SEC Approves Cboe Rule Change for Proposed 3x Bitcoin Futures ETF

The Securities and Exchange Commission (SEC) approved a rule change Oct. 2 allowing Cboe BZX to list proposed leveraged funds tied to Bitcoin (BTC) and Ether (ETH), but the products had not begun operations as of the latest issuer filing.

The approval order was issued at 4:18 p.m. ET (20:18 UTC) and covers the proposed 3x Bitcoin ETF, known as BITH, and 3x Ether ETF, known as ETHK, among other funds. The issuer’s Oct. 7 filing said the funds had not commenced operations, investment activities or share issuance.

BITH would use short-term Bitcoin futures to pursue a daily return equal to three times the benchmark’s performance, before fees and expenses, without holding Bitcoin directly.

The daily target does not mean BITH is designed to deliver three times the Bitcoin Futures Benchmark’s cumulative return over weeks or months. Leveraged ETFs generally reset exposure each trading day, so each day’s gains or losses change the capital base used for the next session.

That compounding effect can produce results that differ sharply from simply multiplying the benchmark’s start-to-finish return by three. In one example covering Dec. 1, 2008, through April 30, 2009, an index gained about 8% while an ETF targeting three times its daily return lost 53%. The example involved neither Bitcoin nor BITH and was not a forecast for the proposed fund.

BITH would also carry risks tied to the futures market. Bitcoin futures may trade at a premium or discount to spot Bitcoin, while contango, backwardation and futures-roll costs can affect returns over time.

The Bitcoin Futures Benchmark would roll positions over five business days each month, starting on the sixth business day before the near-month contract expires. About 20% of expiring positions would be rolled each day during that period.

BITH has a 1.85% annual management fee, estimated total fees and expenses of 2.48%, and a 1.98% 12-month trading-income breakeven estimate after assumed interest income. Those figures are estimates based on stated assumptions, not historical fund results.

A significant Bitcoin decline could cause BITH to lose a substantial portion or all of its value in a single day. The proposed fund also would not establish a trading record or guarantee three times the benchmark’s longer-term performance.

Shareholders would receive Schedule K-1 tax information because each fund would file a partnership tax return. Trading would depend on the products’ registration statements becoming effective and the funds meeting applicable listing requirements.