ProShares Bitcoin Futures ETF underperforms BTC (source K33 Research)

ProShares’ Bitcoin futures exchange-traded fund (ETF) is not performing as well as Bitcoin itself this year, which makes it less attractive as a way to bet on Bitcoin’s price appreciation, according to a report by digital asset research firm K33 Research.

K33 Research noted that the price of ProShares’ Bitcoin Strategy ETF (BITO) has risen 47% year-to-date, while Bitcoin has gained 60% over the same period.

The underperformance is due to the structure of the fund. BITO does not purchase Bitcoin tokens; instead, it holds Bitcoin futures contracts on the Chicago Mercantile Exchange (CME). The fund must roll over the contracts every month as they expire, making it vulnerable to the price difference between the terms. If the next month’s contract trades at a premium to the nearest expiry – a phenomenon called contango and typical during a bull market – over a sustainable period, the fund will compound losses due to the “contango bleed.”

The fund’s vulnerability to rolling costs has been exacerbated by this year’s market rebound, as the CME futures market returned to trade in contango. The performance gap during the first five months of the year has already reached the level that analysts predicted for a whole year.

Investors should expect this trend to continue, according to K33 senior analyst Vetle Lunde. “The strong term structure remains an issue for the viability of using BITO as a tool to maintain long exposure,” he wrote in the report.

The underperformance of the futures-based ETF compared to spot ETFs illustrates the shortcomings of futures-based ETFs, and how the SEC’s rigorous stance against direct Bitcoin spot ETFs harms investors, Lunde added.

The U.S. Securities and Exchange Commission (SEC) has consistently denied applications so far to list exchange traded funds that would directly invest and hold Bitcoin, despite industry players advocating that it would be a superior product for consumers.

Edited by James Rubin.

Read more: Everything You Need to Know About Bitcoin ETFs