Bitcoin ETFs were longly anticipated products that were expected to bring the cryptocurrency market to a whole new level by allowing institutional investors optimal and legal exposure to the cryptocurrency market, but here’s why it’s not the best decision for investing in Bitcoin by using these products.
Difference between physical and futures-based ETF
While futures-based ETF can be called “Bitcoin ETF” it’s not 100% true in some sense. By buying Bitcoin from the exchange you receive Bitcoin to your wallet which you can then withdraw and use however you want which is not the case with futures-based ETF.
All currently available ETFs on the U.S. market are futures-based Bitcoin ETFs which means that by buying into them you are not receiving exposure to underlying assets, instead, you are exposed to Bitcoin futures that are not even close to being decentralized or tied to blockchain.
Bitcoin futures indeed track the price of the underlying assets, but they also have such problems as contango bleed, tracking issues, centralization, etc. Approved products indeed attract more investors to the cryptocurrency market but at the same time, they are not being the most optimal solution for investing in digital assets.
Issues with futures-based ETFs
First and foremost – contango bleed. Contango is the market condition in which the price of a futures contract exceeds the price of underlying assets. Private traders can just ignore that fact and avoid purchasing an asset with the premium, but foundations don’t have such a privilege.
After the end of each month or any given period futures contract gets expired and to maintain the ability to give exposure to the market for their clients, funds have no other choice but to purchase contracts with the premium which puts them into initial loss right after buying.
In a short term, a loss won’t seem significant and total at around 0.5% to 1% but annually, investors might face up to 20% shortage due to contango bleed. After buying derivatives that trade with a premium, traders should understand in advance that their position is already in loss from the start.
Physical Bitcoin ETF
The only solution for the abovementioned problems is the physical Bitcoin ETF which, unfortunately, won’t be approved by the Securities and Exchange Commission in the foreseeable future due to its inability to control and regulate the cryptocurrency market which works in a decentralized manner.
The commission approved futures-based Bitcoin ETFs since its underlying asset – CME Bitcoin futures are trading on the centralized, regulated exchange. By having the ability to regulate an exchange, the commission protects its citizens from market manipulation that is present on the digital assets markets and exchanges.