Summary BITO offers exposure to Bitcoin through futures contracts, providing ease of access and significant monthly distributions despite tracking errors and high volatility. BITO is down significantly since my last article, but I remain bullish, albeit for different reasons. Technical indicators suggest a potential end to BITO's downtrend, with bullish seasonality from October to February historically supporting Bitcoin price increases. BITO is a high-risk, high-reward investment suitable for those bullish on Bitcoin, offering potential income and brokerage account accessibility. About six months ago, I called the ProShares Bitcoin ETF ( BITO ) a strong buy ahead of the Bitcoin halving that would take place a couple of weeks later. As it turns out, the post-halving run up in Bitcoin prices I was looking for didn’t materialize. Indeed, Bitcoin has been consolidating for months now, frustrating bulls at every rally attempt. That has kept a lid on the price of BITO, obviously, but as we reexamine it now, I’m not so sure price will be held down much longer. Obviously, I said BITO was a buy at $31, and we’re now at $17. That’s not amazing. However, in the intervening time, BITO has declared and paid $9.84 in distributions per share. Putting that context in makes the 44% decline since my article a true decline of about 17%. Still not great, but much better. It also highlights a key component of BITO, which we’ll cover below. At any rate, I think seasonality makes BITO a buy here, along with an improving technical picture that may just portend the end of the current downtrend. A refresher on BITO I covered the composition of BITO in depth in the linked article from April, so I won’t go through everything again. However, a brief primer on BITO is that it’s an ETF that owns Bitcoin futures, but not actual Bitcoin. Fund website We can see there’s no multi-month strategy as we see with some commodity ETFs; BITO owns a single contract, which happens to be the October 25 th , 2024 expiry (in addition to a nominal amount of index swaps). Basically, this fund owns a huge amount of Bitcoin futures contracts, so its correlation to spot Bitcoin pricing is good, but not perfect. StockCharts.com We can see the 50-day correlation to Bitcoin spot prices is 0.83, so it’s far from perfect. But BITO offers the ease of owning Bitcoin through a normal brokerage account, as well as distributions each month. For that, you are “paying” for a small amount of tracking error. If that sort of thing bothers you, BITO isn’t for you. In the context of the benefits of BITO against trying to own actual Bitcoin, it may be worth it for some investors. Downtrend ending? That’s the key question here. The pennant I pointed out in April ultimately failed, as the ETF did not break out to new highs. The pennant failed in mid-April, ushering in what has become a protracted downtrend. So the key question then becomes, how do we know the downtrend has ended? StockCharts.com The series of lower highs is obviously the key indicator of a downtrend, and it won’t be complete until we start getting higher highs. I will say that from the August low, we’ve seen support hold in a mini uptrend. The ETF is now in excess of the major moving averages, and the PPO has crested the centerline. These are good signs, but we have to have confirmation through higher highs. The RSI is also still not confirming the downtrend having ended. During consolidation or bearish phases, the 14-day RSI rarely crests 60. You can see during this past six months, there have been at least eight attempts for the RSI to move over 60, and all eight have failed. Seeing a reading of 65+ would be a great indicator a new rally has started. Another point for the bulls is that seasonality is outstanding this time of year. This is a decade’s worth of data on Bitcoin's seasonality, and the period from October to February is tremendously bullish. StockCharts.com October to February, a period of five months, has averaged 48% absolute gains. To be clear, I’m not saying Bitcoin is going to go up 48% in the next five months, but I am saying that betting against Bitcoin during this period is a tough trade to make on the evidence above. Risks and distributions Obviously, a fund that tracks Bitcoin is one that is going to have a lot of risk, and BITO is no different. Seeking Alpha It achieves a risk grade of F via Seeking Alpha’s metrics, as all relevant metrics receive poor scores. Annualized volatility, for example, is more than four times that of the S&P 500. It’s obviously extremely concentrated as well, given it tracks a single instrument. Point being, if you are risk-averse, BITO is not for you. If you are bullish on Bitcoin pricing, it’s one way to gain exposure, but positions should be sized prudently given the inherent risk here. The other very interesting thing here are the distributions the fund pays are extremely significant. Seeking Alpha I mentioned the distributions in the introduction, and you can see just how big they’ve been this year. The $10.93 per share that’s been paid is equal to 62% of the current fund price. You can use such distributions as monthly income, or you can reinvest. But the point being that you cannot talk about BITO without talking about distributions. You can read about how BITO generates funds for its distributions but basically, the gains made by the fund on futures contracts or swaps get turned into net income, which is then distributed. Given that, the distribution varies widely from month to month, and in some months, there may be no distribution at all. For now, BITO is paying huge monthly distributions. The bottom line BITO is obviously a high-risk, high-reward situation as it pertains to gaining exposure to Bitcoin. The OG alt-coin is volatile on its own, and BITO introduces additional risk through tracking error. However, gaining access to Bitcoin in a general brokerage account, as well as the potential income it generates makes up for that, in my view. You may disagree, and that would mean BITO simply isn’t for you. However, with bullish seasonality in the coming months, as well as early signs of technical improvement on the price chart, I’m sticking with my bullish call on BITO.
