While most Australians are sleeping tonight, the United States Securities and Exchange Commission (SEC) could greenlight the first US Bitcoin (CRYPTO: BTC) exchange traded fund (ETF).
As Bloomberg reports, people familiar with the matter, who wished to remain anonymous, said, “The regulator isn’t likely to block the products from starting to trade…”
And this could happen as early as Monday, US time.
To be clear, unlike Bitcoin ETFs already trading on Canada’s Toronto Stock Exchange and several European exchanges, the first US ETFs will be futures based.
Why a futures based US Bitcoin ETF?
Unlike direct Bitcoin ETFs intended to track the spot price, the futures ETFs aim to track the Bitcoin price via futures contracts supervised by the Chicago Mercantile Exchange. That, as we’ll look at below, means the ETF price may not always move directly in line with the real time price movements.
The SEC has previously ruled against authorising direct Bitcoin ETFs, with concerns ranging from the digital token’s notorious volatility, potential liquidity issues, and fears over fraud.
But, as Bloomberg notes:
The proposals by ProShares and Invesco Ltd. are based on futures contracts and were filed under mutual fund rules that SEC Chairman Gary Gensler has said provide “significant investor protections”.
ProShares looks set to be first out of the gate, potentially trading on US markets on Monday (overnight Aussie time).
ProShares and Invesco may also be joined on US exchanges by offerings from VanEck and Valkyrie. Meaning investors could have as many as 4 US-listed Bitcoin ETFs to choose from by the end of October.
Exposure with an element of trust
When it comes to whether to invest in Bitcoin ETFs versus buying the actual token itself, there are a number of factors to consider.
Among the positive factors for choosing the ETF, is trust. There have been many stories about investors losing their Bitcoin when crypto exchanges are hacked. Or others where investors forget their digital keys and lose access to their holdings forever.
According to Eric Balchunas, ETF analyst for Bloomberg Intelligence, “There’s an amount of trust and confidence people have in an SEC-regulated fund structure that trades like an equity.”
Then there are investors who are uncomfortable with some of the technological aspects of actually buying and selling Bitcoin. They may not understand what a digital wallet is, much less how one works.
Nate Geraci, president of the ETF Store, adds that an element of simplicity, particularly surrounding taxes, adds appeal to Bitcoin ETFs:
If I’m an investor and I have a Charles Schwab account or Fidelity account, I may want all of my holdings under one roof. I may want tax reporting and performance reporting all in one place versus having that at another broker.
Geraci did advise investors be patient, adding, “Maybe it’s best to give it some time. I don’t anticipate any issues with Bitcoin futures ETFs, but investors have waited since 2013 for these products to come to market. What’s waiting a few more days to ensure everything is functioning properly?”
The case against the futures based Bitcoin ETF
Having looked at the pros, here are some of the cons the experts are concerned about when it comes to the pending US Bitcoin ETFs.
While a 1% annual fund management fee may seem small, these costs do add up. Particularly over time, when that 1% per year is no longer compounding for year over time.
According to Bloomberg Intelligence analysts Eric Balchunas and James Seyffart, “Traders may use the new Bitcoin ETFs, but we expect their appeal to longer-term investors and advisers to be more muted because of the costs to roll futures.”
Then there’s the added complexity of trading futures, whether they be soy, crude oil, or cryptos.
“Since Bitcoin itself is very liquid, I think individual investors should stick with that when they first start trading. Leave the futures to the sophisticated institutional investor for now,” said Matt Maley, chief market strategist for Miller Tabak + Co.
Maley also echoed Geraci’s advice on patience, saying, “It’s always good to see how any new asset trades before diving in. Given the recent rally in Bitcoin, we could get a ‘sell the news’ reaction for a little while when a Bitcoin ETF launches.”
Finally, while the idea behind the ETF is that SEC regulation should make it less risky, Sylvia Jablonski, chief investment officer for Defiance ETFs, disagrees. “Futures have some risk too. There is a risk that you’re not really getting the best tracking of Bitcoin,” she said.
Proceed with caution – Bitcoin volatility snapshot
Whether it’s a Bitcoin ETF or actual Bitcoin, don’t lose sight of the often wild price moves of the token.
At time of writing Bitcoin is trading for US$61,389 (AU$82,958). That’s up 2% over the past 24 hours and up 12% over the past 7 days.
While those gains sound attractive, and they are, it’s worth having a look back at the highs and lows just over the past 6 months.
On 14 April Bitcoin reached its all-time high of US$64,863. At the time many punters expected the token to keep rising all the way to US$100,000…or beyond.
Instead, it went the other way.
By 20 July the Bitcoin price had tanked to US$29,807. A loss of 56% for any investors buying at the highs and selling at the lows.
So, what’s next for the Bitcoin price and Bitcoin ETFs?
Tune back in 6 months and I’ll let you know!