The Proshares Bitcoin Strategy ETF BITO has already begun trading.  The Valkyrie’s BTF also began trading.  This is the beginning of the exposure to a cryptocurrency based ETF in the US for the first time.

For a quick understanding of the BITO or any ETF, it is important to understand the creation and redemption process.  Creation involves the buying of all the underlying securities and wrapping them into the exchange traded fund structure. Redemption is the process by which the ETF is “unwrapped” back into the individual securities.

A fund is created by pooling money from multiple investors.  These funds are held by the holdings company.  The holdings of the fund are known as the basket of ETF.  The price of the ETF will be trading in line with the holdings in the basket, which means the value held in the basket.

The “Creation and Redemption Process” and the “Basket of Fund Holdings” have fungibility in place, which means the value of the assets used in the creation and redemption process will have value equal to the basket of fund holdings.

The basket of funds will trade either above or below the ETF.

Bret Harrison expressed:  “When the basket trades below the ETF value, an Authorized Participant (AP) will be able to buy the basket and use Creation to create shares of the ETF in exchange for the basket, and sell the ETF for arbitrage profit.

When the basket trades above the ETF, an AP will buy the ETF, use Redemption to redeem the shares of the ETF for the underlying basket, and then sell the basket, again for an arbitrage profit.

The actions of APs as arbitrageurs buying and selling the basket and ETF against each other is what keeps the prices of the two in sync.

The BITO’s basket consists primarily of two kinds of financial instruments: Near-term expiry, CME Bitcoin futures -Money-market instruments, including treasury bills and repo agreements.

CME futures expire to the value of spot Bitcoin at expiry, and arbitrageurs will keep futures prices reasonably in line with spot prices. So the first part of the BITO basket will track bitcoin well, subject to potential complications described below.

But the significant amount of cash reserves in the second part of the basket will mean that this relationship won’t be numerically identical: if Bitcoin goes up 1%, the basket should go up less than 1%.

BITO’s basket consists primarily of two kinds of financial instruments: Near-term expiry CME Bitcoin futures -Money-market instruments, including treasury bills and repo agreements.

CME futures expire to the value of spot Bitcoin at expiry, and arbitrageurs will keep futures prices reasonably in line with spot prices. So, the first part of the BITO basket will track bitcoin well, subject to potential complications.