended price. TradingView As referenced in the preface, BITU is meant to be traded within a single day as it pertains to the 2x target reset on a daily basis. If held for longer than a single day, upside and downside risk can be amplified, as presented in the chart below. TradingView Given this risk, I cannot stress enough that the ETF should be held for no longer than a single day. As can be seen in the chart for the provided period, BTC provided a -13.27% return while BITU provided a return of -34.03%, a significant dispersion from the 2x target. On the flipside, as visualized by the chart below, returns can be compounded above the 2x target during times of excess returns during sequential days of positive returns. TradingView This effect is the result of the daily reset of the leveraged ETF. What this means is that your returns are compounded on the previous day’s closing value rather than your cost basis. This means that if you buy a hypothetical asset valued at $10/share, and it closes that day at $11, the following day’s performance will be based on the $11 rather than the $10 starting value. For additional information on risks involved in leveraged ETFs, please visit the SEC website using the link below: Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors BITU holds a significantly higher expense ratio when compared to spot BTC ETFs at 95bps. IBIT and HODL each hold an expense ratio of 12bps and 20bps, respectively. For more information on these two funds, please visit the links above, as they may be more appropriate for long-term BTC investors. BITU also has significantly lower trading volume when compared to IBIT at 1.2mm shares traded vs. 18mm in IBIT. This can pose a major liquidity risk when entering or exiting a trade and higher spreads. ProShares Conclusion BITU is not meant to be utilized as a long-term buy-and-hold strategy, as gains or losses can be amplified, especially during times of high volatility. The ETF also holds underlying derivative risk as it pertains to cost of carry, volatility drift, and counterparty risk, amongst others. This strategy is not recommended for advisors seeking to build a BTC position in their clients’ portfolios. This strategy is purely meant for day traders and should not be considered otherwise. Given these factors, I rate BITU with a HOLD recommendation with no directional indication.
