First Bitcoin ETF Begins Trading

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First Bitcoin ETF Begins Trading

Eight years after the Winklevoss brothers submitted the initial application for a Bitcoin exchange-traded fund (ETF), the first Bitcoin ETF in the United States will begin trading on the New York Stock Exchange (NYSE).ProShares, a Bethesda, Maryland-based supplier of specialized exchange-traded products, submitted an application Friday to begin trading of the Bitcoin Strategy Fund on Oct. 19, 2021. The fund, which will trade under the ticker BITO, will follow the price of Bitcoin (BTCUSD) using futures contracts traded on the Chicago Mercantile Exchange (CME).

Key Takeaways

  • On October 19, the first Bitcoin ETF in the United States will begin trading.
  • The ETF follows bitcoin values using CME futures contracts.
  • Three more Bitcoin ETFs are set to launch on trading venues in the coming months.
  • While futures-based Bitcoin ETFs provide exposure to a fast rising asset class, they come with many drawbacks.

The debut of the ETF, according to Michael Sapir, CEO of ProShares, is a watershed moment. “The first stock ETF debuted in 1993, the first bond ETF debuted in 2002, and the first gold ETF debuted in 2004.” “The first cryptocurrency-linked ETF will be remembered in 2021,” he said.

Douglas Yones, NYSE’s head of exchange-traded products, also commented about the historic event, but stressed that further development on cryptocurrency investment products needed to be done. “This is an amazing step, but it is not the last one,” he told The New York Times.

According to Sapir, the ProShares fund will provide cryptocurrency exposure to investors who already have a brokerage account “but do not want to go through the hassle and learning curve of establishing another account with a cryptocurrency provider… or are concerned that these providers may be unregulated and subject to security risks.”

  Trading Desk Definition

The Securities and Exchange Commission’s delay has resulted in the launch of trading in the ProShares fund’s shares (SEC).The government has 75 days to submit comments on an ETF proposal. If the SEC permits the deadline to pass, funds may begin trading. On October 18, the deadline for ProShares money expired.

Invesco Ltd., Valkyrie Investments, and VanEck Associates Corp. are among the financial companies whose Bitcoin ETF applications are scheduled for SEC review this month. According to rumors, the agency will take a similar approach for their applications, paving the way for the listing of additional futures-based bitcoin ETFs in public markets.

A Rocky Path to Approval

The road to approval for Bitcoin ETFs has been difficult. Some believe a Bitcoin ETF to be the holy grail since it has the potential to unleash significant institutional investment in the asset class. However, the SEC has dashed this ambition by rejecting multiple applications for ETFs that follow bitcoin spot prices. In a letter issued following the 2017 run-up in bitcoin values, the agency expressed its worries about the Bitcoin ecosystem.

It is primarily concerned with bitcoin price volatility and the possibility of price manipulation in Bitcoin’s mostly unregulated environment. The SEC does not register major cryptocurrency exchanges, which are used to determine spot prices for bitcoin exchange-traded instruments, making it impossible for the agency to check their transaction flow.

Gary Gensler, the current SEC Chairman, has often referred to the crypto environment as a “Wild West” and requested Congress to put cryptocurrency exchanges under his oversight. However, he has said that the agency is still receptive to ETFs based on CME bitcoin futures.

  Multiple Time Frames Can Multiply Returns

Futures prices are determined by trading on the price of an asset in the future. They do not include real bitcoin ownership or trading on spot prices. Instead, within a one-hour window, the CME sets a Bitcoin Reference Rate (BRR) based on transaction volume from major spot exchanges.

A Bitcoin ETF based on CME futures prices will also not pose a regulatory issue since CME is supervised by the Commodity Futures Trading Commission (CFTC). CME’s bitcoin futures have steadily increased in price and trading volume since their debut in December 2017. The contracts are popular among institutional investors, who use them to mitigate risk while profiting quickly from a volatile asset class.

Caveats of Investing in Futures-Based Bitcoin ETFs

While ETFs based on bitcoin futures prices give exposure to a fast developing asset class, they come with many drawbacks. For one thing, they may trade at a considerable premium or discount to the market price of bitcoin. For example, owing to investor anticipation for the establishment of a Bitcoin ETF, the annualized premium for CME bitcoin futures climbed by 15% in recent days compared to bitcoin’s spot price.

Contango, a scenario in which longer-dated futures contracts have higher values than short-term contracts, might result in losses for funds that follow the prices of volatile assets such as bitcoin. According to Karan Sood, chief executive officer of Cboe Vest, real returns from funds based on crypto futures contracts might be “very different” from bitcoin’s spot price.

Bitcoin ETFs based on CME futures contracts may be more costly than comparable products. According to Bloomberg Intelligence, fees for a Bitcoin ETF are projected to be 1% for every $1,000 invested. The average active equity ETF, according to the company, costs 0.71% in fees.

  20 Rules Followed by Professional Traders

The expenses of Bitcoin ETFs will be increased when the underlying futures contracts expire and long-term investors roll over contracts to a new period. “Traders may utilize the new Bitcoin ETFs, but we anticipate their attractiveness to longer-term investors and advisors to be more muted due to the expenses to roll futures,” Bloomberg Intelligence analysts Eric Balchunas and James Seyffart said in a note.

Nonetheless, the launch of a Bitcoin ETF based on futures is reason for excitement. It constitutes a huge step forward in the development of a fund based on bitcoin spot pricing.

According to Matt Hougan, chief investment officer of asset management business Bitwise Investments, “homework” demonstrates that the crypto market has shifted. “The bitcoin market has developed to the point where the CME bitcoin futures market is now the world’s primary source of price discovery,” he added. “Prices change on the CME market before they move on Coinbase, Kraken, or FTX… and, as a consequence, it meets the SEC threshold for future approval of a spot-based ETF.”

On Sunday, Oct. 17, the price of bitcoin surpassed $63,000, after news of the expected filing of the first Bitcoin ETF in US markets.

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