This Tuesday, the first U.S. bitcoin exchange-traded fund (ETF) is set to be launched, ending around six years of demand and anticipation. Assuming nothing goes wrong, ProShares’ ETF will begin trading on NYSE Arca under the ticker $BITO.
But it’s not entirely straightforward. This ETF will focus on bitcoin futures as opposed to holding spot bitcoin, which is a little different. And just because it will go live, doesn’t mean it will necessarily be available to everyone. We take a look at some of the main questions surrounding the swathe of bitcoin ETFs that have been proposed in the U.S.
What’s the difference between a futures ETF and a spot ETF?
With Gary Gensler at the helm of the Securities and Exchange Commission (SEC), it appears to have decided that a bitcoin futures ETF should go ahead — as opposed to one based on spot trading. And there are some key differences between the two.
With a spot ETF, the value of the ETF will closely track the spot price of the underlying asset, in this case bitcoin. In comparison, a futures-based fund may underperform or outperform the spot price — potentially leading to a premium or discount. (In the short term the prices might diverge, but typically they will be similar over the long term.)
A futures-based ETF will involve the cost of rolling contracts that are about to expire to ones that have longer expiration dates. A spot-based ETF won’t have that cost, but it will have to pay for a custodian to look after the bitcoin — something relatively unique to bitcoin.
Both types of ETFs will likely help to increase the demand for bitcoin. For a spot ETF, bitcoin would be purchased as the underlying asset. For a futures ETF, traders will typically hedge their positions by buying physical bitcoin.
Why would the SEC prefer a bitcoin futures ETF?
A lot has been made of the SEC’s approval of futures-based funds and distaste for a spot bitcoin ETF. The thinking behind it is that there are better investor protections around the futures market.
As an ETF based on futures, that means it will be an actively managed fund. The company issuing the fund will trade bitcoin futures and the success of the fund will depend on their trading strategies.
Currently, the proposed bitcoin futures ETFs would only include long positions. That means the companies behind the ETFs would only be able to take long bitcoin positions and would not be able to take any short positions. There are other companies trying to launch inverse bitcoin futures ETFs — which are for short positions — but they haven’t been approved yet.
One important difference in the eyes of the SEC seems to be that while spot bitcoin trades on venues that aren't regulated at the federal level, futures trade on the Chicago Mercantile Exchange, which is regulated by the Commodity Futures Trading Commission.
There are around five bitcoin futures ETFs in line to launch in the near term, with potentially two launching this week.
Will a spot bitcoin ETF get approved?
This question depends on the SEC and, potentially, the success of the imminent bitcoin futures ETFs. So far, the SEC has not expressed any positive signs that it will approve one.
Sui Chung, CEO of CF Benchmarks — which provides market data for the CME bitcoin futures and Proshares’ upcoming bitcoin ETF — said that the launch of the bitcoin futures ETFs will likely not harm the applications for spot ETFs.
But on the flip side, he acknowledged that “if these futures ETFs go well and they get fairly big and are able to satisfy demand that’s out there from investors for bitcoin through ETF channels, then the SEC could argue that demand has been fulfilled, there’s no need for us to authorize a spot ETF.”
How much demand will there be for a bitcoin futures ETF?
There has been a lot of anticipation for a bitcoin ETF because — by virtue of being an ETF — it can be made accessible to a lot of US citizens, particularly in a tax-efficient way. One of the most common ways to invest in the US is with a 401K and ETFs can be included in this investment vehicle.
But it’s not entirely that simple. While bitcoin ETFs are now set to launch, Chung said it remains up to the big investment firms, like Charles Schwab and TD Ameritrade, whether they will make the ETFs available to their customers.
“They may very well be supporting it but what I'm saying is it’s not a given,” Chung said. He added that it’s possible they don’t make the ETFs available to all customers, potentially only letting certain clients access them.
That aside, Chung noted that there’s a lot of demand for bitcoin through an ETF wrapper, which he expects to be filled in the next few days as they go live. “After that, the sustained interest and sustained inflow is very hard to predict,” he said.
© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.