Bitcoin has established itself as a worthy investment asset for everyone. However, some investors and institutions still have their reservations. These people believe that a Bitcoin ETF can help implement a regulated investment atmosphere suitable for them. An exchange-traded fund, otherwise called an ETF, is a financial product that is regulated to monitor the price of a certain asset. It trades on conventional exchanges rather than cryptocurrency platforms.
A Bitcoin ETF monitors the market price of Bitcoin and can hold other assets, including Ethereum, Gold, Stock, etc., aiding diversification and exposure. It is available in traditional markets in the USA and Canada. Bitcoin ETFs would facilitate the adoption of Bitcoin and expose investors to Bitcoin markets. Investors don’t have to own the coin as the ETF exposes them to the price of Bitcoin via traditional exchanges. Also, it will provide the complex regulatory infrastructure and financial base, supporting investments by various financial institutions.
Bitcoin futures are financial tools used for derivatives trading. It allows two persons to agree to a contract that they would trade BTC at a future date when BTC reaches a specific price. Upon expiring, the buyer buys BTC at a premium or a discount, based on the spot price and the value of each futures contract in their portfolio. In this trade, there is a profiting party and a losing party. Although there is an expiry date, investors can decide to sell their contracts on or before the day it expires. Additionally, the prices of bitcoin futures and the spot price of bitcoin rarely converge because of the varying agreement reached by futures traders.
A Bitcoin Futures ETF is a type of financial instrument that follows the futures price of Bitcoin rather than its spot price. It allows investors to invest in Bitcoin futures using brokerage accounts without prior crypto trading knowledge. It derives its value from the price volatility of bitcoin futures. To issue a Bitcoin futures ETF, an investment company has to open positions in the bitcoin futures market and peg the ETF’s value to the company’s futures contracts. As a result, investors get to diversify their investment portfolio and participate in the Bitcoin market without owning any BTC. They trade on conventional markets during trading hours.
The Chicago Mercantile Exchange (CME) Bitcoin futures ETF tracks its Bitcoin Reference Rate (BRR) price. ProShares, Valkyrie, and VanEck allow the listing and trading of these ETFs. However, the source of its price and its divergence from the market price differentiates it from Bitcoin ETF.
Bitcoin futures ETFs are securities traded publicly. They expose traders to the price volatility of Bitcoin futures contracts. Investors can invest in a Bitcoin futures contract without a crypto platform. It tracks Bitcoin futures and not Bitcoin directly, giving investors access to the Bitcoin market. Investors speculate on the probability that the ETF shares will cost more in the future, using Bitcoin futures as the underlying asset. An investment company creates a commodity pool used for trading Bitcoin futures contracts on behalf of investors. This investment costs roll premiums, management fees, etc.
The price of Bitcoin futures ETF varies from that of Bitcoin as it is pegged to a futures price. Therefore, it may never converge with market prices. This difference allows it to trade at a discount in a bear market and a premium in a bull market. The expense ratio varies across exchanges and is used to settle the ETF’s operating expenses. Unlike Bitcoin futures that can be traded around the clock, trading Bitcoin futures ETF only occurs at regular market hours like stocks. The regulations guiding it are similar to that of other traditional investments, as made by the SEC.
The accuracy of the price trackers is the main risk that investors face with Bitcoin futures ETF. There is an inaccurate tracking of price when the futures price is higher than the spot price, leading to contango. Contango is risky to investors as they are expected to pay a roll premium when it happens. Backwardation is the opposite of contango, and it occurs when the spot price is higher than the futures price. Upon expiration of the contract, the investment company is expected to renew the contract. However, the performance of the ETF can be negatively affected if the futures price of the expiring contract is lower than that of the new contract, making the returns inadequate to purchase it.
The regulation of Bitcoin futures ETFs doesn’t imply risk-free investments. However, these risks will vary from those associated with BTC spot trading or futures trading on the crypto market. Therefore, it is essential to make a trading plan for investing, considering your risk tolerance and investment portfolio. Also, it would be best if you learned about the markets, including understanding how spot and futures markets operate and their effect on your investment. Similarly, it would be best to consider the impact of expenses like roll premiums, management fees, and the likes on your portfolio. Additionally, you must gauge your risks by analyzing relevant documents and tracking factors that influence prices and market reactions.
This financial instrument has some advantages, including allowing investors to diversify their portfolios. It is easy to understand and invest in compared to Bitcoin futures. It has clearer tax implications and guidelines for handling returns and risks. It is more secure than investing in Bitcoin futures. However, some fees are incurred due to using a brokerage. Also, investors don’t own Bitcoin and, as such, can’t use it as currency.
Bitcoin futures ETF enables indirect engagement with the Bitcoin market. It can contribute to increasing the value of Bitcoin. It has allowed traders to expose their portfolios to Bitcoin futures via a brokerage while keeping it in a tax-advantaged account. Moreover, Bitcoin is a volatile asset, and as such, anything tied to it directly or indirectly will be affected by volatility. Invest cautiously after doing in-depth research and investing what you can lose, the crypto space is extremely risky.