Summary ProShares Bitcoin Strategy ETF (BITO) offers consistent income by investing in Bitcoin futures, without the upside cap of covered call ETFs. BITO's performance closely tracks Bitcoin, with minimal NAV erosion, making it resilient to price downturns and quick to recover alongside BTC. Investors should focus on income generation, not growth, when holding BITO, and avoid panic selling during temporary price declines. BITO is ideal for those confident in Bitcoin's long-term growth, but new investors should start small and understand its income-focused strategy. ProShares Bitcoin Strategy ETF ( BITO ) has the primary goal of generating income from exposure to Bitcoin futures contracts and/or swap agreements. The two combine to provide generous income results on a consistent basis, with most of that coming from futures contracts. Makeup of BITO (Proshares) Contrary to pure covered call ETFs, BITO doesn't have the same type of cap on the upside as they do, so it has more potential to quickly recover from downturns after a correction associated with Bitcoin's price movement. Since the ETF focuses on generating income, investors need to have a certain mindset if taking a position. We have to fight off the inclination to look at growth to determine the success of the investment vehicle, rather than looking at income and total return as the metric of success. In this article we'll look at the performance of BITO against Bitcoin, NAV performance, and why, based upon performance, taking a temporary hit to the downside shouldn't trigger selling based upon fear, i.e. the mindset needed to be successful if investing in BITO. As goes Bitcoin, so goes BITO Being an indirect play on Bitcoin, it's obvious that how Bitcoin performs, so will BITO perform. That means there will be volatility, including swings on both sides of the play. That said, the share price of the ETF has moved very close in conjunction with the price of Bitcoin. There has been a slight increase in separation between the two, but the pattern remains in place, meaning NAV hasn't suffered much erosion, if any. For readers, NAV erosion isn't when the price of the ETF drops in relationship to Bitcoin; that's not what NAV erosion means. Real NAV erosion is when an ETF like BITO pays out more than the income it generates. So far, that hasn't been the case with BITO, and that's why even after significant downturns in the price of Bitcoin, it can recover rapidly. For example, I've had times when I've been down over $800 with BITO, and yet a few days later can be near or in the green once again. That's why I really don't pay any attention to the decline in share price. I'm in it for income and am totally convinced, over the long haul, the price of Bitcoin will continue to rise, with a lot of upsides left in it in the years ahead. When the price of Bitcoin and BITO drop, that can result in lower distributions, but again, my experience is that share price and distributions recover when Bitcoin recovers. So, when evaluating this ETF, be sure to differentiate between price movements based upon the price movement of Bitcoin, and not to confuse that with NAV erosion coming from failure to meet income goals in any one month. Mindset with high yielders like BITO There is a certain mindset needed when investing in this type of ETF. As mentioned earlier, there must be a separation in the mind concerning growth and income if investing for income. For me, I don't care if there is growth or not with BITO, because my sole reason for taking a position is to generate consistent income over a prolonged period of time. Even so, I have complete confidence that BITO will growth both in the years ahead, and over time should be a very strong performer. That doesn't mean I'll never take some profits off the table when I think it's reached a temporary high that could result in a correction that may last awhile. I will never sell the bulk of my holdings, but if there are other opportunities to invest in at the time, I may sell off a small portion of my holdings, bearing in mind that it's only a small part of my overall income-generating portfolio. One of the things I see all the time is investors not being able to overcome the obvious idea that this is not primarily a growth ETF. Yet, there appears to be more investors evaluating BITO and other high-yielding ETFs as if they are to be measured by growth rather than income. If you're serious about taking a position in BITO and similar ETFS, the mindset must be to value it for income first, and growth, if ever, secondarily. The reason that's important is because if not clear on our goals and strategy, we'll be tempted to sell at a loss. Remember, an unrealized loss isn't a loss, and in the case of BITO, you can see from the chart below (green is Bitcoin and orange BITO) that it recovers over and over again. BITO price movement measured against BTC (Seeking Alpha) Conclusion If we understand and believe Bitcoin has a strong future growth period ahead of us, then BITO is an excellent way to play it. If you aren't convinced about Bitcoin's growth trajectory, I wouldn't take a position in BITO because you'll be tempted to sell when you get a little nervous from the drop in share price. I've held BITO for a while now, and it has had wide swings in its share price and yet continues to pay out nice distributions every month. The distributions vary from month-to-month, but they are never insignificant and are one of my top income performers. High-yielding ETFs like BITO are relatively new to the market, with most being under two years old. For that reason, many investors aren't too familiar with them, or no nothing about them at all. For those that fall in that category, it would be best in my opinion to do a deeper dive into BITO. Understand its purpose and how to determine actual NAV erosion, which is not the share price moving up or down in conjunction with the price of Bitcoin, as mentioned above. This is crucial because a number of investors panic because they enter into BITO wide-eyed because of the high distribution. But when the share price temporarily takes a hit, they exit their position with a loss, only to find a short time later the ETF has recovered nicely and is still throwing off solid distributions. Another thing I recommend is taking small position in the ETF; maybe as low as two or three shares. I have discovered that if you have a little skin in the game, you're more likely to do your homework, even if it represents a small amount of money. I did this when I first started investing in high yield ETFS and found out I did my homework when I had a stake in an ETF, rather than ending up with not much interest because there was nothing at stake.
