Summary The 2x Bitcoin Strategy ETF suffers from significant contango and volatility decay, making it less effective for long-term Bitcoin exposure compared to simpler, low-cost Bitcoin ETFs like IBIT. BITX charges a high 1.85% expense ratio and has underperformed its promise, delivering only 1.5x Bitcoin's return due to decay issues. President Trump's potential 'Bitcoin Reserve' policy could boost Bitcoin prices, but simpler ETFs like IBIT are better for bullish investors without leverage risks. I rate BITX a hold and recommend IBIT ETF for those seeking Bitcoin exposure without the downsides of leverage or decay. With President-elect Donald Trump expected to return to the White House next week and likely designating cryptocurrencies a 'national priority' on day 1, investors may be tempted to add Bitcoin exposure ahead of inauguration day. One option is to buy the 2x Bitcoin Strategy ETF ( BITX ), which promises to deliver twice the daily returns of holding Bitcoins. However, in my opinion, the BITX ETF may not be investors' best option if they expect Bitcoins to rally for an extended period of time. The BITX ETF suffers from significant contango and volatility decay that causes significant slippage compared to actual Bitcoin returns. I rate BITX a hold and prefer the simpler, low-cost Bitcoin ETFs instead. Brief Fund Overview For those unfamiliar, the 2x Bitcoin Strategy ETF seeks to provide daily returns that are twice the return of the S&P CME Bitcoin Futures Daily Roll Index ("SPBTFDUE Index"). This index measures the daily performance of a rolling position in front-month Bitcoin futures that trade on the CME Exchange and is rebalanced on a daily basis between the front-month contract and the second-month contract to maintain its 200% daily exposure. For example, on January 16th, 2025, BITX held 77.6% of its notional exposure in January futures and 122.4% in February futures, with collateral held as cash (Figure 1). Figure 1 - BITX holdings, January 16, 2025 (volatilityshares.com) The BITX ETF has $3.5 billion in net assets and charges a 1.85% expense ratio (Figure 2). Figure 2 - BITX overview (volatilityshares.com) Contango And Volatility Causes Slippage I may sound like a broken record, but investors considering a leveraged futures ETF like the BIX must consider contango and volatility decay. Contango , with respect to a futures market, means that asset prices are more expensive the farther out in maturity you go. For example, while spot Bitcoins are quoted at ~$99,000 on January 16th, 2025, the January futures are trading at $100,500 and the February futures are trading at $101,600 (Figure 2). Figure 3 - Illustrative Bitcoin futures curve (trading view.com) This becomes problematic for a futures-based ETF like BITX because the fund must rebalance its exposure every single day to maintain a weighted average 1-month maturity. On a daily basis, BITX must sell the 'cheaper' near-month future and buy the more 'expensive' second-month future. This constant 'sell-low/buy-high' leads to a gradual decay in value for the BITX ETF. Compounding the problem for BITX is its 200% leveraged exposure. In addition to 'contango decay' , leveraged ETFs suffer from 'volatility decay' . Assume investors have bought $100 worth of BITX. If Bitcoins return +5% on day 1 followed by -5% on day 2, the returns experience for BITX investors is +10% followed by -10% and they will end up with $99.00, significantly less than twice the 2-day compounded loss of 0.25% or $99.50. This loss in value is commonly called 'volatility decay'. While these losses may appear small on a day-to-day basis, when compounded over long periods of time, contango and volatility decay can cause very significant slippage in BITX's returns compared to holding Bitcoins directly. For example, in the past year, Bitcoin has surged by 131%, but the BITX ETF has only returned 194%, significantly less than its claim of 200% returns (Figure 4). Figure 4 - BITX vs. Bitcoins, trailing 1 year (Seeking Alpha) Traders considering the BITX ETF should ensure they fully understand the tracking error risks involved with levered and futures-based ETFs as explained in these FINRA and SEC warnings. 'Bitcoin Reserve' To Become A National Priority According to leaked reports , one of President Trump's first executive order once he returns to the White House may be to establish a 'national strategic Bitcoin stockpile', much like how the U.S. government currently holds gold bullion in reserve. While the details remain hazy, there are several avenues President Trump could pursue to establish this 'Bitcoin Reserve'. One simple way would be for the U.S. government to take the ~200k Bitcoins it has obtained from confiscations and seizures and deem them as the 'Bitcoin Reserve' and add to it over time. However, a more bullish scenario is a proposal by Wyoming Senator Cynthia Lummis that could require the United States buy 200,000 Bitcoins per year, for 5 years, until it has accumulated a total of 1,000,000 Bitcoins. As a reminder, there are currently 19.9 million Bitcoins in circulation and only 21 million Bitcoins can ever exist, according to Bitcoin's codebase. If the United States' 'Bitcoin Reserve' is set in terms of number of coins instead of dollars, then that means there may be a constant 'bid' underneath Bitcoin prices as the U.S. government will be forced to steadily accumulate Bitcoins, regardless of price. Comparing BITX To Peer Funds With such a bullish outlook, investors may be salivating at the chance to 'front-run' the government. But how does BITX compare against other Bitcoin investment options? In terms of investment funds, I believe BITX is a relatively poor choice. First, in terms of fees, the BITX ETF is by far the most expensive, charging a 1.9% expense ratio compared to the ProShares Bitcoin ETF ( BITO ) that charges 0.95% or the iShares Bitcoin Trust ETF ( IBIT ) that charges 0.12% (Figure 5). BITO is similar to BITX in that it is futures-based, while IBIT actually holds Bitcoins in its own wallet. Figure 5 - BITX is expensive (Seeking Alpha) Alternatively, investors can also choose to invest in Bitcoins directly through a crypto-broker like Coinbase, or invest in crypto-related equities like MicroStrategy ( MSTR ) or MARA Holdings ( MARA ). Let's briefly discuss the pros and cons of the various options using the trailing 1-year return as a guide (Figure 6). Figure 6 - BITX vs. alternative Bitcoin investment options, trailing 1 year returns (Seeking Alpha) Options To Avoid BITO, as a futures-based ETF, suffers from 'contango decay' and should be avoided in my opinion. Bitcoin miners like MARA should also be avoided. Bitcoin miners' business model is constantly challenged by an arms-race against other Bitcoin miners and Bitcoin's codebase, which 'halves' the mining reward every ~18-24 months, leading to poor profitability for the miners. In fact, collectively, I do not believe any Bitcoin miners have cumulatively turned a profit for their shareholders. For example, MARA has lost a cumulative $568 million since its 2014, and it turned a profit in the past 12 months only on the revaluation of digital assets (Figure 7). Figure 7 - MARA has lost a cumulative $568 million since 2014 (Seeking Alpha) Options To Consider The IBIT ETF and other Bitcoin-based ETFs, closely track the returns of Bitcoin and can be considered by bullish investors. In the past year, the IBIT ETF returned 131%, the same as Bitcoin's 131% return less a small management fee. BITX, while it claims to offer 2x returns, actually delivered just 1.5x Bitcoin's return (194% vs. 131%), as 'contango decay' and 'volatility' decay ate into its returns. However, for those seeking 'leveraged' returns, it is an option to consider. MicroStrategy has been the most impressive, returning 661% compared to Bitcoin's 131%, or 5x the returns of Bitcoin, as the company has seemingly discovered a 'Bitcoin flywheel' that allows the company to constantly issue capital (both equity and debt) to buy Bitcoins for its treasury that increases the company's valuation. However, the issue I have with MSTR is that its shares trade at a 100% premium to its holdings of Bitcoins (Figure 8). Figure 8 - MSTR trades at a 100% premium to NAV (mstr-tracker.com) While MSTR's premium valuation can be sustained as long as investors continue to support its shares and Bitcoin remains in a bullish phase, MSTR shares are also vulnerable to sharp declines if Bitcoins suffers an extended correction. In fact, given its premium valuation, MSTR's shares may have a similar leveraged effect on the downside. For example, in the past month, as Bitcoin prices digest its gains made since the November election, MSTR has exhibited double the downside of Bitcoin (-10% vs. -5%) (Figure 9). Figure 9 - BITX vs. Bitcoin alternatives, trailing 1 month returns (Seeking Alpha) BITX and BITO returns have also been poor, returning -15% and -10% respectively in the past month, triple and double the declines of Bitcoin. MARA has been especially atrocious, as it has basically failed to participate in Bitcoin's rally in the past year but has delivered 5 times the decline in the past month. Risks To BITX The short-term risk to BITX and Bitcoin investments is President Trump's policies. A lot of expectation has been built up over the potential of the 'Bitcoin Reserve' and if President fails to deliver, BITX and Bitcoin prices could be in for a rude surprise. Conclusion In my opinion, for most investors, a simple Bitcoin ETF like IBIT should be more than sufficient for those who are bullish on Bitcoin, without the downsides of leverage or decay. I rate BITX a hold , given its significant contango and volatility decay, and prefer to buy the IBIT ETF instead to express my bullish view on Bitcoin.
