The first Bitcoin futures ETF in the U.S. went live on the New York Stock
As ProShares’ Bitcoin futures ETF launches on the New York Stock Exchange, Crypto Briefing unpacks the differences between futures and physical ETFs.
How ETFs Are Regulated
The crypto industry has taken a major step toward mainstream adoption this week, with the first Bitcoin-based ETF launching in the U.S. ProShares’ Bitcoin futures ETF went live on the New York Stock Exchange Tuesday and several other funds are expected to receive approval for similar products later this month.
While crypto enthusiasts have welcomed the SEC’s decision to approve a Bitcoin futures ETF, many have questioned the agency’s reluctance to approve a Bitcoin spot ETF. The SEC has rejected dozens of applications since 2013, with no clear indication that it intends to change its stance. The clear difference between futures-based ETFs and physical ETFs may explain the decision.
One of the biggest differences between the two types of ETFs lies in the regulatory framework, as they both go through different pathways. Physical ETFs are ruled via the 1933 Securities Act process, which requires exchanges to file a Form 19b-4 to show that the underlying market is not subject to manipulation. In contrast, futures-based ETFs are ruled via the 1940 Investment Company act and therefore do not require the same form.
Cryptocurrency spot markets are largely unregulated, whereas regulations in futures markets offer some clarity for investors. In the case of ProShares’ Bitcoin futures contracts, it’s the Commodity Futures Trading Commission that has set the rules.
The CFTC’s presence as a federal regulator in the futures market may explain why the SEC has been open to ETFs like the one ProShares launched. On the other hand, while there is no federal regulatory regime for spot crypto markets, applications for spot Bitcoin ETFs have consistently been rejected.
Bitcoin Spot vs. Bitcoin Futures ETFs
A Bitcoin spot ETF would give many retail investors a way to gain direct exposure to the asset while removing the hassle and complexity associated with acquiring and storing it in a cryptocurrency wallet. According to BitwiseInvest CIO Matt Hougan, financial advisors control 40% of all assets in the U.S. Under the current regulations, they are not allowed to invest in cryptocurrencies on behalf of investors. As such, while many have celebrated the launch of the first Bitcoin futures ETF, a spot fund offering exposure to Bitcoin would arguably be a bigger catalyst for the institutionalization of the asset.
Futures-based ETFs differ in that they offer investors access to futures contracts rather than any asset. Futures contracts are legal agreements to buy or sell a commodity, asset, or security at a predetermined price at a specified time in the future. They offer a different risk profile to spot-based investing.
A futures-based ETF tracks futures contracts via the CME-listed futures markets as opposed to tracking the spot price of the underlying asset. Therefore, the price of the ProShares ETF will not be the same as the price of Bitcoin. In addition, with cash-settled futures, none of the underlying assets actually trade hands (i.e., there is no on-chain BTC activity).
CME Bitcoin futures are cash-settled and designed to track the CME CF Bitcoin Reference Rate (BRR), a price index based on the aggregated average trade price from several BTC exchanges, including Bitstamp,
Often traders will “roll over” futures contracts by selling those whose maturity dates are fast approaching and then buying others whose expirations are further out by a few months. This rollover incurs a cost, or what is more commonly known as “contango” (i.e., when the futures price of a commodity becomes higher than the anticipated spot price at the same point in the future).
A Bitcoin spot ETF would remove the costs and price tracking issues associated with futures contracts. It would also be a simpler product for the retail market. However, unless the SEC changes its position, the Bitcoin futures ETFs will be the closest alternative product available on the stock market.
The first Bitcoin futures ETF launch has sparked debate surrounding the potential impact on the crypto market, and how an ETF offering direct exposure to Bitcoin would change the landscape. Many believe that a spot Bitcoin ETF would be a bigger step for the industry. While that may be true, as Bitcoin futures ETFs help increase mainstream crypto exposure and demand for liquidity due to institutional futures trading, it’s hard to argue that they won’t be a net benefit to the industry.