Nobody really knew for sure how last week’s first US-listed bitcoin ETF would be received and what ripples it may or may not make in CME’s bitcoin futures market. Those were the worries.
But lo and behold, the debut could not have been more of a box-office success in terms of demand and trading, once again proving the ETF wrapper can open to door to just about any investible asset class.
Last week, on Tuesday, the first US-listed, bitcoin-related ETF, the ProShares Bitcoin Strategy ETF (BITO), came out of the gate faster than Secretariat.
In two trading days, BITO broke the record for the fastest ETF ever to attract more the $1bn assets under management (AUM), eclipsing the long standard sprint to $1bn by SPDR Gold Trust (GLD) set in 2004.
Though it has not completed a full trading week yet, it took in the second-most assets of any US-listed ETF this past week behind only the SPDR S&P 500 ETF Trust (SPY) – quite an auspicious start.
SEC trial balloon?
What is ironic is that the hugely successful launch of US-listed bitcoin futures ETFs might spark their demise. That success and confirmation of nothing breaking in the ETF structure or in the CME futures market is setting the stage for a physically back ETF in the US. Futures are much more problematic than physical, and the SEC likely understands that.
Europe and Canada have no issues or scary market spooks with their physically-backed bitcoin ETFs.
Perhaps this was a trial balloon by the SEC to see if the things would work as issuers had asserted. The SEC has been too nervous about what might go wrong, rather than what might go right and benefit investors.
This is just beginning
But investors should also pay attention. After BITO launched, the SEC gave approval to a second bitcoin futures ETF, and then 24 hours later the Valkyrie Bitcoin Strategy ETF (BTF) made its own debut.
While not out of the gate as fast a BITO, BTF traded nicely on Friday – about 20% of the hundreds and millions of dollars in BITO volume, but a nice start. In fact, it was one of the top 15 ETF trading volume launches, according to Bloomberg.
If anything, BITO, at $1.2bn AUM, will continue to grow under this status-quo if no physical bitcoin in the US exists. The problem is that the ETF is close to bumping up against the futures contract position limits that the portfolio managers are bound by. That has not happened yet, even with $1.2bn inflows in two trading days. However…
Roll costs coming
One thing easily overlooked by investors who do not look under the hood of bitcoin-futures ETFs is total costs. Not just the expense ratio.
For instance, the cost of the first futures (October) contract rolling over in BITO and BTF will be about 1% when that happens Friday, the last trading day of October. Annualised, that 12% cost on top of the 0.95% annual expense ratio for the ETF means you are looking at a potential 13% cost, which re-enforces the need for a physically-backed bitcoin ETF, that has no futures-contract drag.
But there is a reason for bitcoin futures. Imagine you are an institutional investor with direct exposure to bitcoin because you cannot buy an SEC-approved physical product. Buying futures is like buying car insurance. You are not really buying performance. You are buying a mitigating loss if say bitcoin went from its current price of $60,00 to $30,000. Happened before.
Know contango, or else
BITO over the past week has been slowly shedding its October exposure and moving into the November contract. Eventually, it will move into December contracts. That will mitigate the roll-over costs. The ETF is designed at the moment to be only in the front month and following month contract. Often futures contracts roll into a more expensive contract as the price of a commodity rises, known as “contango”.
If the price of bitcoin or any commodity collapses for a sustained time, then bitcoin or commodity goes into a backwardation futures curve, meaning you get paid to roll your contract. But that is not necessarily the case with bitcoin futures right now, or most futures contracts of anything. That is not their purpose, at least to me.
When the coffee crop freezes in Brazil or drought scorches America's Midwest corn crop, suddenly the price of the current coffee or corn futures is worth more now than the future. You get paid. Hopefully, the farmer locked in those contango prices as insurance with a futures contract. Or a day trader is shorting those commodities spiking unusually. Bitcoin is the same.
Not just another bitcoin filing
I have said for months that no physically-backed bitcoin ETF will cut the mustard with the SEC because issuers have been more concerned with being first in line than addressing what SEC is asking for. The regulatory body is scared to death of price manipulation. Rightly so.
Less than two weeks ago Bitwise Investment, which has a closed-end crypto index fund you shouldn't play with, Bitwise 10 Crypto Index Fund (BITW) and a crypto-industry equity ETF, Bitwise Crypto Industry Innovators ETF (BITQ), which seems safe, filed for a "spot price" ETF. Interesting wording.
Bitwise, a provider of cryptocurrency indices and funds, has once more filed for a physical bitcoin ETF that will hold the world’s most popular cryptocurrency rather than futures on it. The issuer also released two white papers intended to show the relationship between bitcoin spot and futures pricing and the likelihood of an exchange-traded product influencing bitcoin futures pricing.
Matthew Hougan, CIO at Bitwise, explained why this is a difference-maker.
“We entered a new filing for a spot bitcoin ETF because we believe we have now met the standards required for approval,” Hougan said. “Our application included more than 150 pages of novel, data-driven and statistically significant research in response to questions the SEC had raised in the past in rejections of earlier spot bitcoin ETF applications.
“We demonstrate that the CME is the leading source of price discovery for the bitcoin market worldwide,” he said.
Chart 1: Prices on the CME led prices on Coinbase, a large spot exchange, in a statistically significant manner ever since the CME contract debuted
While the worrywarts at the SEC wring their hands over price manipulation and whether price discovery can truly be found, the evidence shows those are really not major concerns.
The record-breaking BITO proves bitcoin futures can be wrapped in an exchange-traded product, and a spot ETF holding physical bitcoin without the added roll costs of futures will only be a bigger help to investors.
Drew Voros is editor-in-chief at ETF.com
This story was originally published on ETF.com