BITX Falls Short: Sell Recommendation Based On Risk, Cost, And Performance Analysis

da-kuk As you will find in this article, my recommendation is to sell BITX due to its higher risks and costs compared to similar leveraged products that offer better performance and lower costs. The goal of the 2x Bitcoin Strategy ETF (BATS:BITX) is to provide investors with twice the exposure to the daily performance of Bitcoin futures. The aim of delivering twice the returns is achieved by concentrating exposure on the daily fluctuations of Bitcoin futures traded on the CME Futures Exchange. This, in contrast to conventional Bitcoin holdings, uses cash-settled futures contracts – which are rolled over on a monthly basis – instead of holding actual Bitcoin. This leveraged ETF is especially important for investors looking for short-term trading possibilities in the cryptocurrency space because it offers a way to profit from daily price volatility with the possibility of larger returns. However, leveraged products naturally have a high level of risk and the potential for equally large losses. As such, BITX and similarly leveraged products need to be actively managed and monitored with great care. ETF Overview BITX uses the S&P CME Bitcoin Futures Daily Roll Index, which it is targeting to outperform by 2x. In practice, Bitcoin futures contracts are purchased via cash settlements and automatically renewed each month as they get closer to expiration. By consistently switching to the contracts for the following month, the fund’s strategy makes sure that it keeps its leveraged exposure. For those familiar with crypto-native perpetual products, these cash-settled contracts are basically the same. BITX is designed for experienced investors who comprehend the risks and volatility involved in making leveraged investments. I would consider it appropriate for people who actively manage their portfolios and want to profit from the daily swings in the Bitcoin futures market, rather than those looking for long-term holdings. This is because it is specifically made to be a short-term trading tool rather than a long-term investment. The Inner Workings of BITX To reach its goal of doubling the daily exposure to Bitcoin, BITX employs a complex technique based on Bitcoin futures contracts. The strategy used by BITX fund managers includes a complex rebalancing procedure that is necessary to consistently maintain the intended leverage. As touched upon earlier, the rebalancing can be boiled down to continuously buying into later-dated contracts to maintain an equal amount of exposure as the closer-dated contracts mature. This rebalancing makes sure that despite the daily swings in the price of Bitcoin futures, the exposure of the fund always stays in line with their 2x target. These daily adjustments aim to reduce the compounding impacts of price fluctuations over several days, which, if improperly managed, can lead to notable deviations from the target leverage. This rolling of contacts must be completed efficiently to reduce slippage and transaction costs, which can reduce returns, making timing and execution critical. The rebalancing is a reason in and of itself why these leveraged products should be seen as short-term vehicles rather than something to buy and hold. In short, the outcome is that it hopes to increase the daily returns on these futures contracts. With the double exposure approach, the fund seeks to achieve a 2% change in its NAV, before fees and other expenses (more on this later), for every 1% movement in the price of Bitcoin futures. Performance Overview In comparing BITX with Bitcoin as a raw asset, both investment options have significant risks and potential. This is supported by the data, which shows that during the same 1-year time period, the price of the 2x Bitcoin Strategy ETF changed by 147.1%, while the price of Bitcoin changed by 114.3%. This suggests that while leveraged ETFs, such as BITX, have the ability to increase returns, they also increase the possibility of losses, as seen during the October 2023 period, quantifying the higher level of risk. Data by YCharts A closer look at BITX’s premium or discount to Net Asset Value indicates how well it tracks its underlying assets. The BITX appears to closely track its underlying assets, namely the Bitcoin CME Futures, which are based on real Bitcoin, as seen by its 0.04% premium or discount to NAV. Although deviations from the desired benchmark’s performance are possible due to the ETF’s leverage, this tight connection suggests that BITX is most often effective at keeping a tight hold on the underlying price, particularly during times of severe market volatility. Data by YCharts As a counterpoint, I took into account the Grayscale Bitcoin Trust ETF (GBTC), which is among the biggest Bitcoin ETFs and is renowned for having a consistent and low premium to NAV. There is a -0.02% premium or discount to NAV for GBTC. In comparison, the BITX is marginally more volatile despite being reasonably close at 0.04%. This value is comparatively consistent across time. Because BITX is a second-layer derivative asset class (deriving value from Bitcoin futures), it entails greater complexity and risk than spot ETFs like GBTC, this heightened volatility in its premium or discount to NAV is expected and seen. Data by YCharts In conclusion, since BITX is leveraged, it carries a higher risk of loss even though it also, and more interestingly, has the potential to yield larger returns. Its premium or discount to NAV demonstrates its excellent tracking of the underlying Bitcoin. This goes to show how crucial it is to understand the subtleties and dangers of leveraged ETFs, particularly when investing in volatile asset classes like Bitcoin. Risks and Considerations Investors should carefully evaluate the special risks associated with leveraged ETFs such as BITX. The daily reset or rebalancing mechanism implies that BITX is intended to accomplish a 2x return on a daily basis however this may not be true over longer periods of time. Particularly in choppy markets, this daily reset may have compounding consequences, causing actual returns to gradually diverge from the projected 2x performance. Additionally, gains and losses can be amplified by market volatility, potentially leading to significant losses in a single day. Furthermore, the 1.85% expense ratio of the fund is very high, and rolling futures contract expenses can eventually further reduce profits. These elements exacerbate return decay, which lessens BITX’s attractiveness as a long-term investment vehicle. Because of these risks, investors in BITX should practice active management and ongoing oversight, as the fund’s performance can be very volatile and dependent on the daily or even hourly state of the market. Comparable Products Several criteria are taken into consideration when comparing BITX to other investment options, like Bitcoin-linked MicroStrategy (MSTR) stock or other Bitcoin ETFs like BRRR and GBTC. Given its significant holdings of Bitcoin, MicroStrategy can act as a leveraged stand-in for actual Bitcoin. Because of its corporate strategy and the inherent leverage of its Bitcoin assets, MSTR has frequently outperformed Bitcoin and leveraged ETFs like BITX over the long run. This means that MSTR offers a potentially superior substitute for investors hoping for greater returns in a bullish Bitcoin market because it combines the advantages of exposure to Bitcoin with the security of a corporate organization. Data by YCharts Over the course of the 1-year period, the price of the BITX ETF changed by 153.5%, compared to a price change of 114.3% for Bitcoin. MicroStrategy, a company whose corporate strategy includes holding substantial amounts of Bitcoin, demonstrated an impressive 359.2% change in price. MSTR is positioned as a leveraged substitute for real Bitcoin because of this performance, which is noticeably better than that of both BITX and Bitcoin. Due to its corporate strategy, which includes holding large amounts of Bitcoin on the balance sheet, MicroStrategy has been able to take advantage of price changes in Bitcoin and often outperform both Bitcoin and leveraged ETFs. Because MSTR combines the benefits of exposure to Bitcoin with the security and corporate governance of a large company, it becomes a compelling choice for investors looking for higher returns in a bull market for cryptocurrencies. The price change of the Grayscale Bitcoin Trust ETF was 197.4%. This is higher than BITX and Bitcoin itself, even if it is lower than MSTR. Compared to leveraged ETFs, GBTC’s structure as a spot ETF provides more direct exposure to Bitcoin, which may account for some of its more steady yet significant gains. Furthermore, GBTC’s premium or discount to NAV of -0.02% shows how well it tracks the fluctuations in Bitcoin’s price, but less so than BITX. However, it needs to be taken into account that much of the upside (outside of bitcoin price gains) is due to GBTC closing the discount to premium to NAV and will not realistically continue in the same manner. All things considered, because BITX is leveraged, it has the potential to yield bigger returns, but it also carries a higher risk, as shown by its performance statistics and volatility in premium or discount to NAV. MSTR presents itself as an arguably better option for investors looking for higher profits combined with the extra protection of a corporate structure. Although GBTC provides a more direct and consistent exposure to Bitcoin, it is still a good option for those who want tighter monitoring of the actual asset and less volatility. Every investment option has a different risk-reward profile, which highlights how crucial it is to match investing decisions to a person’s risk tolerance and market perspective. Conclusion Short-term traders and seasoned investors who closely monitor their portfolios and are familiar with leverage and futures market dynamics are the primary target market for BITX. By using BITX, these investors can improve their daily returns and profit from quick changes in the market. Moreover, BITX can be employed by professional traders or institutional investors to carry out intricate trading plans that need leveraged exposure to Bitcoin futures or as a hedging mechanism. For less sophisticated investors, a number of factors need to be taken into account when comparing BITX to alternative investment options, including the performance of MicroStrategy stock, which is connected to Bitcoin, and other Bitcoin ETFs, such as GBTC. The data highlights the disparities in risk and potential return that various alternatives offer by revealing notable performance discrepancies. As such, I suggest selling BITX relative to comparable leverage products like MSTR or even non-leveraged products like GBTC due to the costs of added management fees and downside volatility.

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