After almost a decade of wrangling with regulators, the ETF industry is finally on the cusp of getting a fund that tracks the price of Bitcoin. But at this point, it may be easier and cheaper for the average investor to just buy Bitcoin.
SEC Approves Bitcoin Futures ETF, Opening Crypto to Wider Investor Base
ProShares is set to launch trading of its bitcoin futures ETF next week.
After years of trial and error by would-be fund sponsors, cryptocurrency investing is finally opening up to the masses with the tacit U.S. approval of a bitcoin futures exchange-traded fund.
The Securities and Exchange Commission (SEC) greenlighted bitcoin futures ETFs in a first for the industry on Friday, after the regulator’s five commissioners met on the issue. ProShares, which filed for its Bitcoin Strategy ETF this past summer, may be the first to launch next week.
The company filed a post-effective amended prospectus on Oct. 15, stating its filing is expected to launch on Monday, Oct. 18, though the fund may not begin trading immediately.
Proponents of a bitcoin ETF believe the product will be more widely accessible for individuals interested in bitcoin than the actual cryptocurrency by giving investors a regulated alternative to the underlying digital asset. The first product will track bitcoin futures, rather than the price of bitcoin directly, however. SEC Chair Gary Gensler indicated he believes futures-based products might provide stronger investor protections due to the laws under which they operate.
The SEC has, in the past, explicitly rejected bitcoin ETF applications, but it does not need to formally approve one. Under federal law, the SEC can just allow an application to become effective, rather than make a formal announcement.
ETFStore President Nate Geraci told CoinDesk the form is “a step forward” for digital assets and bridging them with the more traditional financial sector. He confirmed that the filing of a post-effective amendment is confirmation of the SEC’s tacit approval.
“It’s an encouraging sign for the future of crypto to see SEC Chairman Gensler get comfortable in helping mainstream investors more easily access bitcoin exposure,” he said in an email. “The availability of a bitcoin ETF will now bring more investors under the crypto tent and facilitate greater education across the space.”
James Seyffart, an analyst at Bloomberg Intelligence, also confirmed to CoinDesk the filing is a sign the fund is launching.
He also anticipates the futures-based ETF launch to act as a bridge to ultimately launching a spot market-based ETF.
Seyffart noted that ProShares’ amended filing removed language about the fund possibly investing in Canadian bitcoin ETFs as a sort of hedge.
“It seems the SEC really did not like that language for whatever reason,” he said. “But they are following standard guidelines and allowing first to file to launch first. So we will be tracking closely how much of a first mover advantage there is here.”
A spokesperson for ProShares referred CoinDesk to the post-effective prospectus.
Industry participants have long sought to launch a bitcoin ETF, with Gemini founders Tyler and Cameron Winklevoss first seeking an ETF in 2013. The SEC has rejected every previous application to date, and still has yet to weigh in on more than 30 other current applications.
It is likely the SEC will only allow futures ETFs to launch this year, however. Gensler’s comments supporting a futures ETF hint that he will not allow a spot market ETF to launch in the near term.
“I highly doubt the SEC will approve the product this year,” Seyffart said.
The price of the ETF won’t be pegged to bitcoin
First, it’s important to understand that investing in a futures-based bitcoin ETF is not a direct investment in bitcoin.
A futures-based ETF tracks futures contracts, rather than the price of an asset. As a result, a futures-based bitcoin ETF would track bitcoin futures contracts, not the price of bitcoin itself. Therefore, the price of the ETF will not match the price of bitcoin.
This difference can be a risk, Ivory Johnson, certified financial planner, chartered financial consultant and founder of Delancey Wealth Management, tells CNBC Make It. The price of a futures-based bitcoin ETF could trade at a premium during a bull market or at a discount during a bear market.
The difference in value is also why a futures-based bitcoin ETF “is likely better for short-term exposure than for buy and hold long-term investing,” says Todd Rosenbluth, director of ETF and mutual fund research at CFRA.
Some bitcoin supporters argue that investors may generate better returns by buying the cryptocurrency directly. However, it is impossible to predict future performance of any asset.
A futures-based bitcoin ETF could be helpful for those unsure of how to safely buy bitcoin, or those who prefer to not have the responsibility of protecting and securing their bitcoin wallet. The price of bitcoin often swings as well, so an investor buying the cryptocurrency directly would have to be able to stomach the volatility.
Ultimately, if you’re deciding between investing in a futures-based bitcoin ETF or bitcoin itself, it depends on how much exposure you want to take on and the length of time you want to hold for.
Investors should also be aware that a futures-based bitcoin ETF could potentially be more expensive than investing in bitcoin directly. That’s because there are a number of additional costs attached to the futures contracts the ETF tracks, which can impact the price investors end up paying.
In addition, an ETF will require many middlemen in the investment, including hedge funds and ETF providers, Johnson says. Some in the crypto space say that an ETF would benefit these middlemen more than retail investors, especially if the ETF trades at a premium during bull markets.
“Hedge funds … get to capture those returns,” crypto investor and former hedge fund manager Raoul Pal tweeted on Friday. “Wall street gets richer. Retail investors lose. Again.”
The middlemen also take away from the ethos of crypto assets, since the goal of decentralized, peer-to-peer networks is to remove intermediaries found in traditional financial systems, Johnson says.
Last, investors should know there is still a risk of experiencing a loss.
Although a futures-based bitcoin ETF isn’t a direct investment in cryptocurrency, experts still see the exposure as risky. They view the asset class as volatile and speculative, and in turn, recommend to only invest what you can afford to lose.
As the SEC’s office of investor education and advocacy tweeted on Thursday, “before investing in a fund that holds bitcoin futures contracts, make sure you carefully weigh the potential risks and benefits.”
“All investments in funds involve risk of financial loss. This risk may be increased for positions in bitcoin futures contracts because of the high volatility of bitcoin and bitcoin futures (meaning prices can fluctuate widely),” the SEC wrote in a post in June.
Before investing in a fund that holds Bitcoin futures contracts, make sure you carefully weigh the potential risks and benefits.— SEC Investor Ed (@SEC_Investor_Ed) October 14, 2021
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