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  1. Home
  2. / Investing

Now That We Have the Bitcoin ETF, Do You Know What Contango Is?

Outside of the ETF launch which could generate flow into the crypto space, it is important to ask what the real theme is for Bitcoin.
By MALEEHA BENGALI
Oct 21, 2021 | 01:00 PM EDT
Stocks quotes in this article: BITO, GBTC, MSTR

When Bitcoin traded back at $4500 during the depths of the COVID-19 2020 financial market chaos, those who bought it or held it through past cycles, always had the institutional interest picking up in mind to an eventual launch of a Bitcoin ETF. The past year has seen mindsets changed on Bitcoin and the crypto space in general. It is no longer just a retail frenzy, or traded by a bunch of hackers or anti capitalists. It is now an asset with a market cap in excess of $1.2 trillion and counting. Institutions and Hedge Funds who have long ignored it are now opening physical wallets to accounts on Kraken or other platforms to play the momentum. But it has not been easy for the average mom and pop to be able to trade it.

Those who wanted to own it found a way and there was no stopping them. The simple classification as an "Equity" now means that some that have fixed Equity mandates or preferred to trade something they can see in their trading accounts easily, can now do so. Bitcoin has rallied 115% just in the last few months after it breached $30,000 in July, with many calling for lows of $18k-$20k, as quoting previous cycle patterns, but it failed to materialize. The launch of Bitcoin ETF (BITO) on Tuesday marked a milestone as it is here to stay. The only question is, what is the best way to play Bitcoin? Does the ETF really change things?

Commodity ETFs are not that simple given the futures curve that dictates how they trade from the front month to the future months. The difference is the cost of carry or amount it takes to store or hold the underlying to maturity. That depends on financing rates and other costs. Some commodities trade at a massive contango which means the future months trade at higher value compared to the front. So the holder of the ETF will always lose out every month when they "roll" their holding into the next month's expiration. This is called negative carry. It is also one of the reasons that when a commodity could be up 200%, the ETF could actually be down. One just needs to look at natgas and its previous cycles. In summary, trading ETFs may not be the best way to play the "commodity" in question. It may sound easier to people to buy and sell it than open a special brokerage account, but it is quite cost ineffective.

Choosing an ETF to be long or short all depends on what shape the curve structure displays. This will require constant calculation and arbing to really create alpha and be on the right side of it. Most who trade the ETF will not be able to capture this all the time. This is why the ETF may have been a positive event for Bitcoin but it really has not changed the ownership structure as the bigger institutions and holders are already long it via other entities like Grayscale Bitcoin Trust (GBTC) and  MicroStrategy (MSTR) , etc., if they really want to play it.

Outside of the ETF launch which could generate flow into the crypto space, it is important to ask what the real theme is for Bitcoin and its own fundamental halving cycle that occurs every four years. Regulation is another big part of it as it now becomes center stage ahead of most central banks wanting to launch their own CBDC's. Bitcoin has emerged as one of the top ways to play "inflation", as Paul Tudor Jones claimed that yesterday. Gold has been dismissed forever as money flocks into Bitcoin. If global central banks deflate all the global debt away, Fiat currencies will become meaningless after a while and that argument does hold weight. But it does not mean that Gold goes away, it just may not move 3x or 6x, but then again one wouldn't think of being long $1 billion of Bitcoin, well unless you're in El Salvador.

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At the time of publication, Maleeha Bengali had no position in the securities mentioned.

TAGS: Bitcoin | Commodities | ETFs | Gold | Investing | Markets | Stocks | Trading | Cryptocurrency | Coronavirus

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