The price of bitcoin (BTC) soared to a new all-time high only a day after the first-ever US-based bitcoin exchange-traded fund (ETF) went operational on the NYSE Arca market.
While it would be a stretch to suggest that the ETF was solely responsible for this, it did assist BTC in maintaining its strong price momentum.
Continue reading to learn more about the newly launched Bitcoin Futures ETF.
Meet the ProShares Bitcoin Strategy ETF
The ProShares Bitcoin Strategy ETF (BITO) is the first Bitcoin exchange-traded fund (ETF) based in the United States. It allows investors to acquire exposure to the price of bitcoin without purchasing and safely storing the most popular cryptocurrency.
After multiple failed attempts by numerous financial businesses to obtain approval from the US Securities and Exchange Commission (SEC) to launch a Bitcoin exchange-traded fund (ETF), ProShares ultimately succeeded.
BITO gained about 5% on its first day of trading, with approximately USD 1 billion in shares changing hands, making it the second-most actively traded ETF debut ever.
The introduction had an effect on the price of bitcoin, which increased to USD 64,434 just a few hours after BITO began trading.
BITO enables investors to gain exposure to BTC in the same manner they do with stocks via a brokerage account, without the need to use a cryptocurrency exchange or create a wallet.
Due to the fact that BITO is a Bitcoin Futures ETF, its price is determined by the price of bitcoin futures contracts rather than the spot market price of bitcoin.
This implies the fund does not invest in bitcoin or hold it in custody, but rather seeks to track the price of bitcoin by actively managing investors‘ exposure to bitcoin futures contracts.
The price of BITO is determined by CME Bitcoin Futures contracts that trade on the Chicago Mercantile Exchange, which many see as the primary source of bitcoin price discovery.
The ETF’s total expense ratio is 0.95 percent, which reflects how much of your investment is deducted in fees each year.
According to the prospectus, the fund would invest in front-month CME Bitcoin futures contracts, which are the monthly contracts with the earliest expiration date.
Before expiration, the contract will be rolled over to the next neighboring front-month contract.
Before you buy in any bitcoin futures ETF, it’s critical to understand how they compare to a „real“ bitcoin ETF and direct ownership of BTC.
Bitcoin futures ETF vs. “physical” bitcoin ETF
While both bitcoin futures ETFs and „physical“ bitcoin ETFs allow investors to participate in bitcoin without holding the cryptocurrency, their operations and risk profiles are quite different.
Bitcoin futures exchange-traded funds (ETFs) follow the price of bitcoin futures rather than the spot price of bitcoin.
In this situation, the ETF’s issuers do not hold any bitcoin but rather take bets in the futures market that the ETF would track.
„Physical“ bitcoin exchange-traded funds (ETFs) track the spot price of bitcoin and are issued by companies that have bitcoin in custody.
The SEC approved the first bitcoin futures exchange-traded fund (ETF) since it uses a regulated financial vehicle (CME Bitcoin Futures) as the underlying asset.
The SEC approved a futures-based bitcoin exchange-traded fund (ETF) because the futures market is mature and has operated for decades, governed by robust regulations that safeguard investors from the Commodity Futures Trading Commission.
However, because a BTC futures ETF does not track the price of bitcoin directly, its value is determined by the bitcoin futures market.
And, as anyone who has traded futures is well aware, there are price differentials between futures and spot prices.
For example, bitcoin futures might be in contango, which occurs when the futures contract’s price is greater than the underlying asset’s spot price.
As the contract nears expiration, the company issuing the ETF will need to sell the lower-priced futures contract and replace it with a higher-priced one with a longer expiration date.
This will have an effect on the ETF’s performance over time, as it will reduce some of the returns while increasing investor costs.
However, „physical“ bitcoin ETFs do not experience contango risk because they are backed by bitcoin, not futures contracts.
Buying the bitcoin ETF vs. buying bitcoin
When deciding between a bitcoin ETF and purchasing BTC, there are various factors to consider.
Due to the fact that ETFs are regulated, investors are better protected when investing in bitcoin through this sort of financial instrument than when purchasing BTC directly.
When investing in a Bitcoin ETF, investors do not have to worry as much about regulatory risk, nor do they have to secure their personal wallets from unscrupulous actors looking to steal their coins.
ETFs are managed by third-party service providers who charge a fee for their services.
The fees for the majority of bitcoin ETFs are typically higher than those of crypto exchanges, particularly for a bitcoin futures ETF that incurs additional costs due to contract rollovers.
While certain trading platforms, such as Robinhood, offer commission-free trading for cryptoassets, the expense ratio for exchange-traded bitcoin products can exceed 1% each year.
Rather than paying exorbitant fees for a bitcoin ETF, some investors may prefer to simply purchase bitcoin on a low-fee crypto exchange and store the coins themselves.
For investors accustomed to purchasing traditional investment assets via their online brokerage accounts, purchasing a bitcoin ETF may be more convenient than purchasing BTC via an unfamiliar app or cryptocurrency exchange.
Rather than learning about Bitcoin, private/public keys, and wallets, they can simply acquire a bitcoin ETF through a regular brokerage firm such as Fidelity, Charles Schwab, or Vanguard.
However, because Bitcoin ETFs can be traded only when the stock market is open, trading will be suspended during the evenings and weekends.
Crypto investors are unaccustomed to these constraints and will almost certainly continue to purchase bitcoin from cryptocurrency exchanges that operate 24 hours a day.
While there are some clear benefits of buying shares in a bitcoin ETF, holding “physical” bitcoin in a personal wallet to which only you hold the private keys comes with the benefits of holding censorship-resistant money that only you have control over as well as increased potential returns as no annual management fees eat into your returns.