In 2017 when Bitcoin futures contracts were launched on the Chicago Mercantile Exchange, they were heralded as a liquid, safe and lower-cost way to get exposure to Bitcoin.
The advantage to futures is that they are cash-settled: The buyers of futures do not receive actual Bitcoins, and investors who short futures are not obligated to deliver Bitcoin. The futures are therefore a unique synthetic exposure to Bitcoin, which has been difficult to access for a broader audience. This hurdle is about to lower even more as the launch of the first Bitcoin-futures exchange-traded fund will encourage wider investing in Bitcoin and comfort in crypto as an investment asset.
Last Friday the registration for ProShares Bitcoin Strategy ETF appeared in the Security and Exchange Commission’s Edgar filings database and that was the SEC’s low-key signal that it will not block the New York Stock Exchange from offering the fund for trading under the ticker BITO as early as Tuesday, October 19. ProShares would be the first Bitcoin futures-based ETF, a regulated entity in which retail and institutional investors can put their dollars to hold Bitcoin futures.
Exchange-traded funds are a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way as a regular stock. ETFs are regulated under the Securities Act of 1933, which defined securities, but a Bitcoin-futures fund product could fall under the stricter 1940 Act that governs mutual funds, according to SEC Chairman Gary Gensler. Bloomberg projects that initial demand for Bitcoin-futures ETFs could be low, at about $4 billion of assets or just about 3% of the outstanding notional value of bitcoin futures. Still, the premise of ETFs consisting solely of futures is an interesting one, especially from an arbitrage vantage point.
In theory, Bitcoin spot and futures prices should converge by the settlement of the contract. When futures are based on a digital asset, their prices could trade close to the price of the actual digital asset. In other words, an exchange-traded fund could boost liquidity, volume, and open interest of Bitcoin futures.
The CME meanwhile is planning to raise the cap of the number of futures contracts that can be held by a single firm. That could create additional room for asset-management firms and institutions to build large portfolios of Bitcoin futures. As many as four Bitcoin-futures ETFs are scheduled for October, unless the SEC blocks them, and more could be following.
For the crypto market, the futures-based ETF is a milestone that could transform the trading aspects of Bitcoin, Ethereum and other crypto assets. There is scope for arbitrage, hedging and shorting because ETFs attract flows from financial advisers and institutions that seek a regulated instrument in their portfolios. For investors, that the ETFs are regulated is a key comfort over purchasing Bitcoin on as-yet unregulated crypto exchanges.
As the first day of trading of BITO approaches, the premium of Bitcoin futures maturing in November over futures expiring in October has risen notably, in a sign that markets expect the ETF to attract money inflows. Futures are pricing in that Bitcoin could reach a new record high in the next months, which in crypto terms could mean in a few days or hours. The Bitcoin-futures ETF could enhance the arbitrage opportunities because an ETF would allow investors to short Bitcoin, which is currently not possible.
The Grayscale Bitcoin Trust is the closest alternative to a futures-based exchange-traded fund. The trust has a single position in Bitcoin and its net asset value is settled at the closing price of Grayscale BTC on the OTCQX, the highest-quality market tier in the OTC Markets Group.
The implied value of Bitcoin based on the net asset value of Grayscale BTC (“GBTC”) is approximately US$55,000 compared to Bitcoin futures trading around US$60,000, as of October 18. The discount of GBTC to Bitcoin futures — at an average of around US$5,000 lately — is likely to widen as demand for futures picks up from multiple ETF launches. Investors may also be drawn to the lower cost in fees of a Bitcoin-futures ETF. By some estimates, the futures-based ETF could cost around 90 basis points, while Canadian-listed Bitcoin ETFs like EBIT charge 75 basis points and the GBTC’s expense ratio is 2%.
A Bitcoin-futures ETF is likely to boost volumes of Bitcoin futures and offer investors arbitrage, hedging, and cost-effective Bitcoin buying-and-selling opportunities. The more opportunity for arbitrage and hedging, the more liquidity will centralize in Bitcoin futures to the benefit of Bitcoin itself. Eventually, Bitcoin’s extraordinary daily volatility could move more in line with equity and commodity volatility, making it a more attractive asset for investors overall.
