Bitcoin’s price rally highlights the importance of spot ETFs due to the futures spread.

Bitcoin’s recent surge in value has raised concerns about a market phenomenon that disadvantages traders of futures and futures-based exchange-traded funds (ETFs) compared to coin holders. The spread between prices for the Chicago-Mercantile Exchange (CME)-listed July futures contract and the now-expired June futures contract has widened significantly, reaching the highest gap since late 2021. This spread, known as contango, increases the cost of pre-expiry futures rollover and impacts the performance of futures-based products offered by ProShares, VanEck, and others. Observers believe the excitement surrounding the potential launch of a spot-based ETF is justified.

Futures contracts have an expiry date, which requires traders to rollover their positions before settlement. When the spread between the front-month and next-month contract widens, traders end up selling the expiring contract at a low price and entering the new one at a high price, resulting in financial losses. Matthew Hougan, chief investment officer at Bitwise Asset Management, commented that the level of contango in the bitcoin futures market during bull market periods is not surprising and will certainly impact futures-based ETF investors. He believes that a spot-based ETF would be a superior option for most investors as it allows them to own bitcoin directly.

Several major players in traditional finance, including BlackRock, Invesco, and Fidelity, have filed applications for spot-based bitcoin ETFs with the U.S. Securities and Exchange Commission (SEC). If approved, a spot-based ETF would function similarly to the SPDR Gold Trust ETF, allowing investors to hold their positions indefinitely without incurring rollover costs associated with futures ETFs. Additionally, a spot-based ETF would closely track bitcoin’s spot price, unlike futures-based ETFs.

The underperformance of futures-based ETFs, such as ProShares’ Bitcoin Strategy ETF, compared to the cryptocurrency itself further highlights the potential advantages of a spot-based ETF. Despite being the world’s largest and most actively-traded futures-based ETF, ProShares’ ETF has lagged behind bitcoin’s performance this year. This discrepancy between the two investment avenues emphasizes the cost to investors of being restricted to derivatives-based ETFs.

The situation is unlikely to improve if bitcoin continues to rally, as more buyers enter the derivatives market, keeping futures premiums high across different expiries.

“The 30-day annualized BTC basis just hit 19%, which is the highest value since October 2021, when BTC was trading at above $60,000,” Kim said. “The 30- and 60-day futures are the preferred vehicles for many investors, and more so for bitcoin than for ether.”

Ravi Doshi, co-head of trading at Genesis Global Trading, expressed a similar opinion, saying, “the bullish market sentiment has driven up the front-end CME futures basis.”

Per Doshi, the situation was exacerbated last week as the futures ETFs were required to roll their long exposure from the expiring June contract to July and “the illiquidity in the spread led to a temporary 23% annualized basis in the July contract costing futures ETF holders dearly.”

3:52 UTC: BITO’s year-to-date gain is 79%. The previous version wrongly mentioned the figure at 56%.

Edited by Parikshit Mishra.