Bitcoin ETF from ProShares approached the limit on the allowable investment volume

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ProShares’ Bitcoin ETF (BITO), which hit the market earlier this week, has become a hostage to its own success and has already approached the limit on the number of futures contracts allowed to buy.

According to Bloombrg, after two days of trading, BITO has concentrated about 1,900 October contracts, while the rules of the Chicago Mercantile Exchange (CME) do not allow a separate entity to exceed the limit of 2,000 contracts with the nearest expiration date. As a result, Proshares also started buying November futures and has already accumulated 1,400 such contracts. The total limit for all expirations is 5,000 contracts, but even at such a pace it can be reached very quickly.

“Exchanges enforce position limits to prevent one entity from taking a dominant position over the market or price,” explained Pankaj Balani, CEO of Delta.

The most obvious solution for Proshares is to allocate assets to contracts with more distant expiration dates. However, such contracts tend to trade significantly above the rate of the cryptocurrency, which calls into question the ETF’s ability to track the movements of the bitcoin market.

“Ultimately, ETFs can get serious errors in tracking the bitcoin spot price,” said Nate Gerachey, president of consulting firm The ETF Store. “The ETF will be forced to read the bitcoin price at higher and higher levels, following the futures curve.”

Launching competing ETFs could help remedy the situation, but not all analysts are confident in the effectiveness of this solution.

“The unprecedented early volume of BITO made it like a snowball rolling downhill as liquidity and assets synthesize new liquidity and assets,” said Eric Balchunas, an analyst at Bloomberg Intelligence. “The new funds will have certain advantages, for example, they will only invest in contracts with the nearest expiration, or they will be cheaper, and this will help, but it is almost impossible to steal volumes from them in the short and medium term.”

At the same time, Balchunas admitted that the Proshares experience would force the SEC to expedite approval of an ETF that would invest directly in bitcoin.

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