Evaluation: Bitcoin Futures Spotlight Some Pitfalls For New ETFs

A illustration of the Bitcoin digital cryptocurrency could be seen on this photograph illustration taken on October 19, 2021. REUTERS / Edgar Su

  • Cryo-currency receives enhance from launch of bitcoin ETF futures
  • Bitcoin ETFs might have greater prices than shopping for actual crypto
  • However the advantages of proudly owning ETFs are hailed by many regardless of some dangers.
  • Tuesday’s supply to carry extra Bitcoin ETF futures launches

NEW YORK, Oct. 19 (Reuters) – Tuesday’s launch of the primary bitcoin exchange-traded futures fund (ETF) marks a significant step in the direction of cryptocurrency legitimization, however some ETF traders might face greater prices in comparison with buying the digital forex itself.

Barring last-minute objection from the U.S. Securities and Alternate Fee, the ProShares Bitcoin Technique ETF will start buying and selling on Tuesday. ProShares can be backed by CME Group’s bitcoin futures contracts as a substitute of the digital asset itself. Learn extra

Its supply ought to result in extra ETF launches within the coming days and weeks, after years of regulatory blockages.

General, market members praised the benefit and relative security of proudly owning an ETF versus shopping for bitcoin from cryptocurrency exchanges and brokers. Buyers will not have to fret about guarding and securing their digital wallets, though analysts have stated that there are main exchanges that additionally supply these providers to their purchasers.

“Nonetheless, there isn’t any free lunch,” stated Martha Reyes, head of analysis at premier digital asset dealer and change BEQUANT.

“An ETF primarily based on futures contracts shouldn’t be excellent as a result of there’s a price to construct into the futures contracts, given the contango… leading to an underperformance in opposition to the underlying asset”, she declared.

Merchants normally renew futures contracts to modify from the short-term contract that’s approaching expiration to a different contract later within the months. This rollover comes at a price.

When futures contracts are in “contango”, a time period extra generally understood in commodity markets than monetary futures, costs are greater in long-term contracts than in futures contracts. Which means because the contracts strategy settlement day, the ETF should promote low-priced futures and purchase higher-priced contracts, which can erode returns every time the contracts shut.

“So an issue is being solved, however on the expense of the investor by way of decrease total return than some ETPs (change traded merchandise) in Europe,” stated Bradley Duke, CEO of ETC Group , the biggest ETP supplier in Europe.

ETPs in Europe which can be 100% backed by the underlying bitcoin observe the latter’s spot worth extra constantly, Duke added.


The worth of an ETF primarily based on futures contracts is not going to essentially match the present worth of the underlying asset. Typically, futures ETFs primarily based on commodity belongings similar to gold are likely to underperform bodily ETFs, stated Mikkel Morch, government director of crypto and digital asset hedge fund ARK36.

Together with the chance {that a} bitcoin ETF primarily based on futures contracts is not going to underperform bitcoin, this additionally comes with the price of renewing futures contracts, some analysts have stated.

Nonetheless, analysts imagine traders will proceed to purchase the ETF ahead regardless of the upper price.

“Bitcoin futures function in accordance with commodity change laws. Mutual funds and ETFs are ruled by regulation of funding corporations,” stated Karan Sood, CEO and Managing Director of Cboe Vest , an asset administration associate of the Cboe International Markets derivatives change.

“These two laws supply sturdy protections to traders. There’s a wealthy historical past of rigorous enforcement of those laws, which creates a excessive degree of economic stability and integrity.

At a Monetary Instances convention just a few weeks in the past, US SEC Chairman Gary Gensler reiterated his assist for bitcoin ETFs that may spend money on futures as a substitute of the digital forex itself.

However bitcoin futures are topic to margin and collateral necessities in addition to different limits that may stop the ETF from attaining its aim of producing returns, in accordance with ProShares’ prospectus. It’s an funding that entails many dangers, particularly when the worth of the ETF goes down.

Among the fund managers who’ve requested the launch of bitcoin ETFs within the US embody VanEck Bitcoin Belief, ProShares, Invesco, Valkyrie, and Galaxy Digital Funds.

Late Monday, Invesco stated it didn’t plan to proceed launching a bitcoin futures ETF anytime quickly.

The Nasdaq authorised the itemizing of the Valkyrie Bitcoin Technique ETF on Friday, whereas Grayscale, the world’s largest digital forex supervisor, plans to transform its flagship product, the Grayscale Bitcoin Belief (GBTC.PK) right into a bitcoin ETF at money, CNBC reported on Sunday. .

Bitcoin late Monday hovered close to a six-month excessive. The world’s largest cryptocurrency final stood at $ 62,104, not removed from its all-time excessive of $ 64,895 reached in April.

Reporting by Gertrude Chavez-Dreyfuss; Modifying by Alden Bentley and Shri Navaratnam

Our requirements: Thomson Reuters Belief Ideas.

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