The first Bitcoin ETF has begun trading

Eight years after the Winklevoss brothers filed the first application for a Bitcoin exchange-traded fund (ETF), the first Bitcoin ETF in the United States will begin trading on the New York Stock Exchange (NYSE)

ProShares, a Bethesda, Maryland-based provider of specialized exchange-traded products, filed an application Friday to begin trading of the Bitcoin Strategy Fund on Oct. 19, 2021. The fund, which will be denoted by the ticker BITO, will track Bitcoin (BTCUSD) prices via futures contracts traded on the Chicago Mercantile Exchange (CME).

IMPORTANT TAKEAWAYS

On October 19, the first Bitcoin ETF in the United States will begin trading.

The ETF tracks bitcoin prices through CME futures contracts.

Three more Bitcoin ETFs are set to debut in trading markets in the coming months.

While futures-based Bitcoin ETFs provide exposure to a rapidly growing asset class, they come with several caveats.

The launch of the ETF, according to Michael Sapir, CEO of ProShares, is a watershed moment. "The first equity ETF debuted in 1993, the first bond ETF debuted in 2002, and the first gold ETF debuted in 2004." "The year 2021 will be remembered for the launch of the first cryptocurrency-linked ETF," he said. [1]

Douglas Yones, NYSE's head of exchange-traded products, also spoke about the historic occasion, but suggested that more progress on cryptocurrency investment products needed to be made. "This is an exciting step but not the last," he told The New York Times. [2]

According to Sapir, the ProShares fund will provide cryptocurrency exposure to investors who already have a brokerage account "but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider … or are concerned that these providers may be unregulated and subject to security risks."

The Securities and Exchange Commission's inaction has resulted in the launch of trading in the ProShares fund's shares (SEC). The agency has 75 days to submit comments on an ETF proposal. If the SEC allows the deadline to pass, funds may begin trading. On the morning of October 18, the deadline for ProShares funds expired.

Invesco Ltd., Valkyrie Investments, and VanEck Associates Corp. are among the investment firms whose Bitcoin ETF applications are due for SEC commentary this month. According to reports, the agency will take a similar approach for their applications, paving the way for the listing of more futures-based bitcoin ETFs in public markets.

A Difficult Road to Approval

The road to approval for Bitcoin ETFs has been difficult. Some consider a Bitcoin ETF to be the holy grail because it has the potential to unleash massive institutional investment in the asset class. However, the SEC has sabotaged this dream by rejecting numerous applications for funds that track bitcoin spot prices. In a letter published after the 2017 run-up in bitcoin prices, the agency expressed its concerns about the Bitcoin ecosystem. 3

It is primarily concerned with cryptocurrency price volatility and the possibility of price manipulation in Bitcoin's largely unregulated ecosystem. The SEC does not register major cryptocurrency exchanges, which are used to set spot prices for bitcoin exchange-traded products, making it difficult for the agency to verify their trade flow.

The current SEC Chairman, Gary Gensler, has repeatedly referred to the crypto ecosystem as a "Wild West," and has asked Congress to put cryptocurrency exchanges under his supervision. However, he has stated that the agency is still open to ETFs based on CME bitcoin futures.

Futures prices are based on bets made by traders on the price of an asset in the future. They do not entail actual bitcoin ownership or trading on spot prices. Instead, during a one-hour window, the CME calculates a Bitcoin Reference Rate (BRR) based on trade flow from major spot exchanges. [4]

A Bitcoin ETF based on CME futures prices will also not pose a regulatory issue because CME is supervised by the Commodity Futures Trading Commission (CFTC). CME's bitcoin futures have steadily increased in price and trading volume since their debut in December 2017. The contracts are popular with institutional investors who use them to hedge risk while minting quick profits from a volatile asset class.

The Risks of Investing in Bitcoin Futures ETFs

While ETFs based on bitcoin futures prices provide exposure to a rapidly growing asset class, they come with several caveats. For one thing, they may trade at a significant premium or discount to the spot price of bitcoin. For example, due to investor expectations for the approval of a Bitcoin ETF, the annualized premium for CME bitcoin futures increased by 15% in recent days when compared to bitcoin's spot price. [5]

Contango, a situation in which longer-dated futures contracts have higher prices than short-term contracts, could result in losses for funds that track the prices of volatile assets such as bitcoin. [6] According to Karan Sood, chief executive officer of Cboe Vest, actual returns from funds based on crypto futures contracts can be "quite different" from bitcoin's spot price. [7]

Bitcoin ETFs based on CME futures contracts may also be more expensive than comparable products. According to Bloomberg Intelligence, fees for a Bitcoin ETF are expected to be 1% for every $1,000 invested. The average active equity ETF, according to the firm, charges 0.71 percent in fees.

The costs of Bitcoin ETFs will be exacerbated when the underlying futures contracts expire and long-term investors roll over contracts to a new period. "Traders may use the new Bitcoin ETFs, but we expect their appeal to longer-term investors and advisers to be more muted due to the costs to roll futures," Bloomberg Intelligence analysts Eric Balchunas and James Seyffart wrote in a note. [8]

Nonetheless, the launch of a Bitcoin ETF based on futures is cause for celebration. It represents a significant step forward in the development of a fund based on bitcoin spot prices.

According to Matt Hougan, chief investment officer at asset management firm Bitwise Investments, "homework" shows that the crypto market has changed. "The bitcoin market has matured to the point where the CME bitcoin futures market is actually the leading source of price discovery in the entire world," he said. "Prices move on the CME market before they move on Coinbase, Kraken, or FTX... and, as a result, it meets the SEC hurdle for potential approval of a spot-based ETF." [9]

On Sunday, Oct. 17, the price of bitcoin surpassed $63,000 for the first time, following news of the imminent listing of the first Bitcoin ETF in US markets.

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