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The Problem With Bitcoin Futures ETFs

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What You Need to Know

  • The two Bitcoin futures ETFs that launched last week are trading below their initial prices.
  • Yet more firms are filing ETF applications to trade Bitcoin futures, even though one would short the futures.
  • Investors will incur costs when rolling from front-month Bitcoin futures contracts to later months.

Filings for Bitcoin futures ETFs are proliferating following the launch of two such ETFs last week.

Valkyrie Investments, sponsor of the second Bitcoin futures to launch last week, on Tuesday filed for a leveraged Bitcoin futures ETF with the Securities and Exchange Commission. The ETF would deliver 1.25 times the reference price for Bitcoin.

The same day, Direxion, known for leveraged and inverse ETFs, filed for an ETF that would short Bitcoin futures, allowing investors to place a negative bet on the contract.

Also in the recent mix: a filing by VanEck to trade a Bitcoin futures ETF that would have lower fees (65 basis points) than the two Bitcoin futures that launched last week — the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF) — which charge 95 basis points. VanEck also has a pending application for an ETF based on actual Bitcoin.

Bitcoin futures filings are growing in number despite the recent drop in Bitcoin prices, which had rallied in anticipation of the Bitcoin futures ETF launches, and the decline in the prices of those ETFs, now trading below their initial launch prices even though the ProShares ETF amassed more than $1 billion in assets in its first two days.

Ben Johnson, director of global exchange-traded fund research at Morningstar, writes in a recent report that Bitcoin futures ETFs “are a bad deal for investors” and “a lousy option for long-term exposure to Bitcoin.”

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Bitcoin futures don’t invest directly in Bitcoin and at current prices will cost investors who want to stick with the investment.

Since Bitcoin futures contracts expire monthly and the forward months of the contracts cost more than the current month — a pattern that has prevailed for several years — those investors will lose money when they roll over from the front-month contract to a later month.

“The costs of regularly rolling into higher-priced contracts will compound over the long term,” Johnson writes.

Another complication of the new Bitcoin futures contact is the limit the CME has on the number of front-month futures contracts any one entity can own. The CME Group has announced it will increase that limit to from 2,000 to 4,000 contracts as the November contract moves into the front month.

But there remains the possibility that Bitcoin futures ETFs may have to stop issuing new shares in order to comply with CME limits. If that happened, the contracts “could come unmoored from the value of their assets,” Johnson writes. He concludes that Bitcoin futures are best left to professional traders.