BITO ETF: Playing Bitcoin’s Big 2023 Rally (BITO)

Bitcoin (BTC-USD) is back. Amid easing interest rates and a return to favor in long-duration growth assets, cryptocurrencies have rallied sharply to kick off 2023. What I find fitting is that so many strategists were calling for sub-$15k Bitcoin around the FTX (FTT-USD) debacle just a couple of months ago. Moreover, with a continued hawkish Federal Reserve, hellbent on hiking interest rates toward 5%, it was a clear consensus that coins and tokens could not rally with vigor under such a trouble, higher-rate regime.

Toss all that out the window now. I see upside risks to crypto, and Bitcoin specifically. As it’s hard to gauge the true fundamental value of one token, I prefer to assess price action and the charts to see how investors should play Bitcoin. One way to play near-term moves in this crypto asset is to buy and sell the Bitcoin Strategy ETF (NYSEARCA:BITO).

According to ProShares, BITO offers a way to gain exposure to Bitcoin-linked returns with the liquidity and transparency of an ETF. I am not a big fan of the high 0.95% annual expense ratio, but the 30-day median bid/ask spread is just 8 basis points and tracking error is minimal. BITO is marketed as a diversifying asset for investors’ portfolios.

As an alternative to conventional currencies, it still seems to be benefiting from a falling US dollar. Additionally, BITO can appreciate rapidly when the underlying assets rise. Finally, you do not have to move money to potentially risky exchanges or wallets since this ETF can be purchased through any major brokerage firm.

Think of BITO as a commodity ETF that holds near-dated futures contracts. This vehicle is 35% invested in the March expiration CME Bitcoin futures contracts and 65% in the nearer-dated February expiration.

BITO Holdings

So, ProShares will have to roll out to later-dated contracts each month. That means when Bitcoin is in backwardation, it should benefit, while contango – when near-term contracts are priced relatively cheaply to later-dated contracts – works to the detriment of investors. Right now, the Bitcoin futures term structure is very flat, so I don’t see big risks there.

CME Bitcoin Futures: Flat Term Structure

The Technical Take

Digging into the price action and momentum, I see bullish risks for a few reasons. First, notice in the long-term chart of Bitcoin itself below that the coin has risen above its falling 40-week moving average. Technicians like myself use the 40-week line as a proxy for the 200-day moving average.

It helps gauge the trend’s direction and strength. Up 4 straight weeks to start the year, the low volatility action we saw to finish 2022 (after a steep fall in early November) appears to have been like a coil for this upward thrust. On the upside, $25k could be resistance but more likely $29k to $30k could be where sellers emerge.

Bitcoin: Above Its 40-Week Moving Average (Finally)

Homing in on BITO, there is more to like here. The chart below illustrates that bulls have grabbed the reins. Volume is high this year – mainly on up days – and the ETF is above its 200-day moving average for the first time in its history. Following a pair of bearish consolidations (a bear flag in early 2022 and a bearish rising wedge in Q3 last year), BITO found a floor under $10, and has now risen above the important $13 to $14 zone.

I see resistance in the low $17s. With high RSI momentum holding, this rally has not been swift to be sold off – the last few days of tight ranges lead me to assert that another move-up is in the cards.

BITO: Bullish Thrust On Volume, Next Resistance $17-$18

The Bottom Line

I like BITO for a bullish near-term play on Bitcoin. The fund shows solid volume trends and, along with the underlying asset, may be reversing the bearish trend.