- A Bitcoin Futures ETF tracks Bitcoin futures contracts and not the current price of the asset itself, while a Bitcoin ETF tracks the actual price of Bitcoin on the spot market.
- Unlike the cryptocurrency market which trades 24/7, the ETFs are old school and trade only when the market is open, the same as any listed stock.
Bitcoin is among the best-performing assets in history, with a market cap that has already touched $2 trillion. Whether it’s through direct trading, Bitcoin spot ETFs or futures ETFs, investors are being forced to calculate the risk of investing or not investing in Bitcoin and other cryptocurrencies.
The US is now home to two Bitcoin-based exchange-traded funds (ETFs) by ETFs investment firm Proshares and digital assets manager Valkyrie. VanEK has also been cleared to launch its Bitcoin futures ETF in Mid-October.
This SEC approval of Bitcoin Futures ETFs has increased investor options for exposure to cryptocurrency assets, particularly Bitcoin, and more ETFs are expected to follow soon to absorb the evidently high demand in the market.
We look at the differences between trading Bitcoin directly and buying into an ETF, to ascertain the pros and cons of each investment choice including risks and profitability prospects and for investors.
Trading Bitcoin vs Bitcoin Futures ETFs
A Bitcoin futures ETF is far from a spot Bitcoin ETF, such as those already approved in Canada and Brazil for Bitcoin and Ethereum. The main difference is that a Bitcoin Futures ETF tracks Bitcoin futures contracts and not the current price of the asset itself, while a Bitcoin ETF tracks the actual price of Bitcoin on the spot market.
The Winklevoss twins, owners of the Gemini Crypto exchange were the first to apply for a Bitcoin ETF in 2013. Many other investors also tried over the years, but the Securities and Exchange Commission (SEC) has remained adamant.
The first Bitcoin futures ETF, ProShare’s Bitcoin Strategy ETF (NYSE:BITO), traded over $200 million within 24 hours, reaching over $1 billion assets under management days after its debut on 19 October. The Fund tracks the Chicago Mercantile Exchange’s (CME) Bitcoin futures.
Amidst the attention, Bitcoin’s price skyrocketed, recording its newest all-time-high around $66,900 on 20 October. The second EFT by Digital assets manager Valkyrie launched on 22 October on the Nasqad exchange.
Bitcoin futures ETFs
Bitcoin futures ETFs provide Bitcoin exposure to investors who would otherwise avoid Bitcoin products for regulatory uncertainties or perceived technology difficulties. The SEC greenlight serves as an assurance that the market is regulated and legal to invest in while buying shares is more familiar than having to hold digital wallets or deal with the market volatility of owning Bitcoin directly.
ETFs are also cash-settled and they allow investors to trade Bitcoin under the same umbrella with other assets, which makes it easier to prepare performance and tax reports. Therefore, ETFs save investors the headache of learning about and managing their own cryptocurrency assets.
However, Bitcoin futures ETFs are generally associated with complexities. The Chief market analyst for AvaTrade Naeem Aslam advises the average investor to stay away from them. For instance, a futures market trades on margin rather than the actual product, meaning that Investors are speculating on a derived price movement. This causes the price of Bitcoin futures to differ from the actual price on the Bitcoin spot market.
On the plus side, the fact that the fund could trade at a premium on a bull market and a discount in a bear market is good news for investors looking for short-term gains.
Additionally, retail investors may fall trap to the added costs of investing in ETFs such as the contango trap that causes the futures contracts prices to be higher than spot prices.
Another valid quirk concerning ETFs in general is the limit that caps how many contracts can be offered by the fund in a month. Bloomberg reports show that CME’s futures contract limit of 2,000 for Proshare’s BITO ETF futures contracts reached 1,900 by October 21, while the November limit is past 1,400 shares. Beyond that, the ETF can only hold 5,000 more futures contracts for subsequent months.
Lastly, unlike the cryptocurrency market which trades 24/7, the ETFs are old school and trade only when the market is open, same as any listed stock.
On one hand, the launch of Bitcoin futures ETFs has been viewed as a win for the cryptocurrency market and a step further in the almost decade long fight towards approval of a Bitcoin ETF in the US.
At the same time, cryptocurrency users and other investors who are interested in direct trading have expressed hot opposition to the Bitcoin futures-based ETFs instead of a spot trading Bitcoin ETFs. Barry Silbert, former CEO of the world’s largest digital assets management firm Grayscale, went as far as criticizing ProShares and Valkyrie for what he termed as settling for the second best option from the SEC.
Direct Bitcoin trading
Learning how to navigate the cryptocurrency market is tasking, especially for new users. Most concepts in crypto trading and its other emerging markets such as DeFi are borrowed from the traditional market. However, users have to be familiar with blockchain technology and how to use various tools and resources to trade or take part in these ecosystems.
Smart personal finance management skills, (inclusive of mistakes) become crucial and once users get the hang of it, they usually tend to stick to these methods, which are entirely separate from the operations of the traditional market.
Consequently, buying, selling, managing and finding new investment opportunities becomes easier. At the same time, it accomplishes the goal of Bitcoin and decentralized technology, which aims to give people back the power to be in control of their finances.
In terms of exposure, and adding liquidity to the cryptocurrency market, ETFs play an important role. However, for investors, especially retail investors with long-term goals, it is highly recommended that they invest time to learn about cryptocurrency trading and ownership concepts. Once accomplished, this is a skill guaranteed to be very fulfilling and rewarding as it goes beyond finance and into digital ownership, through the rise of the Non-fungible tokens (NFTS) market.