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Thursday, December 7, 2023

Bitcoin Futures ETFs Could Disappoint Investors in the Long Run

The world of bitcoin investments received a shock with a critical approval from a US regulator, but one investment expert noted that investors need to pay more attention to the specifics.

Halfway through October the Securities and Exchange Commission (SEC) admitted the trading of a bitcoin futures exchange-traded fund, causing a ripple effect of acclaim and appreciation for cryptocurrency investments.

However, while a landmark moment for cryptocurrencies, one Canadian investment agency issued a note outlining a distinctive aspect of this approval that could affect investors in the long run.

The first bitcoin-related US-based ETF hit the market in October, opening the door to more investors curious to begin investing in the finicky cryptocurrency market, including the ETF class.

A listing application from ProShares and Invesco for a futures-based bitcoin ETF was approved by the SEC as a way to sidestep the strict regulations cryptocurrency investments have faced. Thanks to this decision, the ProShares Bitcoin Strategy ETF (ARCA:BITO) began trading.

Differences of futures ETFs for bitcoin investors

Nawan Butt, portfolio manager with Purpose Investments, said the framework by which the US approved bitcoin ETFs could leave a lot of investors exposed to less than optimal investment avenues in the exciting new market.

“What the futures based ETF is trying to do is provide the same but more likely a similar exposure to what crypto has to offer,” Butt said. “There’s a whole bunch of costs involved by saying, ‘Hey, I’ll buy something in the future, but save the price for me today.'”

Butt explained futures are a financial contract, they’re not a physical contract, to buy a certain security in the future for a predetermined price.

In a note to investors co-written by Michael Scott, investment analyst, and Josh Bubar, VP of product with Purpose Investments, it was emphasized investors should be prepared to do extra due diligence when evaluating flashy new bitcoin ETFs.

In the note, the financial experts outlined how a future ETF differs from the established ETF format:

In the case of bitcoin, purchasing future contracts gives instant exposure to a future purchase of bitcoin. These futures contracts are cash settled, meaning that the contract holder receives a cash settlement equal to what a bitcoin is worth as of the defined date.

The clash in investment ideas, according to Scott and Bubar, comes in the moment to cash in the future aspect of the currency:

The major issue with using futures contracts to provide long-term exposure to a commodity is that once the future date arrives, the fund needs to sell the existing futures contract to buy a new one, with a date further in the future; this is known as “rolling the futures.”

Turbulent path ahead for cryptocurrency ETFs in the US

Securities and Exchange Commission Chairman Gary Gensler has been vocal of his desire to protect investors and place additional security measures when it comes to cryptocurrency investing.

“There’s a lot of hype. There’s a lot of investors on one hand, reaching for yield, who are hoping to have a little bit better future, but these platforms right now, generally, have not come into either the (Commodity Futures Trading Commission)
or the SEC to be within an investor protection framework,” Gensler said, according to a report in The Wall Street Journal.

The decision by the SEC to accept a futures-based bitcoin ETF opened the door to more suitors to try their hand at launching funds.

ETF firm VanEck attempted to launch a physically backed bitcoin ETF instead of a futures-based one this week, but it was promptly denied by the US regulator.

The securities regulator is looking for funds protected from “fraud and manipulation” in the cryptocurrency space. “No listing exchange has satisfied its burden to make such demonstration,” the SEC said, according to a report from ETF Stream.

Jan Van Eck, CEO of the ETF firm, expressed his disappointment with the SEC’s decision. However, VanEck will move forward with a futures bitcoin ETF.

Futures ETFs have opened the door to more mainstream investors to get involved with cryptocurrencies today, but those may come with more risks associated.

Canada offers different landscape from US for bitcoin ETFs

As critics call for a change from the SEC, Canadian fund providers thank the vision of regulators in the country.

Butt told INN the investment landscape in Canada should be commended to the regulators who were able to stay “ahead of the curve” when it came to cryptocurrency funds.

The Canadian markets have seen an explosion of interest from ETF firms looking to set up cryptocurrency funds throughout 2021.

Among these is Purpose Investments, which launched its own cryptocurrency funds in October. In September, Evolve ETFs launched its third cryptocurrency fund of the year.

“The space is only just getting started,” Butt told INN. “We’re going to see a lot more innovation.”

Could the restrictions from the US landscape represent an untapped opportunity for Canadian or other international ETF providers with different guidelines who can offer non-futures cryptocurrency funds? Not likely.

Butt explained his firm is not allowed to go after business below the border. Instead, have a US dollar denominated series of their funds accessible on the Toronto Stock Exchange (TSX).

“We’re not going directly after US or international clients, but we’ve given them the carrot where we are making available the option that is the best … and they are sort of coming to us,” Butt said.

Investor takeaway

As the demand for cryptocurrency investments continues to increase, investment experts are keen on establishing their presence in the space and opening the door to new investors looking to get started.

The US offers a unique market set up at the moment as its regulators attempt to warm up and become more comfortable with cryptocurrencies.

Don’t forget to follow us @INN_Technology for real-time updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

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