This week was one for crypto’s history books.
On Tuesday, the first Bitcoin futures ETF – the ProShares Bitcoin Strategy ETF (BITO) – started trading on public markets. In its first two days, BITO amassed over $1 billion in assets, the fastest ETF to reach the billion-dollar mark on record.
The excitement catapulted the price of Bitcoin to a record high and kicked off what could be a flood of Bitcoin futures ETFs debuting in the coming weeks.
The news has been a lot to process in just a few days, and you may not be the only one trying to catch your breath.
So, let’s talk about Bitcoin-linked ETFs.
Why might someone invest in a crypto futures ETF?
It’s crypto exposure in a familiar package. Some investors have been hesitant to buy Bitcoin because of the lack of transparency. Others have been skeptical about the mechanics of buying and selling actual coins. There are also legitimate crypto questions about security, tax logistics and regulation. Crypto in an equity-like instrument could ease some of these concerns.
Fees matter, too. Investing in crypto has been a notoriously expensive process because of high fees and transaction costs. Bitcoin futures ETFs may offer a relatively low-fee solution. For example, the Grayscale Bitcoin Trust (GBTC) charges a fee of 2%, while BITO has an expense ratio of 0.95%. As more ETFs become available, fees could continue to decline. The fee fight has already started, too – a VanEck Bitcoin futures ETF with a fee of 0.65% could start trading as soon as next week.
The ETF wrapper allows investors to do more with their crypto holdings, too. Before this ETF, you had to jump through hoops to get crypto exposure in a retirement account. Also, it hasn’t been cheap for everyday investors to short-sell or hedge crypto. Now, BITO options exist, and advisors have a workable solution if you want some Bitcoin in your nest egg.
Is this just like buying Bitcoin?
Not quite.
Bitcoin futures aren’t pure Bitcoin, even if they appear similar. The price of ETFs can change for multiple reasons outside of market movements (supply, demand, share creation, etc). Because of this, these funds may not track Bitcoin’s daily moves perfectly.
There’s such a thing as too much popularity in the futures ETF space, too. In the past, funds have become untethered from the markets they track when trading volume has spiked too quickly. This could be a problem if BITO’s enormous volume is any guide. Apparently, BITO’s futures allocation has come close to position limits, and that may force the ETF to move into longer-dated futures (risking the correlation to Bitcoin’s price).
Futures contracts inherently have increased volatility as they approach expiration. That can be passed on to any vehicle that invests in them. This is especially true for investments in shorter-term futures contracts as some investors prefer to get rid of the contract (roll them) before expiration, so they don’t have to pay cash for the actual cryptocurrency.
Why is everybody talking about roll costs?
Roll costs are a quirk in the futures market that you should know about if you’re eyeing a Bitcoin futures ETF.
Futures ETFs have to buy and sell futures so they can accurately track the market they’re based on. Bitcoin futures have largely existed in a state of contango (when the price of futures contracts increase as you move out in time), so these ETFs will likely have to sell out of expiring futures at a lower price and buy into new futures contracts at a higher price. That cost can increasingly eat into the ETF’s returns over time. Alternatively, if the contracts further out become cheaper, the performance of the ETF may benefit.
When is an actual Bitcoin ETF debuting?
Likely not any time soon, if pronouncements by the SEC are any guide.
The Bitcoin futures ETF got a pass as the agency pointed to existing regulation over futures markets for adequate investor protection.
What happens next?
The market has spoken. Bitcoin futures ETFs have opened the door to a whole new wave of crypto-curious investors. And for long-time crypto investors, the SEC’s allowance of these ETFs are another stamp of legitimacy for the space. Old Wall Street and new Wall Street are slowly coming together.
If you’re a long-term investor, tread carefully in these funds. Roll costs can compound over time, so you eventually may find that your investment hasn’t tracked crypto as well as you thought.
If you’re a short-term investor, know the ins and outs of how these funds work. It’s great to have more choices, but it’s too soon to tell how these ETFs (and the options on these ETFs) could respond to different market scenarios.
And no matter what, consider your personal investment situation and outlook when making investment decisions.
Sign up to receive the Weekly Viewpoint and other top market insights delivered to your inbox.
For more information on this topic, check out the SEC and ProShares websites. Note that trading ETFs that are based on futures may not be suitable for all investors and involves a substantial amount of risk of losing your money. Please read the prospectus of the ETF in order to get more information about the futures contracts that it is based upon and the underlying risk it entails.
Lindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall wellbeing. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.
Click here for more content from Lindsey Bell.
Comment on this article
Comments
Sara b. on October 25, 2021 at 8:33am
I understand
Misael H. on October 26, 2021 at 4:26pm
Yes
MaureenC on October 27, 2021 at 1:54am
Bad feedback was a slip of finger.
Outcast S. on October 29, 2021 at 8:53am
The BITO ETF reminds me of TBT. It's NOT a good way to take a long term bullish stance on BTC compared to just owning BTC or a good proxy for it. If one wants to be long BTC with a stock (not having to fool with wallets, online exchange hacking risk, etc. and the fees), something like GBTC is probably better, but the 2% annual fee is significant. OTOH, it trades at a significant discount (recently about 15%, and between 10% and 20% for months now) compared to the underlying BTC it holds, and hopefully, it will be granted status as a US ETF, and the discount will go away or at least narrow sharply. But there is NO guarantee if or when the ETF status will be granted, though the news states Grayscale has begun the application process for GBTC, now that ETF's like BITO exist. Disclosure: I'm an ordinary retail trader. I own a little GBTC, which I'm happy to sell if BTC rises a lot, or hold for the long term and hope that BTC falls back to around $10,000 and buy a fair am
Pamela m. on October 29, 2021 at 10:00am
What actually is bitcoin?
chinnamma k. on November 5, 2021 at 4:03pm
I like to get more information about.
BILL B. on November 20, 2021 at 10:55am
THERE IS ALWAYS SOMEONE OUT THERE LOOKING TO HELP YOU L O S E MONEY
Tom on December 30, 2021 at 10:52am
I read the information on Bit coin ETF and some of the terms or language I was unable to understand. Like the term ROLL or (when the price of futures contract increase as you move out in time), share creation, crypto exposure in a retirement account to name a few. You high lighted Volatility in blue which is helpful. Thank you for the information.
Ronald T. on December 30, 2021 at 2:20pm
What are your thoughts on AGNC for long term investments for the dividend and also FMCC is this a time to start buying up FMCC will it rebound its high
Dixon S. on December 30, 2021 at 2:41pm
Why is your article and others about crypto currency investing completely lacking in mention of the tax consequences? Check out the first question on a 1040 personal income tax return: Did you purchase, sell, exchange.....any virtual currency during the year? Bitcoin et al are considered capital assets, and as such have their sales reported on Sch D, for profit or loss.
Stephanie M. on January 22, 2022 at 5:40am
Awes