What are the drawbacks for buyers of owning a bitcoin futures ETF?
Last month, the first U.S. exchange traded fund tied to the value of bitcoin made history as the most successful ETF push, quickly amassing more than $1 billion in assets.
Valkyrie Investments’ fund ranked second in the market, following the ProShares Bitcoin Strategy ETF. More bitcoin futures ETFs are planned for the future.
U.S. investors may be excited about a new opportunity to catch up with the markets in Europe and North America, where there are dozens of spot-tracking tools and futures options on bitcoin and a number of other cryptocurrencies that have amassed tens of billions of dollars in assets.
But the new launches in the U.S. have one distinctive feature: they are not tied to the outright price of bitcoin, but are based on its future price (this is called bitcoin “futures” ETF). According to a study by crypto analytics firm Glassnode, the volume of uncovered bitcoin futures contracts on the Chicago Exchange rose from $1.5 billion to a record $5 billion a month earlier.
Why does this matter?
Futures are contracts for the value of bitcoin several months in advance. They can diverge from the spot price of bitcoin on other cryptocurrency exchanges.
This is partly because CME Group bitcoin futures prices are based on composites of prices on five cryptocurrency exchanges.
Among other things, a futures ETF may not keep up with the value of the underlying asset it is supposed to monitor. Futures-based contracts expire on a specific date, which will need to be rolled over to newer versions. Operating costs and management fees for the new contracts are covered by the futures fund.
According to Refinitiv, the United States Oil Fund futures ETF has outperformed WTI crude by 70% in value over the past 10 years.
Index delivery company Solactive estimates that the futures have earned about 13 percent less than BTC, which has risen 120 percentage points this year.
“Investors in futures-based ETFs will be exposed to additional risks of volatility and tracking divergence between bitcoin and futures prices,” said Alastair Sewell, senior director at Fitch Ratings.
Would a bitcoin futures ETF be successful?
In a sense, yes. ETFs are designed to accurately track the price of bitcoin, so the most in-demand futures are the contract that will end closer to the current momentum and the contract that is called the first month or spot. That’s why ProShares holds all 3,900 futures in the November contract
However, CME Group has imposed limits on the number of contracts one party can buy to prevent one company from taking over the market. This could create problems for bitcoin futures because the market is relatively small.
If a company exceeds the limit of 4,000 contracts per party, it will have to buy longer term futures contracts for which there are no limits.
However, the CME Group sets limits on the number of contracts one company can buy, in order to prevent one company from becoming a monopoly. This could cause problems with bitcoin futures, as the market is quite small.
If a company exceeds the limit of 4,000 contracts per person, it would have to buy longer term futures, for which there are no limits.
This comes with some costs. If the value of bitcoin rises in the long run, then the price of longer term futures will be higher than the price of short term contracts. This is called a contango, which incurs higher costs for the fund when the futures contract is carried over to the next month, effectively selling a low price and buying a high one.
