Valkyrie Counters BIS Says Concerns About Bitcoin ETF Front-Running Misplaced

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2021-12-20 03:26:32

Bitcoin’s volatility makes it impossible to run a monthly ETF, one observer said.

Bank of International Settlements (BIS) concerns about speculators exploiting the monthly conversion of bitcoin futures (ETF)-based exchange-traded funds (ETFs) from one contract to another. is excessive, according to ETF director Valkyrie.

It is recognized that funds are exposed to contango bleed,a decline over time in performance due to month-end conversion of long positions from short-term contract expiration. However, the problem could be exacerbated by speculators tapping into monthly rollovers, according to the BIS.

“The predictable rebalancing behavior of an ETF can also give rise to ‘first run’ incentives, prompting investors to buy longer-term bitcoin futures in anticipation of the ETF moving into futures.” that contract,” noted BIS economist Karamfil Todorov in a December 6 blog post.

While such front-end activity has had a significant effect on the performance of traditional market ETFs in the past, there is no indication that traders employ a similar strategy in the market. crypto market, according to Valkyrie.

“We have not noticed any prior activity specifically related to the rolling of BTF futures,” Bill Cannon, head of ETF portfolio management at Valkyrie Investments, told CoinDesk. “Liquidity was healthy, and there weren’t any issues with execution.”

Valkyrie’s bitcoin futures ETF went live on Nasdaq under the ticker BTF on October 22. ProShares Bitcoin Strategy ETF launched on the New York Stock Exchange on October 19. VanEck Bitcoin Strategy ETF, also based on futures contracts futures, began trading last month.

These ETFs expose bitcoin through regulated futures contracts that trade on the Chicago Mercantile Exchange (CME) rather than owning the cryptocurrency. So, unlike ETFs that invest in stocks and gold, these futures-based ETFs must keep moving long positions from one expiration to another in an attempt to mimic price performance of cryptocurrencies.

That leaves the door open for traders to buy next month’s contract and sell expiring contracts ahead of orders from the ETFs. Funds end up paying more to buy the next month’s contract and receive less to sell the current month, resulting in larger losses.

Roll ETFs and run ahead of potential

As of Thursday, the Valkyrie ETF held 215 contracts (each representing 5 BTC) of December futures that expire at the end of the year. Some time before expiration, they will sell December 215 futures and buy 215 January or expiration futures contracts. The Proshares ETF currently holds 3,803 December futures contracts, and VanEck holds 69 regular contracts and 14 micro contracts that will do the same.

The futures curve is in contango, which means that long-term contracts are priced higher than short-term contracts. The December contract is changing hands at $47,085 at press time, while the January contract is trading at $47,355, according to data tracked by TradingView. So ETFs will sell low and buy high during the transition. It is bleeding contango.

According to the BIS, if the Proshares ETF were to launch in 2018, it would underperform the spot price by 18 percent “on a cumulative basis over the next four years to date,” because of the bleeding.

If traders run ahead of the roll by selling expiring contracts and buying longer term contracts in front of ETFs, the latter will become more expensive. In other words, the contango will slope up, and the funds end up incurring higher rollover costs than other types.

While it is difficult to estimate an exact number of additional rollover losses caused by traders’ front-running ETFs, traditional market experience suggests that the drop can be substantial.

U.S. oil fund LP, which trades on the NYSE under the ticker USO, lost about $120 million while rolling 80,000 contracts between March and April, according to a report by The Wall Street Journal. The United States Natural Gas (UNG) ETF became the target of the leaders a decade ago.

Easy to say, hard refresh

While the monthly ETF conversion offers a window of opportunity for traders, taking advantage of it may not be so easy.

“In order to run successfully ahead, you need to be able to predict the short-term price movements of [tài sản] basic with relative confidence; the volatility of bitcoin and the crypto asset class makes that a particularly difficult, risky task,” Sui Chung, CEO of CF Benchmarks, said in a Telegram chat “Therefore, what makes crypto products unique is the volatility of the underlying which makes front-end operations unviable.”

The three long futures-based ETFs discussed above are actively managed, which means that a manager or a group of experts decides on allocation. So predicting the exact timing of the transition and whether the fund is moving into next month’s or longer term contract is a gamble. ETFs can always diversify their holdings into different contracts to avoid the usual frontrunners.

“While such a pattern is not easily identifiable, this type of trading anomaly can occur at the time of rebalancing of leveraged and short-term futures-based ETFs where demand for rebalancing balance is directly affected by volatility on certain days,” Valkyrie’s Cannon said.

A trader from a major crypto exchange, who asked not to be named because of employer-imposed restrictions on making public statements, said ETFs have a way of keeping the market afloat. honest school.

“If they think too many market makers and speculators are on the edge of running their open interest roll, they’ll probably wait a day or two, or they’ll do a certain amount of volume. at the counter,” said the trader. “This panics the speculators, and they will actually break the contagion down [bằng cách tự tháo gỡ giao dịch phía trước], thinking that the fund will not have ammo in this particular period. It’s a big game of poker.”

There is another effect: If too many speculators flock to next month’s contract, the impact on the fund could be less marked. That’s because, as the fund starts rolling, speculators begin to liquidate their longs, building selling pressure that pulls futures prices down and narrows the contango.

“This kind of public activity is so heavily exploited, it’s often really counterproductive,” Dave Nadig, director of research at ETF Trends, said in a Twitter chat. “We’ve seen that in things like the Russell index rebalancing forward activity. We’ve also seen it in the VIX. [biến động thị trường chứng khoán] ETF futures for a while. It’s a big mistake to think of it as free money.”


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