What the First Bitcoin Futures ETF Means for Advisors

The debut Monday of ProShares’ Bitcoin futures ETF known as the ProShares Bitcoin Strategy ETF (BITO) is a milestone that paves the way for more ETFs based on Bitcoin futures to come to market, but not ETFs that hold actual Bitcoin, according to analysts.

“Odds are that many of the Bitcoin Futures ETFs that are in the hopper now will amend their prospectuses to mirror BITO’s futures-only approach and also list,” says Ben Johnson, director of global exchange-traded fund research for Morningstar. “I don’t think the SEC is in any hurry to give a green light to an ETF that invests directly in Bitcoin.”

BITO is also expected to provide financial advisors and their clients an investment that tracks the price of Bitcoin more closely than do Bitcoin trusts, which invest in actual Bitcoin and trade over the counter.

The very popular Grayscale Bitcoin Trust (GBTC) is currently trading at an 18% discount to its net asset value, which is the value of its assets minus liabilities, while the Osprey Bitcoin Trust (OBTC) is priced at a 22% discount to NAV. Both have been known for prices that swing between premiums and discounts to NAV, which add to the volatility of investment in an already volatile market.

“Futures-based Bitcoin ETFs offer a competing option to Grayscale Bitcoin Trust, which currently has nearly $40 billion but can suffer from significant premiums and discounts,” noted Nathan Geraci, president of the ETF Store, an RIA that invests only in ETFs. “Advisors will have to weigh the potential costs of futures-based Bitcoin ETFs, including negative roll costs, with the potential portfolio benefits.”

Negative roll costs are incurred when investors roll from one expiring futures contract into a later month and the later contract costs more than the current contract, which is the case for Bitcoin futures currently.

‘Not a Placeholder’

The ProShares Bitcoin futures ETF follows the same investment strategy as the Bitcoin Strategy ProFund (BTCFX), a mutual fund launched by ProShares affiliate ProFunds on July 28, said Simeon Hyman, global investment strategist at ProShares. The mutual fund has just under $15 million in assets compared with $40 billion in the Grayscale Bitcoin Trust or $174 million in the Osprey Bitcoin Trust, but it more closely tracks the value of Bitcoin than they do.

Since its inception on July 28, BTCFX is up over 50%, like Bitcoin, while GBTC has gained 35% and OBTC hardly anything at all.

“We believe Bitcoin futures are perhaps the best place for price discovery,” said Hyman, noting there is “400% more volume in CME Bitcoin futures than in Bitcoin spot trading at Coinbase … “This is not a second-class solution but a real robust one … Bitcoin futures is a first call solution, not a placeholder.”

In early trading on Tuesday, the ProShares Bitcoin futures ETF was up 3% with over 500 million shares trading before retreating to about 2% higher. It is the biggest ETF launch so far this year, surpassing the debut of BUZZ in opening-day volume, according to Eric Balchunas, Bloomberg’s senior ETF analyst.

The ETF provides diversification benefits for investors because Bitcoin is uncorrelated with traditional asset classes and does not file K-1 tax reports like many commodity ETFs, which can be a headache for investors and advisors.

“Advisors can easily slot this into a regular client’s account for a key diversification benefit,” said  Hyman.

Asked whether ProShares has any plans for an ETF that invests directly in Bitcoin, Hyman said the firm is watching the maturity and evolution of the spot market and the evolution of the regulatory environment, and if the opportunity to bring other solutions to the crypto market arises, “we will take it.”

More Bitcoin Futures ETFs Are Coming

In the meantime, analysts expect more Bitcoin futures ETFs will be coming to market this year.

“There are nine Bitcoin futures-based ETFs being reviewed by the SEC, all with the potential launch dates during the fourth quarter of 2021,” said Todd Rosenbluth, head of ETF & Mutual Fund Research at CFRA.

On Monday, however, Invesco withdrew its application for a Bitcoin futures ETF, though it noted it will continue to pursue a Bitcoin ETF in partnership with Galaxy Digital, according to Bloomberg.

That leaves VanEck, Bitwise, Valkyrie and Ark Invest, which is lending its name to an ETF sponsored and managed by other firms, among the asset managers that could possibly launch a Bitcoin futures ETF in the coming months.  These ETFs would not only compete with Grayscale and Osprey Bitcoin trusts but with thematic ETFs that invest in blockchain companies or companies that invest in Bitcoin, according to Rosenbluth.

“We think the supply of Bitcoin futures-based ETFs could lead to outflows for BLOK [the Amplify transformational Data Sharing ETF] and thematic peers even as those funds’ net asset values climb as Bitcoin edges higher,” Rosenbluth said.

The SEC will closely monitor all Bitcoin futures market once they come to market to “evaluate how they interact with the underlying futures market,” Geraci said.

No Bitcoin ETF Anytime Soon

Ken Joseph, Head of Americas Compliance and Regulatory Consulting at Kroll and a former attorney in the SEC’s enforcement and examination divisions, said the SEC is comfortable with a Bitcoin futures ETF because it will operate within an “an established regulatory scheme on a regulated market.” That is not the case for an ETF that invests directly in Bitcoin, according to Joseph.

“I don’t see the commission moving to approve a Bitcoin-based ETF anytime soon,” he said. “The commission is really struggling to accommodate innovation along with its investor protection, antifraud and anti-manipulation concerns.”

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