A lot of excitement radiated out of New York this week with the launch of the first Bitcoin exchange-traded fund (ETF) sanctioned by the United States Securities and Exchange Commission. The ProShares Bitcoin Strategy ETF (BITO) had a stunning debut on the New York Stock Exchange as the second-most heavily traded opening-day fund on record, with some calling it “a watershed moment for the crypto industry.”
But others, like Arca CEO Rayne Steinberg, had “mixed feelings” about the events. While pleased that a much-awaited crypto investment vehicle finally received regulatory approval — ending eight years of futility on the part of U.S. fund issuers — he had some misgivings about the product that finally met the approval of the SEC, specifically the fact that it was futures-based and didn’t track the price of Bitcoin (BTC) directly.
“We do not think a futures ETF is a good way to get Bitcoin exposure,” he said in a blog, adding, “Futures based ETFs work for short term trading, but have massive tracking error issues over long periods, which is what most investors are looking for when it comes to Bitcoin exposure.”
Markus Hammer, an attorney and principal at Hammer Execution consulting firm, agreed with some others that the event was a milestone yet cautioned, “It is only one milestone with quite a journey ahead,” further informing Cointelegraph, “As an investor, if you want to go long in crypto — and many do — you prefer a fund that tracks ‘physical’ Bitcoin and not a derivative of it.”
The ProShares ETF is a bet on BTC’s future price movements. That is, “the product ultimately deviates from the BTC price itself, next to the fact that ProShares as the issuer is just another intermediary and thus counterparty risk to the investor.”
Futures-based vs. physical ETF — Does it matter?
Many institutional investors will probably wait for a physical Bitcoin ETF — tied to the spot market, not the derivatives market — that tracks the actual price of the cryptocurrency, Campbell Harvey, professor of international business at Duke University, told Cointelegraph. The BTC futures market is relatively small, he explained, “and the buying pressure in the futures will lead to a negative ‘roll return,’” meaning that:
“You are paying a premium to buy the futures each time you ‘roll over’ to the next contract. It is far more direct to buy the physical, but the SEC has given no indication they are willing to allow that.”
In an interview with CNBC shortly after the Oct. 19 launch, SEC Chair Gary Gensler suggested why the agency had permitted only this indirect path to the crypto space: “What you have here is a product that’s been overseen for four years by a U.S. federal regulator, the CFTC, and that has been wrapped in something that is within our jurisdiction [i.e., the SEC] by the Investment Company Act of 1940, so we have some ability to bring it inside of investor protection.”