Bitcoin: Bitcoin futures highlight some pitfalls for new ETFs

Synopsis

The launch of the first bitcoin futures exchange traded fund (ETF) on Tuesday marks a major step toward legitimizing the cryptocurrency, but some ETF investors may face higher costs compared with buying the digital currency itself.

Traders typically roll over futures to switch from the short-term contract that is approaching expiration to another contract further out in months. This rollover entails a cost.

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The launch of the first bitcoin futures exchange traded fund (ETF) on Tuesday marks a major step toward legitimizing the cryptocurrency, but some ETF investors may face higher costs compared with buying the digital currency itself.

Barring any last-minute objection from the U.S. Securities and Exchange Commission, the ProShares Bitcoin Strategy ETF will begin trading on Tuesday. ProShares will be backed by the CME Group’s bitcoin futures instead of the actual virtual asset itself.

Its offering is expected to lead to more launches of futures-based ETFs in the coming days and weeks after years of regulatory roadblocks.
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Market participants overall lauded the ease and relative safety of owning an ETF instead of buying bitcoin from cryptocurrency exchanges and brokers. Investors won’t have to worry about custody and securing their digital wallets, although analysts said there are top-tier exchanges that offer these services to their customers as well. “There is no free lunch, however,” said Martha Reyes, head of research at digital asset prime brokerage and exchange BEQUANT.

“An ETF based on futures is not ideal as there is a cost to rolling into the futures contracts, given contango … translating into underperformance versus the underlying asset,” she said.

Traders typically roll over futures to switch from the short-term contract that is approaching expiration to another contract further out in months. This rollover entails a cost.

When futures are in so-called “contango,” a term more commonly heard in commodity markets than financial futures, prices are higher in longer-term contracts than on the front end. That means as contracts approach settlement day, the ETF will have to sell lower-priced futures and buy higher-priced ones, which will erode returns every time contracts roll off.

Source

Updated: 10/20/2021 — 00:00