Barring any last-minute objection from the U.S. Securities and Exchange Commission, the ProShares Bitcoin Strategy ETF will begin trading on Tuesday. ProShares will be supported by the CME Group's virtual currency bitcoin futures instead of the actual asset itself.
Its offering is expected to lead to more launches of futures based ETFs in the coming days and weeks after years of regulatory roadblocks.
Market participants lauded the ease and relative security of owning an ETF instead of buying bitcoin from crypto exchanges and brokers. Investors won't have to worry about custody and securing their digital wallets, although analysts said there are top-tier exchange companies that offer these services to their customers as well.
However, there is no free lunch, noted Martha Reyes, head of research at digital asset prime brokerage and exchange BEQUANT.
An ETF based on futures is not ideal as there is a cost to rolling into the future contracts, given contango translating into underperformance versus the underlying asset, she said.
The traders typically roll over futures to switch from the short-term contract that is approaching expiration to another contract further out in months. When futures are in so-called contango, a term more commonly used in commodity markets than finance futures, prices are higher in longer-term contracts than at the front end. That means that as contracts approach settlement day, the ETF will have to sell higher-priced futures and buy lower-priced ones, which will erode returns every time contracts roll off.
One problem is being solved, but at a cost to the investor in poorer overall return when compared to some of the ETPs exchange traded products in Germany, said Bradley Duke, chief executive officer of ETC Group, the largest provider of ETPs in Europe.
ETPs in the EU that are 100% backed with underlying bitcoin track the latter's spot price more consistently, Duke added.
A futures-based ETF price will not necessarily match the current price of the underlying asset. In most cases, digital ETFs based on commodity assets such as gold tend to underperform physical ETFs, said Mikkel Morch, executive director of crypto and cryptocurrency funds ARK 36.
In addition to the risk of a futures trading derivative ETF investing beats bitcoin, it also comes with the cost of the futures roll-over, some analysts said.
All the same, analysts believe investors will still buy an ETF using the futures mechanism despite the higher cost.
Bitcoin futures operate within commodity exchange rules. Mutual funds and ETFs are regulated under the investment company regulations, said Karan Sood, CEO and managing director of CBOE Vest, an asset management partner of the derivatives exchange Cboe Global Markets.
Both these regulations create strong shareholder protections. There is a rich history of strong enforcement of such regulations, which creates a high level of financial stability and integrity. At a Financial Times conference a few weeks ago, Gary Gensler reiterated his support for Bitcoin ETFs that would invest in futures contracts instead of the digital currency itself.
As a proponent of bitcoin futures, they are subject to other specific requirements and margin conditions as well as other limits that may prohibit the ETF from generating returns after ProShares prospectus. It’s an investment which is fraught with risk especially when the ETF price declines.
Among fund managers who have applied to launch Bitcoin ETFs in the United States are the VanEck Bitcoin Trust, ProShares, Invesco, Valkyrie and Galaxy Digital Funds.
On Monday Invesco said it was not planning to launch a bitcoin futures ETF in the immediate near-term.
The Nasdaq Valkyrie Bitcoin Strategy ETF was approved on Friday, while Grayscale, the world's largest digital currency manager, plans to convert its flagship product, the Grayscale Bitcoin Trust into a spot bitcoin ETF, CNBC reported on Sunday.
Despite a low of Bitcoins late on Monday, the pair hovered near a six-month high. The world's largest cryptocurrency last registered the number $62,104, not far from its all-time peak of $64,895 in April.