Bitcoin exchange traded funds (or ETFs) have been making the news recently after the launch
of ProShares Bitcoin Strategy ETF, the first U.S. bitcoin futures ETF in October 2021.
Its launch saw one of the biggest first days on record for ETFs, raking in $550 million
of investment.
However is the rise of Bitcoin ETFs good or bad for investors?
In this video, we’ll consider their advantages and disadvantages compared to investing in
bitcoin directly.
Also will Bitcoin ETFs impact the price of Bitcoin positively or negatively?
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How do bitcoin ETFs work?
An ETF is an investment in a vehicle that is listed on a stock exchange which the tracks
the price of an underlying asset or a group of assets.
One of the most popular types of ETFs are ETFs that track a share price index.
A Bitcoin ETF is meant to track the price of bitcoin.
The way it does this depends on whether the ETF is a spot or futures ETF.
A spot Bitcoin ETF will actually go out and buy bitcoin on the blockchain and hold this
in cold storage.
Therefore its price should closely track the price of Bitcoin as aside from the management
fees charged it is holding the physical Bitcoin.
An example of a spot Bitcoin ETF is the Purpose Bitcoin ETF, listed on Canada's Toronto Stock
Exchange (TSX) with the ticker BTCC, which was the world’s first physically settled
Bitcoin ETF.
A futures Bitcoin ETF meanwhile is not actually holding any bitcoin.
It is holding futures contracts, a type of derivative instrument.
The ProShares Bitcoin Strategy ETF is an example of a futures Bitcoin ETF.
As it states on its website, the price and performance of bitcoin futures should be expected
to differ from the current “spot” price of bitcoin.
This is because a futures contract allows you to purchase Bitcoin at a future date at
a particular price which is not necessarily matched in timing and price to the underlying
Bitcoin at a particular time.
What’s more, there are additional costs involved in acquiring and rolling forward
derivative contracts.
Futures ETFs can also suffer from the issue of Contango.
Contango is a situation where the futures price of a commodity is higher than the spot
price.
This is because a futures contract can sometimes price in the expected future performance of
the underlying asset.
This means that investors can lose money when the futures contracts expire higher than the
spot price.
One of the key advantages of bitcoin ETFs is that they are more accessible than holding
actual cryptocurrency.
Institutions and pension vehicles in particular often have strict investment mandates that
do not include dealing directly in cryptocurrencies as they are legally distinct from shares and
ETFs.
This could allow you to gain exposure to Bitcoin when you otherwise couldn’t and may also
potentially have tax advantages depending on the structure you invest through.
ETFs might also be a better choice for people who aren’t prepared to put in the time to
research the best and most secure exchanges and ways to store their Bitcoin.
However that is probably where the benefits of bitcoin ETFs end.
As a retail investor, you could easily go on a cryptocurrency exchange and buy Bitcoin
just as you could buy a share in a Bitcoin ETF on a stock exchange, with lower fees and
greater control over your Bitcoin.
Often the price of the ETF may be higher than the value of the assets underlying it.
For example the Grayscale Bitcoin Trust was often trading at a premium to its underlying
net asset value.
Also as mentioned, a Bitcoin ETF will also not necessarily track the price of Bitcoin
as it isn’t the same as holding direct Bitcoin.
You would not only be exposed to the price of Bitcoin but also the risks associated with
the futures contracts themselves, poor management and supply and demand for the ETF stock itself.
If you’re keen on investing in a spot Bitcoin ETF, it should be noted that there aren’t
any approved spot ETFs around the world, including the US.
This means that you might also have to take foreign currency risk by investing on a non-local
stock exchange.
So are Bitcoin ETFs a good or bad thing for Bitcoin prices overall?
An increased interest in Bitcoin would seem like a good thing as it indicates growing
acceptance of Bitcoin in the financial community, thereby increasing demand.
Spot ETFs would need to go out to buy more and more Bitcoin to meet this demand, increasing
the price of Bitcoin due to its limited supply.
However Caitlin Long, a bitcoin and blockchain expert who is the founder and CEO of Avanti
Financial Group, has argued that the use of futures in Bitcoin ETFs might actually only
serve to reduce the price of Bitcoin.
The demand for exposure to Bitcoin that might have otherwise pushed up the price of on-chain
Bitcoin if those investors had bought Bitcoin directly is instead being soaked up by these
ETFs.
Therefore the jury’s still out as to whether Bitcoin ETFs will impact the price of Bitcoin
positively or negatively.
Let me know in the comments below whether you think Bitcoin ETFs are good or bad for Bitcoin.
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