So far, investors got the closest thing to a bitcoin etf or mutual fund when the bitcoin proshares strategy etf began trading this week. But buying shares of a bitcoin futures fund is very different from buying shares of an actual bitcoin ETF, and not fully understanding the difference could cost you.
Cryptocurrency advocates have long been pushing for a bitcoin ETF, which would give everyday investors the ability to track the price of cryptocurrencies and invest in them without having to buy the digital currencies. But the Securities and Exchange Commission (SEC) rejected the proposals and warned investors about bitcoin’s volatility and fraud potential.
Reading: Why bitcoin etf futures might not
with cryptocurrency fans crying that the us. uu. it is lagging behind other countries and retail investors are missing out, the sec removed the bitcoin futures etf from proshares and the etf began trading on tuesday. and another bitcoin futures ETF from financial firm Valkyrie hit the market on Friday. a third is expected soon from vaneck.
But futures ETFs, whether oil, metals like gold, or cryptocurrencies like bitcoin, don’t always track the price of the underlying asset they’re designed to be a long-term target for. In other words, while buying one of the new bitcoin ETFs may be convenient, it also means that the next time you see headlines proclaiming that Bitcoin has hit a new high, you shouldn’t necessarily expect ETF investors to get the same Profits.
“This is a great product for short-term traders, and maybe it’s a good enough product right now for long-term investors,” says Matt Hogan, chief investment officer of Bitwise Asset Management. “but it is not a perfect product and investors should understand that it will not perfectly track the price of bitcoin over long periods of time.”
why a bitcoin futures etf won’t track the price of bitcoin
Investing in a bitcoin futures ETF means you don’t own bitcoin directly, as you would with an ETF that contains stocks or bonds. instead, you own bitcoin futures.
Futures contracts are basically bets between two investors on where the price of a commodity, be it wheat, oil or bitcoin, will be at a certain time in the future (hence the name). Bitcoin futures contracts, traded on the Chicago Mercantile Exchange, typically last six months. therefore, each month a batch of contracts expires and the exchange creates a new batch that will expire several months in the future.
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Naturally, the price of bitcoin futures contracts can rise or fall above the current price of bitcoin (known as the spot price), depending on whether investors believe the cryptocurrency will end up being worth more or less than it is. It’s in six months. right now. however, as the date of the contracts approaches, the price of the contracts should converge with the spot price of bitcoin, until they finally coincide on the last day.
The bitcoin ETF works by buying futures contracts whose expiration dates are relatively close, maybe within a month or two, which should roughly, but not perfectly, match the current price of bitcoin. As the date approaches, the ETF sells these expiring contracts and buys a new set of contracts expiring in a month or two, basically “rolling” them.
Because the futures value of one- or two-month-dated contracts will typically not match the current bitcoin price, the ETF is expected to gain or lose a bit during this process. That money, known as “roll yield” when it ends up being a profit, means that the ETF’s returns will always be a bit different from the returns on Bitcoin itself.
This process is not unusual; Many commodity ETFs work this way. The most popular oil ETF, the United States Oil Fund (USE), does not hold crude oil, but rather crude oil futures. Over short periods of time, think days or weeks, these price discrepancies usually don’t add up to much. But over longer periods of six months or a year, they can become significant, Hogan says.
how much will the price difference be?
so are we talking about prospective bitcoin etf investors missing out on a ton of the money bitcoin investors make? not necessarily.
Historically, there has been a 5% per year headwind in the bitcoin market, Hogan says.
simeon hyman, head of global investment strategy at proshares, declined to project what the difference would be. however it says that the difference in September was 20 basis points (or hundredths of a percentage point) and if you annualize that (i.e. repeat it 12 times in a row) it would be about 2.5% for the year, if every month seemed September.
While Andrew Hambleton, an advisor at Telemus Capital, says he’d be surprised if the difference is more than 5%, he says he’s a bit concerned about how the space might change when (and if) a pure bitcoin ETF is. goes on the market, since it may be the preference of many investors. It could cause even more volatility and uncertainty around bitcoin futures ETFs, Hambleton says.
is this a good step for you?
Those familiar with the workings of oil futures contracts may wonder if there is a risk that the bitcoin futures market will face the same dramatic problem that the oil futures market did in April 2020. During that initial stage of the covid-19 pandemic, the excess supply of oil caused a collapse in the price of oil. uso, which uses west texas intermediate (wti) oil futures contracts as a benchmark, plunged more than 100% and investors disappeared.
the future of bitcoin is extremely uncertain due to its speculative nature. Some of the investors who predicted the 2008 property crash think bitcoin is a speculative bubble, and the Bank of England’s deputy governor for financial stability said bitcoin’s price falling to zero is “a plausible scenario.”
In theory, the bitcoin futures market could implode much like the oil futures market did in April. but from a practical perspective, hougan says that’s unlikely, since a lot of the problem in the oil scenario had to do with the cost of storage, and there’s no problem with storing bitcoins (since you can’t even keep it). .
Today there is no perfect way to invest in bitcoin. you can buy it on an app and you have to pay commissions you can buy it through a product like grayscale bitcoin escrow which can also be listed at a discount compared to the actual value of bitcoin or you can buy it through this new futures etf.
“You just have to understand the pros and cons of each and select the best one for you if you want to expose yourself to this space,” says hougan.
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