Bitcoin ETF’s & the Future
The dawn of the 19th of October saw the first Bitcoin ETF trading on Wall Street, bridging the gap between two of the hottest areas of the investment world- cryptocurrency and Exchange Traded Funds. Companies have been seeking approval from the US Securities and Exchange Commission (SEC) to list leveraged bitcoin ETFs since 2013. Almost 8 years later, ProShares Bitcoin Strategy ETF or BITO is the first American bitcoin-linked ETF to gain approval.
ETFs are pooled investment funds which track the performance of an asset and can be bought or sold on a stock exchange. A Bitcoin ETF (B-ETF) therefore mimics the price of the coin and allows investors to dabble into the cryptocurrency world without having to trade the coin itself. If bitcoin increases in value, so does the ETF, and vice versa.
However, if a bitcoin ETF mimics the price of the coin, why not just invest in bitcoin itself? B-ETFs provide more options for cryptocurrency leverage. They make the asset class more convenient to institutional investors such as pension funds and tax havens.
There are several factors that make ETFs a more attractive investment strategy to some:
- Investors would not have to deal with cryptocurrency exchanges and can trade directly on the stock market. Using the more traditional exchange would allow them to focus on their investments rather than on learning how to use a cryptocurrency exchange.
- They would not have to deal with the responsibility of securing and protecting their cryptocurrency wallets to keep their investments safe from hackers.
- B-ETFs allow diversification without ownership of the asset.
- B-ETFs also allow short selling, which is not possible in the spot cryptocurrency market.
In the past, the SEC has explicitly blocked several proposals for B-ETFs on the grounds of the unregulated nature of the cryptocurrency market, making it susceptible to manipulation by investors with large holdings. Concerns about threats from hackers and validating the ownership of bitcoins held by the funds have also contributed as roadblocks to its approval.
Unlike companies such as Valkyrie and Gemini which filed for spot-based bitcoin ETFs, ProShares offering a futures-based ETF might have been the nudge required to get the SEC greenlight. The futures-based bitcoin ETF tracks futures contracts rather than the price of bitcoin itself. Futures are thought to be protected from market volatility and negative price movements. The SEC Chair Gary Gensler has further indicated that futures-based funds might provide better protection to investors due to the laws imposed upon them.
It is important to note that while a spot-based bitcoin ETF would be backed by actual bitcoin, the futures ETF is backed solely by bitcoin futures contracts. Consequently, the price of the futures contracts might track the price of bitcoin inaccurately due to external factors such as investors’ sentiment. This risk is mitigated in spot-based ETFs. Experts in the industry, however, speculate that a spot-based bitcoin ETF is unlikely until mid-2022 at the earliest.
Nonetheless, the SEC approval of a bitcoin-based is a significant milestone and positive step towards bridging digital assets and the more traditional financial sector.
-Shreya Murali,
Head Of Operations, U.K.
