Bitcoin flirted with $64,000 on Tuesday, with EUR 600,000 on a record high as excitement over its first exchange traded fund ETF and one very soon — reached a fever pitch.
As the largest cryptocurrency by market capitalization rallied over 4% on the day, the Proshares Bitcoin Strategy ETF BTC BITO launched on the New York Stock Exchange NYSE — the first cryptocurrency which was available to U.S. investors (NASDAQ:TSB) While some market participants have questioned the utility of the new product, it will offer people a new way to gain exposure to BTC via brokerage accounts.
However, they should be forewarned: the new Bitcoin ETF would not trade like the standard crypto market cryptocurrency that tends to fluctuate greatly. The Securities and Exchange Commission SEC approved the new ETF as derivative, meaning they are further based on the underlying BTC price. That makes them more expensive and complex to own than holding Bitcoin outright.
But Grayscale Investments and the New York Stock Exchange is moving to convert the world s biggest bitcoin fund into a spot-based ETF, capitalizing on market’s embrace of the new fund and a regulatory environment that appears to be shifting in favor of Bitcoin.
The daily correlation of BITO to spot Bitcoin is going to be almost perfect, Eric Balchunas, senior ETF analyst at Bloomberg, told Yahoo Finance Live, even when BITO will likely miss the price of Bitcoin by 5 to 10% over the course of a few years, he added.
According to Balchunas, advisors won't buy it, just says the analyst. Analysts have been clamoring for a fund based on retail prices that would better serve investors. However, the SEC chose to approve BITO first because they are governed by an 1980 s law act which gives investors a higher degree of protection and secondly because futures products are likely to be affected by market distortions.
Other Bitcoin ETF contenders — including Grayscale, which offers GBTC — remain confident that the spot-based ETF will pave the way for a futures model. However, near-term Balchunas remain bearish given that the SEC chairman Gary Gensler appears less interested in the spot ETF for Bitcoin because it falls under a 1933 securities provision which grants less investor protection.
Balchunas just doesn't like the 1933 Act, said Gary Gensler. If you forced me to pick the right date for that I would probably go with a year to eighteen months. What investors need to know about new investments and how to attract their best clients?
If you've never traded futures or owned a futures-based ETF, the key difference is that the returns of BTC futures contracts don t mirror the returns of Bitcoin Market Price for more than 36 hours.
Two key terms you could be acquainted with are - contango and backwards? The former is a condition where the futures price is above the expected future spot price, while the latter refers to the reverse the spot price is above the futures price Taken together it means investors will sometimes gain or lose value longer by owning the futures-based BTC ETF, even when Bitcoin won t fluctuate in the same way and should return to the same level.
But contango and backwardation also open another opportunity for a trade called cash and carry. The point is to profit from this price difference between BTC futures and the underlying bitcoin price, also called the futures premium?
Traders could employ the cash and carry strategy for years to come. But now that the launch of the futures ETF is expected to get much larger, the premium is expected to go much larger. Once it does, it will serve another way for U.S. funds and pro-traders to make profits off BTC futures.
Although some crypto investors believe that retail investors who aren t active futures traders probably aren't interested in cash and carry trades. However, they need to understand that an increasing premium in BTC futures means that significantly longer term, it will likely fluctuate on the additional factor of professionals commodity traders making more sophisticated plays on the product.
An all-time high interest on CME Futures at a open interest in open market.
Shiliang Tang, Chief Investment Officer at ledgerPrime, is nevertheless optimistic for how the futures-based crypto ETF might spur the price of Bitcoin over the near-term, with Wall Street investors piling into this new type of fund.
The Chicago Mercantile Exchange CME where the new fund is listed, is generally reflective of institutional capital, Tang told Yahoo Finance. He explained that the open interest on CME Bitcoin futures is a solid way to gauge the level of participation that E-Commerce and Institutional investors are showing in BTC Futures — at least in part to capitalize on the cash and carry trade.
Vaulting past the first all-time high of $3 billion, the open interest in Bitcoins and Blockchains (BTC Futures) on CME sits presently at $3.6 billion according to the crypto exchange bybit.
The aggregated open interest in Bitcoin futures across all major exchanges is now above $23 billion and climbing, not far from this year's all-time high $27.3 billion set just before Coinbase's initial public offering in April.
David Hollerith is a senior journalist covering commodities and stock markets.