Bitcoin futures ETF finally arrives on the NYSE: Here’s what it is and how it works

18 Oct Bitcoin futures ETF finally arrives on the NYSE: Here’s what it is and how it works

Want to trade bitcoin? Now there’s an ETF, or exchange-traded fund, for that. Tuesday morning, one of the leading providers of ETFs—ProShares—will launch a new fund on the New York Stock Exchange linked to bitcoin futures. That sounds exciting, but perhaps also confusing. Here’s a quick primer on what you should know.

This is a big industry first

This ends a nearly decadelong push to get crypto onto a legitimate exchange. The push for an ETF specifically began in 2013, and in the eight years since, anxious traders have watched the the Securities and Exchange Commission reject numerous applications.

“2021 will be remembered for this milestone,” says ProShares CEO Michael Sapir. For investors still on the fence about dabbling in the unregulated cryptocurrency market, he adds that his company is giving them “convenient access to Bitcoin in a wrapper that has market integrity.”

So people can finally trade bitcoin on a regulated exchange?

Actually, no—not yet. In fact, this safeguard is probably one reason why the SEC didn’t reject the fund’s application and, according to ProShares, also one of its selling points: It gives investors exposure to bitcoin without them having to hold the cryptocurrency directly.

Experts had suggested that the SEC might allow bitcoin trading if it were arranged this way, based on futures (bets on price fluctuations, versus the actual crypto itself) and safely tucked into a regulated exchange. Ironically, the SEC has not officially announced ProShares’s ETF, but the New York Times reports its prospectus “met with no opposition ahead of its effective deadline,” meaning the fund is ready to launch tomorrow on the NYSE, under the ticker symbol “BITO.”

Are there risks associated with trading bitcoin futures?

Some crypto backers, who want the ability to trade bitcoin directly, certainly believe so. They say this will ultimately create extra costs borne by the end user—costs that would have been mitigated by using the cash market, the opposite of the futures market. Futures are derivatives designed to give investors exposure to a commodity without owning it outright. But their contracts expire each month, meaning they must be repurchased, upping the costs to administer the fund that are generally passed on to the end user.

Because a futures-based ETF tracks futures contracts, as opposed to the current price of an asset, the price of the ProShares ETF won’t match the price of bitcoin. (ProShares had to peg the futures price to a listed exchange price exchange, and it picked the Chicago Mercantile Exchange’s.) Some experts warn that difference could cause ProShares’ fund to trade at a premium in a bull market, and at a discount in a bear market. This might make the ETF better as a short-term investment than for one the investor intends to ride for the long haul.

What is this doing to the price of bitcoin?

Bitcoin’s price surged to more than $60,000 on the news. In the coming months, it’s expected more traditional finance firms will follow in ProShares’ footsteps and offer their own futures-based crypto ETFs—fund providers like Valkyrie Investments, VanEck, and Invesco already have their own versions awaiting the SEC’s green light.

What else is there to know?

According to a fact sheet from ProShares, the fund’s inception date is Monday. Price information as of October 15 was $40 a share.

Source: Fast Company