Bitcoin Futures ETF: Ancient Farmers’ Custom Received SEC Approval for Crypto

As investors awaited SEC approval for a Bitcoin ETF during the crypto boom in 2021, they flocked to other options. The ProShares Bitcoin Strategy ETF (BITO) received $570 million in purchases when it debuted on October 19, 2021.

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It was the first ETF to offer exposure to cryptocurrencies in the US through Bitcoin futures. The timing was perfect as Bitcoin scaled above $60,000 that week.

BITO has no Bitcoin itself. As of September 23, 75% of the futures contracts had expired in September, while the remaining expired in October.

The Regulation Advantage of Bitcoin Futures ETFs

Futures started as agreements for price guarantees at a future point in time for farmers who needed to manage price fluctuations. Through futures, they could bet on future price points for agricultural products and livestock and hedge against future risk.

Futures contracts became a regulated way of trading future prices and hedging risk in the 19th century, when railroads enabled long-distance trade in farmers’ grain. As its use grew, in 1919 the Chicago Mercantile Exchange (CME) opened futures contracts to public trading.

BITO’s futures contracts are traded on the regulated CME. All trades go through CME’s clearing house, making the exchange an intermediary between buyers and sellers.

For the emerging asset class, BITO showed that authority approval has gained traction. Other futures ETFs have been quick to follow suit. VanEck Bitcoin Strategy Fund (XBTF), Valkyrie Bitcoin Strategy Fund (BTF) also provides exposure to the leading crypto.

Price action

BITO seeks to increase investors’ capital through managed Bitcoin futures contracts. The price of the futures contracts depends on the daily trading settlement and volume on the Chicago Mercantile Exchange.

Futures usually trade at a premium to spot prices. For BITO, the premium has been decreasing. This could be due to a growing Bitcoin futures market, which has seen volumes increase.

In the short term, however, investors should see if the premium falls below spot prices. A recent trend for the second leading crypto, Ethereum, bears that lesson.

After its launch, BITO’s price plummeted with Bitcoin’s fall. It is trading more than 70% below its opening price of 40 per share.

Furthermore, as the markets turned and Bitcoin dipped below $20,000, ProShares launched a futures ETF that held short positions in Bitcoin – the ProShares Short Bitcoin Strategy (BITI) – in June.

Trading the day after the launch reached $35 million. Today, its average daily dollar volume is around $25 million. By comparison, BITO’s average daily dollar volume is around $85 billion, although the ETF is trading near all-time lows.

The SEC has rejected ETFs that track the Bitcoin spot price, citing a need for investor protection. The SEC, which does not oversee crypto exchanges, in June blocked Grayscale Investments from converting Bitcoin Trust (GBTC) into an ETF.

For investors, futures ETFs address crypto’s regulatory risk, providing the standard features of futures contracts: transparency, liquidity and guaranteed execution. Nevertheless, the imminent risk of the premiums falling below the spot prices is something to watch out for.

While an ETF that tracks Bitcoin prices still seems a long way off, Bitcoin futures ETFs have likely found their niche as a way to provide managed exposure to Bitcoin.

Follow Vidya Ramakrishnan on Twitter @VidyaRamakrishnan

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