Excitement. The horde of asset managers clamoring to have the first SEC approved Bitcoin ETF just rushed over to door number two. Yells of “let me in” are getting very loud. So what’s behind door number two? Bitcoin futures. Recently the SEC dropped hints they MAY be receptive to ETFs that will trade in bitcoin futures rather than the cryptocurrency itself. Thus the stampede and excitement got all the management firm’s juices flowing.
Literally, in the past two weeks, ProShares, Invesco Ltd., VanEck, Valkyrie Digital Assets and Galaxy Digital have all filed applications for Bitcoin futures ETFs. Seems they all read the Chairman of the Securities & Exchange Commission (Gary Gensler) indicate that he would be receptive to ETFs that would trade in Bitcoin futures. One slight caveat, they would have to follow stricter rules usually reserved for mutual funds. So, basically, these ETFs would be a mutual fund that really doesn’t hold Bitcoin but rather a derivative (futures) that actually is far riskier than “actual” Bitcoin itself. Got it? But no matter what, just keep in mind the SEC is there to protect investors.
So would a Bitcoin futures ETF be the all coveted “holy grail” that will have investors flocking to pour money into them? Maybe, and maybe not. The worst thing that could happen would be that investors actually read and understand how futures work and differ from the actual “spot” price of, say, Bitcoin. Very bad for asset managers. OR, investors could just accept that the SEC says all is OK and they will have some Bitcoin. Very very good for asset mangers.
Now why would the SEC prefer Bitcoin futures for an ETF and not the “actual” Bitcoin? Less risk for investors? Hardly. I know you want a quick and simple answer so here it is; Bitcoin futures are traded on a regulated exchange (CME Group). Crypto exchanges that trade “actual” Bitcoin (Coinbase, etc.) are NOT regulated…..yet. Hence, SEC (or CFTC) oversight….a/k/a control….which “protects” investors. Yeah, right!
Let’s quickly take a look at how Bitcoin futures (or any futures for that matter) can differ from holding “actual” Bitcoin. Say Bitcoin goes from $30,000 to $50,000 (which it did) over six months (it actually took about a month). An investor holding “actual” Bitcoin made $20,000, or 67%. If a Bitcoin ETF held futures, and most probably the most liquid “front” month contracts, those contracts would need to be replaced (rolled) six times (once every month). Each time a contract is rolled (sell expiring month, buy next month) there is risk on execution. Big risk. Also, if the contracts that expire at a later date become more expensive than the ones expiring, performance of the ETF could suffer and investors could lose money. By the way, can you picture a billion dollar ETF having to “roll” their Bitcoin futures in a quiet, less liquid market. Oh the chills.
So, a long time ago many railroad crossings didn’t have flashing lights to warn of an approaching train. Rather, there was a big X shaped sign that said “Stop. Look, Listen.” to make sure a train wasn’t about to ruin you day. The SEC isn’t saying a Bitcoin ETF holding “actual” Bitcoin isn’t safe, its saying we can regulate futures (control). So what if investors have more risk.
“Stop. Look. Listen.”…… or said another way, “Ready. Set. STOP!”