Bitcoin’s price edged ever closer to its all-time high over the weekend, boosted by the news that the U.S. Securities and Exchange Commission is slated to approve two Bitcoin futures exchange-traded funds in the coming days. The world’s biggest cryptocurrency jumped around 9.5% in the 24 hours into Saturday Asia time, reaching US$62,688, according to data from CoinGecko, just shy of its all-time high of US$64,804.72 reached in April at the height of the market-wide bull run.
After months of speculation as to when the SEC would approve an ETF for Bitcoin, two separate listings appeared in quick succession on Friday; one for ProShares, which will trade on the New York Stock Exchange, and another for Valkyrie, to trade on the Nasdaq. Barring any last-minute disapprovals from the SEC, the ProShares ETF would begin trading on Monday North America time, marking the culmination of a decade-long campaign for a Bitcoin ETF which began with the Winklevoss twins first submitting a request for one in 2013.
Despite the growing level of institutional adoption in the crypto industry — particularly in Bitcoin — the approval of a Bitcoin ETF in the U.S. was seen to be a watershed moment for the industry when it entered the realm of other established assets. Businesses and institutions that may have restrictions on what they are able to invest in are now able to gain exposure to the US$1.175 trillion asset class, clearing the road for more entities to participate in the industry.
“It just puts more assurance to the industry that this asset class is going to stay,” Jeff Yew, CEO of Monochrome, Australia’s first fund to offer institutional-grade exposure to Bitcoin, told Forkast.News. “The institutional appetite for Bitcoin is going only one way — which is increasing, which is good to see. [The approval of these ETFs] legitimizes this asset class and demystifies a lot of what people are afraid of, what people do understand about Bitcoin. When such a big move gets into play, it means that more institutional investors and also regular investors can now access the market in a regulated manner.”
Futures vs. physically backed ETFs
Notably, both the ProShares and Valkyrie funds are futures trading funds, not a physical Bitcoin ETF. This means they track the futures contracts traded on futures exchanges like the Chicago Mercantile Exchange rather than trading on the value of Bitcoin stored by the fund. Both types have their advantages and disadvantages; a futures fund has lower custody risk compared to a physically-backed fund, though could be more susceptible to price shocks due to how the instruments get connected to the underlying asset.
It is not surprising that the first ETF approved in the country would be a futures ETF, due to the higher degree of regulation that applies to it. Trading on regulated stock exchanges, the ETFs track regulated futures contracts on the CME, which itself is regulated. A far cry from tracking Bitcoin spot purchases that would be available through other types of ETFs.
“It seems like the SEC is comfortable with this from what we’ve seen publicly from them,” said Jonathon Miller, Australian managing director of crypto exchange Kraken, though he admits nothing is certain until the funds are live. “The futures ETFs allows businesses, institutions and managed funds who have restrictions around the venues and the instruments that they can trade to get access because it will tick the boxes as an ETF.”
The U.S. is not the first country in the world to approve either type of these ETFs; neighboring Canada has both futures and physically-backed Bitcoin ETFs — as well as ETFs for Ethereum. Yew says that while both types of ETFs are able to track the price of Bitcoin reasonably well, physically-backed ETFs tend to perform better overall, though this could be a first-mover advantage. He also added he believes physically-backed ETFs are now likely to be approved in the U.S. “sooner than we think.”
“A physically-backed Bitcoin ETF will make more sense for investors that want a hedge against a black swan event,” Yew said. “Hence, why direct exposure would make more sense as they have more control over the asset class ultimately. But a futures-based Bitcoin ETF does have its benefits as well.”
Not everyone is pleased with the decision to allow a futures ETF before a physically-backed one. Raoul Pal, founder and CEO of Global Macro Investor, posted on Twitter: “Issuing the BTC futures ETF is a good step but it’s basically handing hedge funds a massive arbitrage opportunity as the futures will trade at a large premium in bull phases and they get to capture those returns. This is the old financial market trick — you now have to add multiple new intermediaries who all make profits — the ETF provider, clearinghouse, futures broker, administrator, auditor, law firm, CME and hedge fund arbs. Wall Street gets richer. Retail investors lose. Again.”
For all the excitement surrounding the approval, Miller suggested it was worth remembering the premise that Bitcoin was founded on — permissionless, peer-to-peer trading — and that it was envisioned as a means to democratize money and increase access to the financial system. Besides the slight irony of the developments moving away from these principals, Miller added there may just be a competitive disadvantage to using ETFs as opposed to direct trading.
“The fees involved for any of these choices vary,” Miller said, “and you’d have to think that an ETF which is a product issued by a third party on an exchange that takes fees that uses futures contracts that have spread from the Bitcoin price that in itself have fees because they’re dealing with the Chicago Mercantile Exchange; you’d have to think that product is also going to be potentially less competitive [than] going direct.”
Future price of Bitcoin
After reaching its six-month high on Saturday, Bitcoin’s price started trending down slightly over the course of the weekend, though it started picking up again as Monday progressed, and was trading at US$62,616 at press time. This sudden price surge has given credence to some Bitcoin bulls predicting it could top the US$100K mark by the end of the year. While Yew acknowledged that historically Bitcoin’s price tends to begin performing well in the lead-up to Christmas, the market is ever-changing, and past performance does not guarantee future returns.
In the past, Bitcoin’s price has been largely a retail-driven phenomenon, but increasingly, and especially after the news of the ProShares and Valkyrie ETFs, there is more institutional exposure and players in the space. “It’s interesting because it’s an unknown to have that institutional support and demand underwriting the Bitcoin story from now onwards. I would think that’s an exciting moment to be in,” he said.