For everyday investors, new bitcoin ETFs might be more costly and complicated than purchasing the cryptocurrency directly
by CLAIRE BALLENTINE / Pic by BLOOMBERG
AFTER almost a decade of wrangling with regulators, the exchange traded fund (ETF) industry is nally on the cusp of getting a fund that tracks the price of bitcoin. But at this point, it may be easier and cheaper for the average investor to just buy bitcoin.
Since 2013, when crypto investors Cameron and Tyler Winklevoss first submitted a proposal, various issuers have tried to get permission for a bitcoin fund to join the now — US$6.8 trillion (RM28.22 trillion) ETF industry. At the time, buying bitcoin was complicated and somewhat technical, requiring a whole new vocabulary to learn and digital encryption keys to keep track of, and the risk of losing it all by accident.
US regulators had batted down various attempts to create the ETFs, citing the cryptocurrency’s volatility, as well as the potential for fraud and manipulation in the market.
But the push picked up steam this year, after the cryptocurrency became more deeply embedded in the mainstream financial system. In August, US Securities and Exchange Commission (SEC) chairman Gary Gensler signalled he would be more open to an ETF proposal that followed Bitcoin futures — rather than bitcoin itself — and was submitted through the same rules that mutual funds follow, which he says offer greater investor protection.
That ignited a flurry of new applications, including one co-branded with Cathie Wood’s Ark Investment Management. Asset manager ProShares indicated on its filing last Friday that one could start trading as early as Monday. Others from Invesco Ltd, Valkyrie Investments and VanEck Associates Corp could also debut shortly.
Now, the SEC is poised to approve the first bitcoin futures ETF, according to people familiar with the matter.
Bitcoin and bitcoin futures may sound almost identical, but there are key differences. Futures track bitcoin’s spot price indirectly through the use of contracts overseen by the Chicago Mercantile Exchange.
They also require investors to put down cash to trade, as a form of collateral. Traders often use futures to bet on price movements, such as shorting the price of bitcoin or to hedge other bets.
Still, the prices of bitcoin and its futures tend to trade in line. As of 9:32am on Saturday, bitcoin traded around US$60,836, compared to bitcoin futures at US$62,075 at last Friday’s close.
Whether you’re new to crypto or a tried-and-true investor, it’s hard not to be intrigued by such a buzzy new product. Here’s what to know if you’re considering making a purchase:
What’s the Case for Buying?
If you want bitcoin exposure in a traditional brokerage account. For customers at some older, larger brokerages, a bitcoin futures ETF might be the only choice for getting exposure to bitcoin. Many don’t offer the option of buying Bitcoin directly, forcing customers to turn to places like Robinhood Markets or Cash App. But it’s likely that the brokerages would have an easier time offering a way for their customers to buy an ETF rather than incorporating the cryptocurrency into their systems. “If I’m an investor and I have a Charles Schwab account or Fide
lity account, I may want all of my holdings under one roof,” said Nate Geraci, president of the ETF Store. “I may want tax reporting and performance reporting all in one place versus having that at another broker.”
If you’re crypto-crazed and want a slightly safer offering. To some investors, the SEC greenlighting such a product adds an additional layer of comfort. Maybe you’ve been dying to get into crypto or even have some holdings in a digital wallet but worry about the security — an ETF format that’s blessed by US regulators could give some peace of mind. “There’s an amount of trust and confidence people have in an SEC-regulated fund structure that trades like an equity,” said Eric Balchunas, ETF analyst for Bloomberg Intelligence.
If you don’t want to mess with digital wallets or keys. Unlike most of the crypto industry, ETFs have been around for decades, and many investors are already familiar with them. That’s a big plus when concepts like blockchain, encryption or mining can be perplexing.
If you don’t want to wait for an ETF that physically holds bitcoin. The biggest benefit of a bitcoin futures ETF might be that it’s actually happening. “My sense is the SEC wants to first evaluate how futures-based ETFs trade and function before considering spot bitcoin ETFs,” ETF Store’s Geraci
said. “Given how deliberate the SEC has been throughout this entire process, investors could be waiting a while for a physical bitcoin ETF.”
What are Reasons to Steer Clear?
If you’re trying to reduce costs. A bitcoin futures ETF may be more convenient in some regards, but it’s likely to charge a significant fee. Although the actual prices for the upcoming funds aren’t available yet, Bloomberg Intelligence estimates they’re likely to be more than 1% meaning $10 in annual fees for every US$1,000 you invest. The average active equity ETF charges 0.71%. “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,” Bloomberg Intelligence analysts Eric Balchunas and James Seyffart wrote in a note Friday. Compare that with an option like Robinhood that offers commission-free trading for cryptocurrencies.
If you’re new to bitcoin. These ETFs may not be best for those just embarking on their crypto journeys. The involvement in the futures market introduces complicated concepts like contango and backwardation. Luckily, the ETF provider will handle the trading around those, but it still may be more than the average investor wants to grapple with. Plus, retail-friendly platforms like Coinbase and even Venmo now offer both educational resources and smooth interfaces for first-time crypto investors. “Since bitcoin itself is very liquid, I think individual investors should stick with that when they first start trading,” said Matt Maley, chief market strategist for Miller Tabak + Co. “Leave the futures to the sophisticated institutional investor for now.”
If you want to see the range of offerings available. Four bitcoin futures ETFs may be trading by the end of the month, but there are likely many more to come. At least five additional ones are being reviewed by the SEC, according to Bloomberg Intelligence, including products from companies like Bitwise Asset Management and BlockFi Inc. These will probably have a range of different fee structures and the issuers may even cut their prices to attract cash. That competition could eventually help reduce costs throughout the crypto industry, said Matt Hougan, chief investment officer of Bitwise Asset Management. “An ETF will bring down costs to a much lower level,” he said. “They have in every asset class they’ve tackled, and bitcoin will be no different.”
If you’re wary of a brand-new product. Like anything fresh out of the gate, no one quite knows how bitcoin futures ETFs will trade. As with any ETF, there’s a chance that its price could deviate from that of its underlying holdings, due to a mismatch in supply and demand. In the short term, all the hype around a bitcoin ETF could lead to disappointment when trading begins. “It’s always good to see how any new asset trades before diving in,” Maley said. “Given the recent rally in bitcoin, we could get a ‘sell the news’ reaction for a little while when a bitcoin ETF launches.”
Sylvia Jablonski, CIO for Defiance ETFs, said that an ETF in itself doesn’t make your bet any safer. “Futures have some risk too,” she said. “There is a risk that you’re not really getting the best tracking of bitcoin.”
Maybe it’s best to give it some time, Geraci said. “I don’t anticipate any issues with bitcoin futures ETFs, but investors have waited since 2013 for these products to come to market,” he said. “What’s waiting a few more days to ensure everything is functioning properly?” — Bloomberg