Bitcoin ETFs are Finally Trading. Now What?

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Good question. Who knows.

Keep in mind that these newly listed Bitcoin ETFs do NOT actually hold Bitcoin, but rather Bitcoin FUTURES, and specifically, futures traded on the CME (Chicago Mercantile Exchange) which settle monthly in cash. In other words, these new ETFs will never actually hold Bitcoins. How will this affect Bitcoin trading, settlement and, most importantly, how the ETFs will trade? Again, who knows. Its a brand new world.

First, it is extremely unlikely that the returns of these new Bitcoin futures ETFs will actually mimic the returns of the underlying asset (Bitcoin). To be fair, that would be true of any ETF that holds futures rather than an actual asset (gold, oil, grains, etc). In fact there could very well be sharp divergences in the price of the Bitcoin ETFs and that of Bitcoin itself. It would not be particularly surprising to see the price of Bitcoin go up and a Bitcoin futures ETF go down, or vice versa.

Recently, after receiving SEC approval, both ProShares and Valkyrie launched Bitcoin strategy ETFs raising well over $1B dollars. That’s a huge amount (congrats) of money going to work in the relatively untested liquidity of the CME futures market. Again, keep in mind, these Bitcoin futures are relatively new, having been around for only about three years. So introducing a huge new influx of actively managed capital may have some “unintended” reactions. Like? Again, who knows.

Second, because the Bitcoin futures settle in cash (not “physical/actual” delivery) they must be “rolled” each month. These Bitcoin ETF held futures, probably the most liquid “front” month contracts, would need to be replaced (rolled) twelve 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 will 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. Ouch!

Assuming both ProShares and Valkyrie have the best traders on the planet (sarcasm), nothing could go wrong, right? Or, will the rush to establish positions in the futures market cause futures premiums to expand uncharacteristically driving up the underlying spot Bitcoin price (arbitrage firms will buy the underlying Bitcoin and sell the futures)? Will each month’s “rolling” of futures contracts (last Friday of each month) create unforeseen liquidity issues?

Again, it’s all new and untested. With liquidity as the major potential impediment, it seems volatility (both up and down) will certainly increase. Big time. NOTE: One scenario no one has addressed. What if the “out” month futures turn and trade BELOW the near term futures? Nasty.

One thing for certain, don’t expect the Bitcoin futures ETFs to match the performance of spot Bitcoin.

All the SEC had to do was allow a “pure” Bitcoin ETF. Sigh!