21 Oct 2021 · 5 min read

Here's What You Need to Know About the Bitcoin Futures ETF

Source: iStock/pichet_w

Only a day after the first-ever US-based bitcoin exchange-traded fund (ETF) went live on the NYSE Arca exchange, the price of bitcoin (BTC) rallied to a new all-time high. While it would be a bit of a stretch to claim that only the ETF caused this, it helped BTC retain its positive price momentum. 

Read on to learn more about the new Bitcoin Futures ETF. 

Meet the ProShares Bitcoin Strategy ETF

The ProShares Bitcoin Strategy ETF (BITO) is the first US-based Bitcoin ETF that offers investors the opportunity to gain exposure to the price of bitcoin without having to buy and securely store the most popular cryptocurrency themselves. 

After several attempts by numerous investment firms to receive US Securities and Exchange Commission (SEC) approval to launch a Bitcoin ETF, ProShares finally gained it. 

On the first day of trading, BITO gained nearly 5%, with around USD 1bn in shares changing hands during the trading, making it the second-most highly-traded ETF debut ever. The impact of the launch was also seen in the price of bitcoin, as it jumped to USD 64,434 just a few hours after BITO started trading. 

BITO allows investors to access exposure to BTC in the same way they buy a stock through a brokerage account and they don’t need to use a crypto exchange or set up a wallet. 

Since BITO is a Bitcoin Futures ETF, it tracks the price of bitcoin futures contracts and not the spot market price of bitcoin. This means the fund doesn't invest in bitcoin or hold the digital currency in custody but, instead, aims to track the price of bitcoin by actively managing exposure to bitcoin futures contracts on behalf of investors.

The price of BITO is based on CME Bitcoin Futures contracts that trade on the Chicago Mercantile Exchange, which many consider as the leading source of price discovery in the bitcoin market. The ETF’s total expense ratio is 0.95%, which indicates how much of your investment in a fund will be deducted annually as fees.

According to the fund's prospectus, it will be investing in the front-month CME Bitcoin futures contract i.e., monthly contracts with the closest expiration date. The contract will be rolled over to the next nearby front-month contract before expiration.

Before you go ahead to invest in any bitcoin futures ETF, it's important to understand how they fair against a "physical" bitcoin ETF and owning BTC outright.

Bitcoin futures ETF vs. “physical” bitcoin ETF

While bitcoin futures ETFs and “physical” bitcoin ETFs both provide investors with the opportunity to invest in bitcoin without owning the cryptocurrency itself, there's a difference in how they function and the risk surrounding their markets.

Bitcoin futures ETFs track the price of bitcoin futures instead of the spot price of bitcoin. In this case, the issuers of the ETF do not hold any bitcoin in custody but instead, take on positions in the futures market that the ETF will track. 

"Physical" bitcoin ETFs track the spot price of bitcoin and the company issuing it holds bitcoin in custody. 

A bitcoin futures ETF has been approved first by the SEC because it has a regulated financial vehicle (CME Bitcoin Futures) as the underlying asset. The SEC has greenlit a futures-based bitcoin ETF because the futures market is developed and has existed for decades with strong regulations that offer investors protection from the Commodity Futures Trading Commission.

However, since a BTC futures ETF doesn’t actually track the price of bitcoin, its value depends on action in the bitcoin futures market. 

And as anyone who has ever traded futures knows, there are price discrepancies between the futures and the spot price. 

For example, bitcoin futures can be in contango, which occurs when the price of a futures contract is higher than the spot price of the underlying asset. As the contract approaches expiration, the company issuing the ETF will have to sell the lower-priced futures contract and purchase higher-priced ones with longer expiration dates. This will affect the ETF's performance over time as it will erode some of the returns while incurring additional costs for investors.

"Physical" bitcoin ETFs, however, do not face the risk of contango since they are backed by bitcoin and not futures contracts.

Buying the bitcoin ETF vs. buying bitcoin

When it comes to choosing between a bitcoin ETF or buying BTC, there are several considerations you should take into account before making a decision.

Regulations

Since ETFs are regulated, gaining exposure to the price of bitcoin through this type of investment vehicle offers more protection to investors than buying BTC directly. Investors don’t have to worry as much about regulatory risk when holding a Bitcoin ETF, nor do they have to protect their personal wallets from malicious actors looking to steal their coins.

Fees

ETFs are managed by companies that charge fees for their service. The fees for most bitcoin ETFs are usually more costly than those of crypto exchanges, especially with a bitcoin futures ETF that incurs extra costs from rolling over contracts.

Some trading platforms, like Robinhood for example, offer commission-free trading for cryptoassets while the expense ratio for exchange-traded bitcoin products can be higher than 1% p.a. Instead of paying high fees for a bitcoin ETF, some investors might just stick with buying bitcoin on a crypto exchange with low fees and storing the coins themselves.

Convenience

For investors who are used to buying traditional investment assets through their online brokerage accounts, buying a bitcoin ETF might be simpler than buying BTC using an unfamiliar app or a crypto exchange. 

Rather than spending time learning about Bitcoin, private/public keys, and wallets, they can just purchase a bitcoin ETF from traditional brokerage platforms like Fidelity, Charles Schwab, or Vanguard.

However, Bitcoin ETFs can only be traded when the stock exchange is open, so trading activities will not take place during evening hours and weekends. Crypto investors are not used to these restrictions and will likely opt to continue buying bitcoin from crypto exchanges that operate 24/7. 

While there are some clear benefits of buying shares in a bitcoin ETF, holding “physical” bitcoin in a personal wallet to which only you hold the private keys comes with the benefits of holding censorship-resistant money that only you have control over as well as increased potential returns as no annual management fees eat into your returns. 

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Learn more: 
- First Bitcoin ETF Booms
- ‘Risk-Free’ Trade Makes Comeback as Bitcoin ETF Fuels Futures Premiums

- Not Ideal, but ‘Better Than Nothing’ - Market Awaits 'Paper Bitcoin' ETF
- Approval for Non-futures-based Bitcoin ETF ‘Still a Year off’ – Expert