Why Does BITO Underperform Bitcoin?

BITO, the ProShares bitcoin futures ETF, does not own bitcoin. It owns futures contracts that expire, so every month it has to sell the expiring one and buy the next. That monthly swap usually costs a little, the fund charges 0.95% a year on top, and the two together are why BITO's return tends to trail bitcoin's the longer you hold it.

What the monthly roll costs

A bitcoin future is an agreement to settle against bitcoin's price on a set date. Contracts for later dates normally trade a bit above nearer ones, because people will pay something for locking a price in advance. So when BITO rolls, it is usually selling the cheaper expiring contract and buying the dearer next one - a small haircut, repeated twelve times a year. Think of a season ticket you are forced to re-buy every month at whatever next month's price is, instead of owning the seat.

The fee adds to it

BITO's expense ratio is 0.95%. The large spot bitcoin ETFs - the ones that simply hold coins - charge somewhere around 0.20% to 0.25%. On a $10,000 position that difference alone is roughly $70 a year, before the roll is counted at all. Neither number is dramatic on its own; both are relentless.

Why the share price alone misleads

Here is the part that trips people up. BITO pays out a large slice of what it earns as monthly distributions, and a distribution comes straight off the share price. So a chart of BITO's price next to a chart of bitcoin exaggerates the gap - some of that drop is cash that already went to holders. The honest comparison is total return, which counts distributions back in. The gap is real; it is just smaller than the price chart suggests.

If you want the plainest exposure, look at what a fund holds before you look at its chart, and compare total return over a year or more rather than price over a month. How the two kinds of fund differ from the ground up is in bitcoin spot ETF vs futures ETF, and the cheapest spot options are ranked in which is the lowest-fee bitcoin ETF.