The launch of ProShares’ Bitcoin Futures ETF (BITO) on the NYSE Arca marked a pivotal moment in the evolution of cryptocurrency investment vehicles. While many investors celebrate this milestone, it's essential to understand that Bitcoin Futures ETFs and Bitcoin Spot ETFs operate under fundamentally different mechanisms — and come with distinct risks and limitations.
To help clarify the nuances, Brett Harrison, former president of FTX.US, took to Twitter to break down how futures-based ETFs work, why they don’t perfectly track Bitcoin’s price, and what hidden costs investors might overlook.
How ETFs Maintain Price Alignment: The Creation and Redemption Mechanism
At the heart of every ETF’s functionality lies the creation and redemption mechanism, a process that ensures the market price of an ETF stays closely aligned with the value of its underlying assets.
Most retail investors trade ETFs on secondary markets — essentially buying and selling shares like stocks. However, there’s another critical layer: Authorized Participants (APs), typically large financial institutions, can directly interact with the ETF issuer.
These APs can:
- Create new ETF shares by delivering a basket of underlying assets.
- Redeem ETF shares for the actual basket of assets.
This two-way exchange acts as a powerful arbitrage tool. For example:
- If the ETF trades at a premium to its net asset value (NAV), APs buy the underlying assets, create new ETF shares, and sell them for profit.
- If the ETF trades at a discount, APs buy ETF shares cheaply, redeem them for the basket, and sell the assets.
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This mechanism keeps the ETF’s market price tightly pegged to its intrinsic value — provided the underlying assets are liquid and transparent.
But when it comes to Bitcoin Futures ETFs, things get more complicated.
Why BITO Doesn’t Fully Track Bitcoin’s Price
Unlike a Spot Bitcoin ETF, which holds actual Bitcoin secured by custodians, the ProShares Bitcoin Futures ETF (BITO) is built on a basket of financial derivatives, not physical crypto.
Specifically, BITO invests in:
- Near-term CME Bitcoin futures contracts
- Short-term U.S. Treasury bills and repurchase agreements (repo instruments)
While CME futures are regulated and generally track spot Bitcoin prices due to arbitrage activity, the inclusion of cash-like instruments introduces a critical divergence.
The Cash Drag Effect
A significant portion of BITO’s portfolio consists of low-yield cash equivalents. This means:
“Even if Bitcoin rises 1%, BITO will likely gain less than 1%.”
— Brett Harrison
This phenomenon is known as cash drag — the dilution of returns because part of the fund isn’t exposed to Bitcoin at all. In bull markets, this underperformance becomes increasingly apparent.
The Hidden Cost: Futures Contango and Roll Yield Losses
One of the most misunderstood risks in futures-based ETFs is contango — a market condition where longer-dated futures contracts trade at a premium to shorter-dated ones.
Bitcoin often trades in contango due to:
- Positive funding rates
- Bullish market sentiment
- Interest rate differentials
Here’s how it impacts BITO:
The Futures Roll Process
As each futures contract nears expiration, BITO must sell the expiring contract and buy a new one with a later expiry — a process called rolling.
But because future contracts are usually more expensive than current ones (contango), this roll incurs a recurring loss.
“In contango, the fund loses money every time it rolls — this is a structural drag on long-term performance.”
— Brett Harrison
Over time, these roll losses accumulate. In persistent contango environments, an investor could see Bitcoin rise significantly while BITO flatlines or even declines — a phenomenon observed in commodity ETFs like those tracking oil.
Why Spot ETFs Are More Efficient for Long-Term Investors
A true Spot Bitcoin ETF avoids these pitfalls by holding actual Bitcoin. This eliminates:
- Roll costs
- Contango risk
- Cash drag from non-crypto assets
Instead, its price moves almost one-to-one with Bitcoin, minus minimal management fees.
The absence of a spot ETF in the U.S. (at the time of BITO’s launch) forced investors into suboptimal futures-based products. However, regulatory shifts have since paved the way for spot Bitcoin ETF approvals in 2024–2025, marking a major win for investor access and transparency.
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What’s Next? Expanding Access to Regulated Crypto Derivatives
While futures ETFs represent progress, they’re just one step toward broader crypto integration into traditional finance.
FTX.US’ planned acquisition of LedgerX — a fully regulated U.S. derivatives platform licensed by the CFTC — highlights a growing trend: bringing crypto derivatives into compliant frameworks.
With LedgerX’s triple regulatory approval (DCM, DCO, SEF), FTX.US aimed to:
- Offer crypto futures and options directly to retail investors
- Provide clearing services for other exchanges
- Expand into tokenized equities and broader digital assets
This move aligns with industry visionaries like Sam Bankman-Fried (SBF), who envisioned FTX.US as a bridge between traditional capital markets and innovative digital assets.
Frequently Asked Questions (FAQ)
Q: What is the main difference between a Bitcoin Spot ETF and a Futures ETF?
A: A Spot ETF holds actual Bitcoin, while a Futures ETF holds contracts betting on Bitcoin’s future price. The spot version tracks price more accurately and avoids roll costs.
Q: Why does BITO underperform when Bitcoin rises?
A: Due to cash drag (part of the fund is in Treasuries) and roll losses from contango — selling cheaper near-term contracts and buying pricier long-term ones.
Q: Is contango always bad for investors?
A: Not necessarily. In sideways or bear markets, contango can reduce volatility. But in strong bull markets, it erodes gains over time.
Q: Can futures-based ETFs ever perfectly track Bitcoin?
A: No — structural factors like roll yield and cash holdings prevent perfect correlation, especially over long periods.
Q: Are Spot Bitcoin ETFs available in the U.S.?
A: Yes — multiple spot Bitcoin ETFs were approved by the SEC in early 2024, offering investors more efficient exposure than futures-based alternatives.
Q: What are Authorized Participants (APs) in an ETF?
A: Large institutions that create or redeem ETF shares directly with the issuer to maintain price alignment with underlying assets through arbitrage.
Final Thoughts: Choose the Right Tool for Your Goals
While the approval of BITO was historic, it’s crucial to recognize its limitations. For long-term investors seeking pure Bitcoin exposure, Spot ETFs are superior due to direct ownership and lower structural drag.
Futures ETFs still serve a purpose — particularly for short-term traders or those in jurisdictions where spot products aren’t yet available. But they come with built-in inefficiencies that can hurt returns over time.
As regulatory clarity improves and infrastructure evolves, investors now have better options than ever before.
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Whether you're evaluating ETFs or diving into direct crypto investing, understanding the mechanics behind these products is key to making informed decisions in today’s rapidly evolving financial landscape.
Core Keywords:
Bitcoin Futures ETF, Spot Bitcoin ETF, BITO ETF, ETF creation and redemption, contango in crypto, roll yield loss, CME Bitcoin futures, Authorized Participants (APs)