Partnered With:

Why does the SEC prefer Bitcoin futures ETFs?

Read this article in 7 Minutes

Bitcoin futures ETF passed, can spot ETF far behind?

A Bitcoin ETF is about to launch. Here is what You need to know

By Tim Copeland

Babbitt

The first U.S. Bitcoin exchange traded fund (ETF) was launched on Tuesday, ending some six years of anticipation in the cryptocurrency community. Assuming all goes well, ProShares' ETF will begin trading on the NYSE Arca under the ticker symbol $BITO.

But it's not that simple. The ETF will focus on bitcoin futures rather than holding physical bitcoin, which is slightly different. And just because it's going online doesn't mean it's going to be available to everyone. Let's take a look at some of the main questions surrounding the large number of Bitcoin ETFs proposed in the US.

What is the difference between a futures ETF and a spot ETF?

With Gary Gensler at the helm, the SECURITIES and Exchange Commission appears to have decided to approve bitcoin futures ETFs -- as opposed to etFs based on spot trading. There are some key differences.

For a spot ETF, the value of the ETF will closely track the spot price of the underlying asset, which in the case of a Bitcoin ETF is the price of bitcoin. Futures funds, by contrast, can underperform or outperform spot prices - which can lead to a premium or discount. (In the short term, prices may vary, but in the long term they are usually similar.)

A futures-based ETF would involve the cost of rolling an expiring contract into one with a longer maturity. A spot-based ETF would not have that cost, but it would have to pay a custodian to manage bitcoin -- something that is relatively unique to the currency.

Both types of ETFs could help increase demand for bitcoin. For a spot ETF, bitcoin is bought as the underlying asset. With futures ETFs, traders typically hedge their positions by buying physical Bitcoins.

Why does the SEC prefer Bitcoin futures ETFs?

Much attention has been paid to the SEC's approval of future-based bitcoin funds and its aversion to physical Bitcoin ETFs. The idea behind it is that there is better investor protection around futures markets.

Being a futures-based ETF means it will be an actively managed fund. The companies launching the fund will trade bitcoin futures and the success of the fund will depend on their trading strategy.

Currently, the proposed Bitcoin futures ETF only includes long positions. That means the company behind the ETF can only hold long bitcoin positions, not any short positions. Other companies have tried to launch reverse Bitcoin futures ETFs, which are used for short positions, but have not received approval.

One important difference from the SEC's point of view appears to be that while spot bitcoin trading takes place at venues not regulated at the federal level, futures trading takes place on the CME, which is regulated by the CFTC.

About five bitcoin futures ETFs are poised to launch in the near term, with two likely to launch this week.

Will a spot Bitcoin ETF be approved?

That question rests with the SEC, and may depend on the success of the upcoming Bitcoin futures ETF. So far, the U.S. Securities and Exchange Commission hasn't indicated any positive signs that it will approve a bitcoin spot ETF.

Sui Chung, CHIEF executive of CF Benchmarks, which provides market data for CME Bitcoin futures and Proshares' forthcoming Bitcoin ETF, said the launch of a Bitcoin futures ETF might not harm the application of spot ETFs.

But on the other hand, he concedes, "If these futures ETFs go well and are sufficiently large to satisfy investor demand for Bitcoin through the ETF channel, then the SEC could argue that the demand has been met and we don't need to authorize spot ETFs."

How much demand is there for Bitcoin futures ETFs?

There are a lot of expectations for a Bitcoin ETF because -- as an ETF -- it could be used by many US citizens, especially in a tax-efficient way. One of the most common ways to invest in the US is to use a 401K, in which etFs can be included.

But it's not entirely that simple. Despite the launch of a Bitcoin ETF, Chung said it depends on whether large investment firms such as Charles Schwab and TD Ameritrade will offer ETF trading services to their clients.

"They will probably support it, but I would say it's not absolute, they may not offer ETFs to all their clients, they may only allow certain clients access to these products."

In addition, Chung noted that there is a lot of demand for bitcoin through ETF wrappers, which he expects to be met when the BITCOIN ETF goes live in the coming days. "After that, continued interest and continued inflows into bitcoin ETFs are hard to predict," he said.