Bitcoin ETF Debut: 3 Reasons Investors Should Stay Away From BITO

On Tuesday, a brand new Bitcoin (CCC:BTC-USD) futures exchange-traded fund (ETF) is set to hit the market. For the first time, the U.S. Securities and Exchange Commission is expected to allow a Bitcoin ETF to trade on a major U.S. exchange. The ProShares Bitcoin Strategy ETF (NYSEArca:BITO) will no doubt be the first of many cryptocurrency ETFs in coming months.

A blue-toned concept image showing Bitcoin (BTC) cracking in half.
Source: Shutterstock

Meanwhile, rival Invesco Bitcoin Strategy ETF won’t be making its debut any time soon after the fund manager shelved its plans to do so. For years, BTC bulls have insisted a Bitcoin ETF would be a landmark bullish catalyst.

Here are three reasons investors shouldn’t buy the new BITO ETF.

Reason No. 1: Buy Bitcoin Instead

The best reason not to buy the BITO ETF is that it’s simply too easy to buy actual Bitcoin.

Billionaire Bitcoin bull Mark Cuban was recently asked if he’ll be buying the BITO ETF.

“No. I can buy BTC directly,” he said.

It’s really just that simple. It used to be a difficult process to buy BTC via a cryptocurrency exchange and a digital wallet. Today, it’s as simple as logging into PayPal (NASDAQ:PYPL), Cash App or Robinhood (NASDAQ:HOOD) and clicking “buy.”

Throughout most of 2020, the OTC-listed Grayscale Bitcoin Trust (OTC:GBTC) traded at a 5% to 40% premium to net asset value. Today, it trades at about a 15% discount to NAV. In other words, the fund is priced below the value of its BTC asset holdings. Yet is is “solely and passively invested in Bitcoin,” reads the marketing material.

In the past year, Bitcoin prices have appreciated 441%. Over that same period, GBTC is up 283%. Why should investors buy an ETF that invests in Bitcoin and underperforms when they can just buy BTC directly?

Add to that, GBTC is not registered with the Securities and Exchange Commission and is not subject to disclosure and certain other requirements mandated by U.S. securities laws. GBTC isn’t registered with the SEC and isn’t subject to disclosure and certain other requirements under U.S. securities laws.

Reason No. 2: Bitcoin ETF Could Trigger a Sell-Off

Seasoned traders know huge news headlines years in the making can often be sell-the-news events. Most investors assumed that a Bitcoin ETF would be allowed on a major exchange at some point. There are plenty of reasons why that’s good for BTC.

Yet it is possible that the debut of the ETF is already priced into the cryptocurrency. Bitcoin prices are already up 756% since the beginning of 2020. It goes without saying that a huge amount of optimism reflected in the price.

There are definitely certain institutional investors who were prohibited from buying Bitcoin directly or investing in the GBTC trust because it was not listed on a major exchange. But in terms of market-moving catalysts for BTC, an New York Stock Exchange listing is about as big as it gets. After it happens, what will the next catalyst be to drive prices higher in the near-term?

Since markets look forward, these big bullish catalysts are often priced into the market weeks and months in advance. It’s no coincidence the price of Bitcoin recently pushed above $60,000 for the first time in six months. Investors started pricing in the new ETF well in advance of the listing. Once that big event finally arrives, traders often cash in on their winning trade and look ahead for the next big market catalyst.

As a result, the sell-the-news trade can be extremely frustrating and seemingly counterintuitive for traders who aren’t anticipating it.

Reason No. 3: Potential Short Selling

Sure, the new Bitcoin ETF will provide certain institutional investors access to BTC for the first time. But it will also potentially make short selling Bitcoin an easy option for the first time as well.

Up to this point, short selling Bitcoin has been a complicated process. Traders needed to utilize a Contract for Difference, short sell via a crypto exchange that allows shorting or find BTC put options on certain specialized exchanges.

Regardless of whether or not you are personally a Bitcoin bull, there are plenty of Bitcoin skeptics out there. I am one of them. I will not be shorting the BITO ETF, nor would I recommend anyone else do it either. However, there are plenty of people out there who will.

The BTC market has never had an easy means of shorting the crypto up until now. Maybe this was the point Michael Burry was making when he recently asked about shorting cryptos on Twitter.

Will short sellers aggressively pile into the BITO ETF? How easy will it be to borrow shares? I don’t know the answers to these questions. But I wouldn’t recommend buying the BITO ETF and hoping for the best.

How To Play the Bitcoin ETF

I’m not bullish on Bitcoin. But if I were, I’d follow Mark Cuban’s lead and buy the crypto itself. There’s too much risk and too many unknowns surrounding the BITO ETF at this point. If BITO skyrockets, there’s a good chance your BTC holdings will too.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


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