As of October 2021, the first bitcoin futures ETF—ProShares Bitcoin Strategy ETF (NYSE: BITO)—registered with the SEC and was approved for trading by the New York Stock Exchange. This marked an important milestone in the institutionalization of cryptocurrencies.
That said, there are nuances to the first bitcoin ETF, and investing in a bitcoin futures ETF is not the same as investing directly in bitcoin as a crypto asset.
TL;DR
- The ProShares Bitcoin Strategy ETF ($BITO) is the first bitcoin futures ETF to trade on a major U.S. exchange.
- Since it’s a futures ETF, the fund holds futures contracts for bitcoin assets but does not hold bitcoin itself.
- Bitcoin ETFs could open up access to the crypto asset to institutional investors, and other investors who may not have access to cryptos via their investing platform.
- The net impact of bitcoins futures ETFs remains unclear, with some experts believing that the true milestone will be ETFs that are materially investing in bitcoin.
What is a bitcoin ETF?
A bitcoin ETF is a fund designed to track the performance of bitcoin over time. There are similar ETFs that track assets like gold, silver, and the total stock market index.
In order for an ETF to become available to investors, it must be approved by the Securities and Exchange Commission (SEC) and registered under the Investment Company Act of 1940. The first bitcoin ETF to receive this status is ProShares Bitcoin Strategy ETF ($BITO) and has begun trading as of Oct. 19, 2021.
How is investing in a bitcoin ETF different from investing in bitcoin itself?
Investing in a bitcoin ETF means seeking to invest in the general trajectory of the bitcoin cryptocurrency, without directly investing in or owning bitcoin. A similar example would be an investor who opts to invest in a gold ETF instead of owning physical gold.
Importantly, the first bitcoin ETF (BITO) is a futures ETF. This means that the fund holds futures contracts for bitcoin assets, and not bitcoin itself. A futures contract is a formal agreement to purchase an asset at a future date, or in this case, an IOU for the future purchase of bitcoin.
FINRA refers to funds that offer exposure to commodities as non-traditional exchange-traded products (ETPs). FINRA considers these types of ETPs as speculative and suggests that they may not be suitable for retail investors.
In the case of Bitcoin futures, these contracts are “cash-settled” meaning that they do not actually promise the delivery of bitcoin, rather they promise the delivery of cash equivalent to the value of the bitcoin at the time of expiration. A futures contract is an agreement to buy a commodity (in this case, bitcoin) at a future date.
The fact that the first bitcoin ETF is a futures ETF is important. There is a cost associated with “rolling” futures contracts and this means that a bitcoin futures ETF will not perfectly track the spot price of the asset (bitcoin). The spot price is the current market price of an asset.
Thematic cryptocurrency ETFs currently exist, but these funds do not hold crypto futures contracts nor do they hold crypto assets directly. These thematic ETFs instead hold positions in companies that make up the infrastructure of the overall cryptocurrency space. This is an important distinction and why the approval of a bitcoin ETF is so significant.
An example of a thematic cryptocurrency ETF is the NexGen Economy ETF (NYSE: BLCN), which has positions in Marathon Digital Holdings (MARA), PayPal (PYPL), and Overstock.com (OSTK), which was among the first major retailers to accept payment in bitcoin.
Investing in bitcoin directly or via a bitcoin ETF may have different tax implications for investors. The bitcoin ETF is a security and will be treated as such. Actual bitcoin, however, is currently considered to be property by the IRS, which gives it slightly different tax consequences (though capital gains still apply). This is not tax advice. Please consult your tax advisor for specifics.
Bitcoin ETFs vs. bitcoin assets: pros and cons
One advantage of a bitcoin ETF is the flexibility it affords investors. Bitcoin ETFs allow investors to invest in the future of this cryptocurrency without needing to invest directly. Proponents of bitcoin ETFs say that this broadens access to bitcoin to larger groups of investors who may not want to invest in bitcoin directly.
While investing in bitcoin and other cryptocurrencies has become more accessible—Public.com began to roll out the ability to invest in bitcoin and ten other cryptos as of Oct. 2021—there are still many places where people cannot invest in crypto assets. Bitcoin ETFs, therefore, further institutionalize the very idea of investing in crypto.
As for the drawbacks, one important consideration is that ETFs often come with management fees, and the approved Bitcoin Strategy ETF is no different, with a listed management fee of 0.95%. ETF management fees are taken from the net asset value on a daily basis, which is why investors don’t see them reflected in their transactions.
There is also the question of whether a bitcoin futures ETF is able to accurately track the market price for bitcoin over time. This is due to what is called contango, which occurs when a spot price (current market value) is lower than the value of a futures contract for an asset (or backwardation, where the opposite is true). Some analysts believe that this could create lower returns for investors who opt for a bitcoin futures ETF and not bitcoin the asset.
Bitcoin ETFs may also make it easier to short bitcoin or bet on the price of bitcoin declining in value over time. Some bitcoin enthusiasts believe that institutional investors may try this approach in order to drive the price of bitcoin down. A reason for doing this could be to buy back in at a lower price.
Finally, bitcoin ETFs also pose an interesting scenario in which a largely unregulated asset becomes regulated within the format of a futures ETF. A fundamental principle of cryptocurrencies is decentralization, and so for some cryptocurrency advocates this conflicts with bitcoin’s original premise.
Impact on the crypto space
Following the New York Stock Exchange’s approval of the Bitcoin Strategy ETF ($BITO), the price of bitcoin rose 7 percent. At a high level, the inclusion of the first bitcoin future ETFs (with more expected to come) has the effect of legitimizing bitcoin as an asset. The result could be more institutional dollars flowing into cryptocurrency as an alternative asset.
That said, the total impact remains to be seen. Individual investors can already invest in bitcoin and as many as 13% of Americans have invested in crypto so far in 2021 according to one University of Chicago study. Moreover, institutional investors already have the ability to invest via Grayscale Bitcoin Trust, which trades on the OTC markets. For that reason, some experts believe the true catalyst for bitcoin and other cryptos would be the approval of a non-futures-based (aka, physically-backed) crypto ETF.