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Only a few weeks ago we witnessed a historical event for the cryptocurrency markets. Securities and Exchange Commission (SEC), one of the main financial regulators in the United States, has officially approved the first bitcoin futures ETF in the country. While there have already been some cryptocurrency ETFs approved in other countries such as Canada, Sweden or Switzerland, approval in the US is by far the most important.
The approval of bitcoin futures ETF was met by an ATH on the price of Bitcoin that occurred on the very same day, when the trading of the first bitcoin futures ETF started. However, even though this event is mainly perceived as a positive step for the crypto industry, there are few drawbacks to it.
Last two weeks of October brought three different bitcoin futures ETF approvals. These were the approvals of the ProShares Bitcoin Strategy ETF (BITO) (Balchunas, 2021), Valkyrie Bitcoin Strategy ETF (BTF) and VanEck Bitcoin Strategy ETF (XBTF) (Strack , 2021). All of these ETF (exchange traded funds) however took a form of the futures, not spot ETFs. What are the main differences between these two financial instruments and do they matter in the case of Bitcoin?
First, let’s look at what futures contracts are. Bitcoin futures are types of derivative contracts that form an agreement between two parties to buy/sell at a predefined price at agreed upon time (or before). When the bitcoin futures contract expires, the party that agreed to buy the Bitcoin needs to make the purchase for the agreed upon price, no matter what the price of Bitcoin is at that time. Thus, there can either be a premium (actual price higher than the agreed upon price) or discount (actual price lower than the agreed upon price).
Now let’s look at what futures ETF mean. Futures ETF are the derivative products that are built on existing exchange traded funds. Futures as such represent an agreement to buy/sell shares of an underlying ETF at the time, that is agreed upon in advance (or before) at the agreed-upon price. In the case of bitcoin futures ETF, the underlying asset is the bitcoin futures contracts and each share of the bitcoin futures ETF follows the price of the futures contract. Therefore, the owner of the bitcoin futures ETF shares does not physically own any bitcoins (CHEN, 2021).
Combining both above-mentioned definitions is not a difficult task. To put it simply, a bitcoin futures ETF is a financial derivative instrument that mimics the price of the underlying asset, which in this case is a bitcoin futures contract. It is important to note that the bitcoin futures ETF does not mimic the price of Bitcoin. That is something that is done by the bitcoin spot ETF, also known simply as bitcoin ETF.
Bitcoin ETF is in many ways similar to the bitcoin futures ETF, yet there is one main difference between the two. Bitcoin ETF is actually backed by bitcoin. That means that the company that is issuing the ETFs, has to physically own and store bitcoins. Thus, this type of contract is not backed by any type of derivative (futures), like in the case of bitcoin futures ETF (Shirnia, 2021).
This also leads to the fact that while bitcoin futures ETF may lead to occasional irregularities between the price of Bitcoin and the price of bitcoin futures, that tracks the price of BTC, the bitcoin ETF should always have a price that is accurate to Bitcoin´s spot price. Thus, bitcoin futures ETF may, at some points, be different from the price of bitcoin ETF, since there is no such risk of the price divergence for the price of bitcoin ETF (Sergeenkov, 2021).
When talking specifically about the difference between the bitcoin futures ETF and bitcoin ETF, there is another one that needs to be reiterated. As of now, there are three approved bitcoin futures ETF in the United States, as mentioned above, by the SEC, however, there is not any bitcoin ETF, although there are companies that are trying to accomplish this.
Grayscale Investments, the biggest digital asset manager in the world, is for instance trying to change its Grayscale Bitcoin Trust to a bitcoin ETF. However, the chairman of the SEC, Gary Gensler, has already stated that it is very unlikely to see the spot bitcoin ETF arrive anytime soon. Bitcoin futures ETF were, according to him, easier to process since bitcoin futures are a financial instrument that is being regulated by this institution. Bitcoin futures has been traded on Chicago Mercantile Exchange (CME) since late 2017 (DiCamillo, 2021).
The decision of Grayscale Investments to try to push for bitcoin ETF was definitely also a reaction to what actually happened with bitcoin futures ETF. The first bitcoin futures ETF, ProShares´ Bitcoin Strategy ETF, saw enormous demand in its first two days.
This ETF started trading on NYSE under the ticker BITO on the 19th of October and almost hit a billion dollar volume on its first day. The asset under management (AUM) figure that shows the overall inflow of capital into the given ETF increased rapidly in the first two days. In fact, BITO broke the record for the fastest ETF to reach a billion dollar valuation. Can you guess which asset was the holder of the previous record? It was gold with the gold ETF (GLD), which reached the valuation of one billion dollars in three days since it started trading in 2004. Now this record belongs to Bitcoin.
As we have already pointed out, the approval of bitcoin futures ETF was met with tremendous volumes. That is by far one of the biggest pros of this event. However, there are other positives as well as negatives that need to be stated when it comes to the approval itself.
For example, many believe that the fact that the bitcoin futures ETF was approved by the SEC, gives additional credibility to the cryptocurrency world. Many US regulators have so far been rather hesitant on whether or how to regulate cryptocurrencies. Therefore, the fact that they have decided to approve several different ETFs proves that the cryptomarkets have matured and that the SEC no longer has a temptation to ban the whole sector. Moreover, the stamp of approval of this step also shows to investors that SEC is planning, sooner or later, to work on appropriate regulatory steps when it comes to cryptocurrencies (Crawley, 2021).
Another positive impact is the fact that many institutional and accredited investors will have easier access to cryptocurrency markets. Without the need for storing private keys or creating special accounts for cryptocurrency exchanges, the bitcoin futures ETF offers easy and relatively safe access to this industry to anyone who wants to speculate on the price movements of the biggest cryptocurrency.
Yet, there are also some drawbacks to this step. First and foremost, owning a share of a bitcoin futures ETF is not like owning a cryptocurrency. Actually, it is as far from it as possible. You not only do not have your private keys, but the company that is creating the ETF does not need to even hold any amount of bitcoin. This would change in case of bitcoin spot ETF approval, but that has not happened yet, which means that this type of investment is more like price speculation rather than investing into cryptocurrencies.
Moreover, since this type of financial instrument is based on futures it is possible that the accuracy of the price tracking can be off in some events. For instance, if the futures price of Bitcoin is higher than the spot price, the bitcoin futures ETF is not accurately tracking the price of Bitcoin. This is called contango and it can have negative effects on the investor’s portfolio or expected returns. If the opposite happens, the futures price is lower than the spot price of Bitcoin, we talk about backwardation (Stafford, 2021).
Overall, Bitcoin futures ETF has definitely helped to reach the ATH of Bitcoin, since the enthusiasm around this step was huge. However, one still needs to bear in mind that buying Bitcoin futures ETF is not like buying Bitcoin and that even Bitcoin spot ETF, where the issuing company has to own Bitcoin for underwriting of the ETF, is not the same as owning the cryptocurrency. Bitcoin spot ETF has not even been approved and it can take some time before it happens, however, until then the Bitcoin futures ETF should suffice for those investors who do not want to have direct exposure to Bitcoin, but still want to be financially invested in the cryptosphere.
Balchunas, E. (2021, 10 28). Eric Balchunas. Retrieved from Twitter: https://twitter.com/EricBalchunas/status/1453736946346328065
Strack , B. (2021, 10 27). VanEck Ready to Launch Delayed Bitcoin Futures ETF. Retrieved from Blockworks: https://blockworks.co/vaneck-ready-to-launch-delayed-bitcoin-futures-etf/
CHEN, J. (2021, 3 23). ETF Futures and Options. Retrieved from Investopedia: https://www.investopedia.com/terms/e/etf-futures-and-options.asp
Shirnia, E. (2021, 10 21). Bitcoin spot or Bitcoin futures? The ETF question. Retrieved from Yaahoo: https://finance.yahoo.com/news/bitcoin-spot-bitcoin-futures-etf-094139507.html
Sergeenkov, A. (2021, 9 10). What Is a Bitcoin Futures ETF? Retrieved from Coindesk: https://www.coindesk.com/learn/what-is-a-bitcoin-futures-etf/
DiCamillo, N. (2021, 8 6). Gensler’s Preference for Bitcoin Futures Products Is Likely Bad News for a Spot BTC ETF. Retrieved from Coindesk: https://www.coindesk.com/policy/2021/08/05/genslers-preference-for-bitcoin-futures-products-is-likely-bad-news-for-a-spot-btc-etf/
Crawley, J. (2021, 8 3). SEC Boss Gensler Eyeing Robust Regulation of Crypto Market: Report. Retrieved from Coindesk: https://www.coindesk.com/policy/2021/08/03/sec-boss-gensler-eyeing-robust-regulation-of-crypto-market-report/
Stafford, P. (2021, 11 1). What are the drawbacks to investors of holding a bitcoin futures ETF? Retrieved from FT: https://www.ft.com/content/5c21e984-9acf-4293-8da2-202d125c332a