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Bitcoin futures ETFs will face the problems investors have been facing in the commodity market for 15 years.
Original title: ” Bloomberg View: ProShares’ Bitcoin ETF has some potential risks “
Written by: Jared Dillian
Compilation: Katie Gu
With much anticipation, ProShares’ Bitcoin strategy ETF will begin trading on Tuesday, US time.
The first thing to be clear is that this is not a fund backed by Bitcoin (spot), but by futures linked to Bitcoin. Compared to entering the market rashly, it is important to understand the difference between the two first.
Looking back at the traditional fund market, most mutual funds and ETFs based on commodities are backed by futures, but they do not actually store spot, such as oil. And most of the trading activities and liquidity of almost all commodities often occur in the futures market, rather than the spot market. The United States Oil Fund LP is a typical example of a commodity fund backed by futures. The fund went into a scandal in 2020 when it violated its prospectus, and in order to prevent the fund from going bankrupt when oil prices fell, negative quotes appeared. At the very least, this case illustrates that futures ETFs may have some “weird” unexpected risks.
But the main reason people oppose futures-based ETFs is actually the cost of arbitrage. When the futures price is at a premium, or when the price of the deferred delivery month contract is higher than the price of the near-month contract, the cost of transferring the futures contract from one month to the next is very high, and this part of the cost will be passed on to investors. For many years, this has been one of the reasons why people complain about commodity futures ETFs.
Although commodity futures are often traded at a futures premium, they can also be traded at a spot premium, that is, the monthly contract for deferred delivery is lower than the previous month’s contract. In this case, the investor gets a positive roll yield (positive roll yield). At present, many commodity futures transactions are at a spot premium, while Bitcoin is at a futures premium. Of course, Bitcoin may also have a spot premium someday.
A gold ETF is an example of holding gold spot rather than futures, because the storage and accounting of physical gold (compared to oil) is relatively simple.
So, why can’t Bitcoin ETFs hold real Bitcoins? The main objection of the US Securities and Exchange Commission (SEC) to physical bitcoin funds is that the underlying market is not regulated. The gold market is not regulated, and we have physical gold ETFs. What is the reason? Bitcoin researchers are trying to figure this out.
In my opinion, physical Bitcoin ETFs should be allowed. As early as 2013, when the trading price of Bitcoin was less than US$1,000 (currently about US$62,000), the founders of the cryptocurrency exchange Gemini, The Winkelvoss brothers, first applied for Bitcoin. The currency fund, if approved, may now be the largest and most liquid ETF in existence, and will provide a generation of investors with strong returns. This was the failure of supervision at that time. But at the time, Bitcoin’s technology was still relatively primitive, and cyber attacks continued to occur. The market sentiment at that time believed that Bitcoin was dangerous and insecure. But at present it has matured a lot.
From 2019 to 2021, I invested in physical Bitcoin through the Coinbase exchange, and I have never been satisfied with this investment. Because Coinbase will experience downtime, customer service is not to my taste, and people keep hearing that cryptocurrency is lost or some accounts are locked. If a Bitcoin ETF exists, I will buy it. Because it is in a brokerage account, at the end of the year you will get official tax documents to help you file your taxes, instead of letting you get a mess of transaction records.
I think the emergence of Bitcoin spot ETFs is possible one day, but at least it will not appear until the crypto market has a regulatory framework, which may take several years. I don’t necessarily think that the Bitcoin futures ETF is getting worse and worse for investors. It just faces the problem that investors have been facing in the commodity market for 15 years: the Bitcoin futures market is regulated, while the Bitcoin spot market is No (at least the lack of a comprehensive regulatory system).
For ETF issuers, the bigger business (competitive) problem is that there are dozens of cryptocurrency funds waiting for approval. Like most commodities in the ETF field, this will be a gold rush. Becoming the first is very important. It is very important to have the lowest fees and good marketing. An interesting game is about to start.
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