America's First Bitcoin ETF Wants Exemption from Trading Restrictions

Less than a week after its blowout launch, ProShares wants to change the way it runs its new Bitcoin futures ETF.

ProShares CEO Michael Sapir told Barron’s that his firm has filed for an exemption from trading limits at the Chicago Mercantile Exchange, where it purchases futures contracts for its Bitcoin ETF, and that ProShares will request permission to invest in other kinds of derivatives contracts. 

Bloomberg ETF analyst Eric Balchunas corroborated the news on Twitter: “Barron’s article confirms what I’ve been hearing too, that ProShares is filing to be exempt from CME position limits AND they can use swaps if need-be. Both would obv be huge help to maintain exposure if $BITO keeps getting bigger."

The CME caps the number of Bitcoin futures contracts that expire in the same month as 2,000. ProShares can only hold 4,000 contracts for November, and 5,000 contracts overall. ProShares holds 2,133 contracts for November and 1,679 contracts for October, or 76% of its limit. 

The ETF invests 25% of investors’ cash in a Cayman Islands subsidiary, and then instructs that subsidiary to buy Bitcoin futures on the Chicago Mercantile Exchange. After launching on Tuesday, the ETF swelled to more than than $1 billion in assets under management.

Right now, ProShares invests the remaining 75% in treasury securities and the repo market. ProShares also borrows money from the repo market to gain leverage on its investments. With this leveraged cash, ProShares invests in futures contracts—cash-settled bets on the future price of Bitcoin.

The fund does this no matter the condition of the market. If Bitcoin's price goes up, ProShares profits from those bets. It would use those profits to make and borrow money from the money market to buy Bitcoin futures. If Bitcoin sinks, ProShares loses the cash-settled bets and its pile of cash and Bitcoin exposure will shrink.

Sapir told Barron’s that ProShares is considering investing the remaining 75% in other things besides treasury or repo securities. It could invest in later-dated contracts, swaps, or structured notes, he said. 

ProShares described this in detail in a prospectus on Tuesday. The fund “may, after consultation with the Staff of the SEC,” invest in other products that correlate with the price of Bitcoin, plus other cryptocurrencies. 

ProShares also said it could invest in stocks that correlate with the cryptocurrency market, such as Bitcoin miner Riot or MicroStrategy, the U.S. cloud computing firm that went gaga for Bitcoin about this time last year.