Summary BITO's technicals show balanced support/resistance, but a double top and weak momentum signal a potential bearish reversal. Bullish momentum is fading, with MACD, RSI, and stochastics all confirming weakening bulls and rising downside risk. BITO's structure offers high yield but comes with higher risk and expenses compared to ARKB and IBIT peers. Given the elevated risk, high fees, and weak technicals, I find BITO unattractive for investors seeking Bitcoin exposure. Bitcoin ( BTC-USD ) has regained its mojo after Trump's election win as his administration has promised a favorable regulatory environment for cryptocurrencies. One of the ways to play Bitcoin is through the ProShares Bitcoin ETF (NYSEARCA: BITO ), but as you can see below, the fund has diverged from the underlying asset. This is due to a unique structure in which the ETF has a monstrous dividend yield and so investors can easily reinvest if they wish to do so. In the below technical analysis, it is shown that while support and resistance are relatively balanced, bullish momentum is weak and a double top suggests the potential of a bearish reversal. Near the end of this article, it is also discussed that the ETF has higher risk and expenses than peers and so I believe that BITO is unattractive for investors looking for Bitcoin exposure. Seeking Alpha Trend Lines Are Converging Yahoo Finance For today's technical analysis, I will first look at some key support and resistance zones for the ETF as well as some of the trends. Currently, BITO is in a longer term uptrend that began back in early April. That trend line was most recently support at the start of July. However, in the near term, a potential downtrend may have been forming since early to mid July. As these trend lines converge, it will be interesting to see which way the ETF breaks out. For support, there are three key levels that investors should keeps their eyes on. The area around 21.8 could come to the rescue soon as a major July gap up occurred there. The 20.8 level should also be significant support since that area was resistance back in March and April. Lastly, the 19.7s could also be support as a late March peak occurred there and an early May trough also occurred there. While there is significant support, resistance is also abundant. Just above 23, there may be resistance as that price level was a key obstacle for BITO in the second half of February. As you can see in the above chart, the next source of resistance is a double top pattern at about 23.5. This could be a sign that a bearish reversal is in the cards and so investors should be on the look out for further signs of technical weakness. Lastly, there may be considerable resistance in the 24.5s as well since a major February gap down occurred there. Momentum Is Weak Yahoo Finance In the above discussion, it was shown that the ETF had relatively balanced support and resistance. Now we turn to see how momentum is playing out for BITO. For the long term, the 50 day SMA broke above the 200 day SMA in early July for a golden cross. That indicated the arrival of a bullish period. However, the 50 day SMA's trajectory has been weak and the deviation between the SMAs has failed to expand in a strong manner. Therefore it seems that long term bulls are still hesitating as clearly momentum has not been ideal. For the near term, let's first look at the EMAs. The 9 day EMA had a bullish crossover with the 21 day EMA also in early July to show strength. After expanding, the gap between the EMAs has started to narrow and so near term bullishness is now receding. The ETF has also broken below the 9 day EMA and so there is some notable weakness in the bulls. For the MACD, a bullish crossover occurred in early July as well. The histogram was quite strong for a period but note that the past 8 bars have been red and so momentum has weakened significantly. In fact, a bearish crossover seems to be imminent to reflect near term bearishness. From the above moving averages and MACD indicator, I believe it is clear that bullish momentum is weak and near term momentum is actually at risk of turning bearish. As an aside, note that the MACD confirms the double top in BITO. At the ETF's July peak, the indicator made a much lower high than back at the ETF's high in May. Therefore, there is a good chance for a bearish reversal. We'll look at more signs of confirmation a little later. Bulls Are Still In Control - For Now Yahoo Finance The ETF broke above the Bollinger Bands midline in early July to show that the bulls have taken control. BITO actually went on to break above the upper band and so perhaps the near term downtrend could be seen as an overbought pullback. In recent days, the ETF has pulled back to near the midline and so while the bulls seem to still be in control, there should definitely be some cautiousness. The RSI shows a similar story. The indicator nearly hit 70 in the first half of July to show dominant bulls but has now receded to a reading of just 53.71. Therefore, the bulls are now only in control by a modest margin as the bears have reclaimed a significant amount of lost ground. Lastly, for the stochastics, a key bearish crossover occurred between the %K and %D in early to mid July and both lines have fallen out of the the 80+ zone to show weakened bulls. The %K is now dropping dangerously close to the 50 level. As another confirmation signal of the double top and bearish reversal, the RSI also made a lower high at the July peak than back at the May peak for the ETF. This can be seen as a top failure swing by traders. With two key indicators showing that there is potential for significant downside, investors should be aware of the technical risk. A Few Noteworthy Items As stated in the introduction, the ETF has a unique structure since it has an enormous yield. The fund is weighted towards providing income rather than capital gains. BITO also differs from competing ETFs as it uses derivatives and futures rather than investing directly into the underlying asset, Bitcoin. Risk Is Higher Vs. Peers Data by YCharts ARK 21Shares Bitcoin ETF ( ARKB ) and iShares Bitcoin Trust ETF ( IBIT ) are two competing funds also allowing for easy exposure to the cryptocurrency. In the the above chart you can see that the standard deviation for both of these two ETFs are much lower than for BITO. ARKB and IBIT are both rated as a D- for risk by Seeking Alpha but note that BITO is rated at an even worse rating of F. This rating involves more than just standard deviation but I believe this brief discussion shows that BITO is quite risky in the grand scheme of things. Expenses Could Be A Deterrent In addition to potentially greater risk, BITO has a significantly higher expense ratio. The median expense ratio for all ETFs is 0.50% while BITO's is at 0.95%. Note that ARKB and IBIT have expense ratios of just 0.21% and 0.25% respectively and so in comparison, BITO's expenses are rather high. This difference is likely due to the fact that derivatives need to be rolled over before expiration and so there is an aspect of active management in BITO. In short, BITO is a Bitcoin ETF that has higher standard deviation risk, has higher expenses, but provides a steady income stream in the form of dividend returns. Personally, I find that to be a poor value proposition but it is understandable that some investors prefer those kind of returns. Takeaway While the technical support and resistance levels are relatively balanced, the appearance of a double top could be ominous. In terms of momentum, it is clear that bullishness is weak and the RSI and stochastics indicators show that the bulls are starting to lose control of the ETF to the bears. Furthermore, the MACD and RSI confirm the double top with negative divergence and so there is a very real risk of downside from here. In terms of the fund itself, daily standard deviation is shown to be much higher than peers while expenses are also higher due to their derivatives strategy. BITO may appeal to income hunters but in my view, the ETF provides a poor fundamental proposition for investors looking for Bitcoin exposure.
