The long wait for Bitcoin futures exchange-traded fund (ETF) in the U.S. is finally over as the cryptocurrency officially hit the New York Stock Exchange (NYSE) during the week with the launch of the new Bitcoin-linked futures ETF. The ProShares Bitcoin Strategy ETF (NYSE: BITO) started trading on the exchange with increased participation from the Wall Street investors.
BITO touched $1 billion in trading volumes on the first day of trading. The ETF started trading on October 19, at a price of $40 a share and posted a rise of 4.85 per cent before closing on the first day with gains of 2.59 per cent, at $41.94. At the end of Day 1 of trading, the ETF surpassed the $1 billion in volumes and became the second most traded ETF on its first day. The number one position is held by the BlackRock U.S. Carbon Transition Readiness ETF with $1.16 billion in trading volumes on its first day.
What are Bitcoin Futures?
Bitcoins and Bitcoin futures are two different assets. In the futures contract, as in the case of BITO, an investor will agree to buy or sell the asset in the future at some specified price (similar to other stock futures contracts). Futures contracts here are derivatives of Bitcoins and are not directly backed by actual Bitcoins. Investors are not directly buying and selling the underlying asset (Bitcoin in this case).
How does this ETF work?
BITO lets investors buy into bitcoins through the futures contract (F&O segment) without actually buying it on a crypto exchange. The underlying driver behind the value of the shares in this fund is Bitcoins. This works like other futures contracts such as commodities’ ETFs or the gold futures ETFs where the investors do not actually buy physical gold or gold bars.
How does a Bitcoin ETF impact the price of Bitcoins?
Bitcoin price surged to a record high of more than $60,000 on the news and touched a high of $66,974, crossing the previous high of $64,889 set in April. As of October 25, Bitcoin was still trading at over $61,000. Since this ETF is a future-based ETF that tracks futures contracts as opposed to the current price of the asset, the price of the ProShares ETF won’t be the same as the price of the Bitcoin. ProShares had to peg the future price to a listed exchange price and has picked the Chicago Mercantile Exchange (CME) as the benchmark. This may lead to a situation where the ProShares’ fund is likely to trade at a premium in a bull market and at a discount in a bear market, which might make the ETF a good short-term investment than for an investor who is looking at long-term investments.
What are the costs involved?
BITO has an expense ratio of 0.95 per cent which looks quite high at the moment. In other words, if an investor invested $10,000 in this fund, $95 will go towards the funds’ operating expenses. The ideal low-cost index funds have an expense ratio of around 0.30 per cent. Since this is a new asset class, there may be many middlemen and the price of the futures ETF is likely to be high until more competition brings down the fees and expenses of the ETF. It also seems that in the coming months, it’s likely that more firms will follow in ProShares’ footsteps and offer their own futures-based crypto ETFs. Fund houses like Valkyrie Investments, VanEck and Invesco are awaiting the SEC’s green signal.
Market Hours
BITO will be trading at regular market hours like any other stock, unlike Bitcoin which can be bought, sold or traded at any time. Investors can place orders for BITO during off-market hours, however, the orders will be executed during the market hours only unlike Bitcoins.
Regulation
Bitcoin-linked ETF comes with protection in line with other conventional investments. Brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). This insurance covers accounts up to $500,000 in cash and securities if a brokerage is closed due to bankruptcy or other financial difficulties and if customers’ assets are missing from accounts.
So, should you buy a Bitcoin-linked ETF?
Bitcoin is still very new compared to conventional stock market investing, which means it lacks the historical track record which investors can use to anticipate future performance. While there may be a difference in the price of Bitcoin and the price of BITO, Bitcoin is highly volatile and the ETF is also likely to see volatility. Bitcoin prices saw an all-time high of over $60,000 in April before losing half of their value and trading below $30,000 and have now returned back to $60,000 levels once again. Investors can expose 5-10 per cent of their portfolios in buying cryptos or investing in crypto-linked ETFs like BITO. Also, investors should remember that investments in any speculative investment should never be at the expense of other financial goals like paying off high-interest debt or saving for retirement since these are high-risk-high-return assets in the portfolios.
Investors can invest in Bitcoin ETF through their regular brokerage account. This ETF allows an access to many investors who were looking to invest in Bitcoins and other cryptos but did not know how to begin with. BITO is safe for investors to gain access to the crypto world as it is regulated by the SEC, making it the first regulated cryptocurrency investment vehicle in the U.S. to go mainstream. ETFs allow investors to diversify their portfolios without having to own the assets themselves.
The author is Co-founder and Co-CEO of Stockal.
DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.