Now that the first Bitcoin ETF is finally trading after its launch Tuesday, we need to look at what kind of impact it will have on investors…

The ProShares Bitcoin Strategy Fund (BITO) had an illustrious debut, with $1 billion in trading volume on its first day. That made it the second-most heavily traded debut ETF in history. BITO closed its first day up nearly 5% and already has $1 billion in AUM (assets under management).

The arrival of the first Bitcoin ETF was a long time coming.

It’s been more than eight years since Tyler and Cameron Winklevoss filed the first proposal for a Bitcoin exchange-traded fund. Many more followed. Until now, the Securities and Exchange Commission (SEC) had denied all of them.

But over the summer, SEC Chair Gary Gensler started suggesting his agency would favor a Bitcoin ETF based on futures contracts. The rejected proposals had all been for a physically backed Bitcoin ETF that would hold Bitcoin itself, similar to how commodity-based ETFs like those for gold and silver must own the underlying commodity.

To be sure, a physically-backed Bitcoin ETF would have been better for Bitcoin investors. The structure would require the purchase of Bitcoin to match inflows from investors. The Bitcoin futures ETFs, being based on derivatives, won’t themselves increase demand.

But the SEC has said repeatedly that it believes Bitcoin-backed ETFs would be more vulnerable to market manipulation than those based on futures (I disagree, and you can find out why here). The SEC has said it doesn’t trust the 24/7 global trading of Bitcoin on mostly unregulated exchanges. It favors Bitcoin ETFs based on futures because futures are subject to regulation by the CFTC (Commodity Futures Trading Commission).

So the first Bitcoin ETF is futures-based. But it’s still good for Bitcoin. That the SEC would approve any Bitcoin ETF is tacit acceptance by a key regulator that cryptocurrencies are indeed a legitimate asset class.

Here’s a detailed look at the implications of this development…

The First Bitcoin ETF: What it Means

Let’s break this down in five categories.

What the ProShares Bitcoin ETF Means for Retail Investors: Dave Nadig, chief investment officer and director of research of ETF Trends, told Coindesk most of the demand for BITO shares is coming from retail investors. He said he wasn’t seeing the big block trades institutional investors typically use. In the absence of a Bitcoin-backed ETF, retail investors appear to be jumping on what they can get their hands on. Investing directly in Bitcoin via an exchange like Coinbase Global Inc. (COIN) is better – being based on futures, there will be times when the ProShares ETF price does not accurately track the Bitcoin price. But BITO is easier to buy as it’s available through just about any brokerage. And for many retail investors, that convenience will trump any other consideration.

What the ProShares Bitcoin ETF Means for Institutions: As noted above, institutions showed less initial enthusiasm for BITO than retail investors. That’s likely to change, since we know institutions have been increasing their exposure to Bitcoin. In particular, there’s a lot of “big money” in the Grayscale Bitcoin Trust (GBTC). That fund used a loophole to offer Bitcoin-based shares to accredited investors which now trade in the secondary market. As of Q4 2020, institutional investors accounted for 93% of GBTC’s capital inflows. Cathie Wood’s ARK Invest is GBTC’s largest shareholder. BITO is yet another way to get Bitcoin exposure, and I’m guessing institutions are keen for more alternatives. They may simply be biding their time on BITO – or are waiting for more options as the other planned Bitcoin futures ETFs launch.

What the ProShares Bitcoin ETF Means for Other Bitcoin ETFs: The flood has begun. When SEC Chair Gensler started hinting that he favored futures-based ETFs, fund managers got the message loud and clear. The SEC was quickly bombarded with proposals for Bitcoin futures ETFs. The ProShares ETF was just the first to be approved. Already, the SEC has approved a second Bitcoin futures ETF, this one from VanEck. It’s expected to start trading early next week. And an additional four Bitcoin futures ETFs are in the pipeline. Grayscale, meanwhile, has filed with the SEC to convert GBTC into a physically-backed Bitcoin ETF to “force the SEC’s hand.” That’s an uphill battle for sure, but if Grayscale succeeds we’ll see another wave of physically-backed Bitcoin ETFs. What’s more likely is that we’ll start seeing futures ETFs for other major cryptocurrencies, particularly Ethereum.

What the ProShares Bitcoin ETF Means for Bitcoin Prices: Bitcoin futures ETFs won’t themselves increase demand for Bitcoin, but it will have a positive psychological impact. The ETFs are clearly a step forward, and that feeds positive sentiment. Anticipation of the ProShares ETF added fuel to a rally that saw Bitcoin rise 126% from the lows of July 20th to an all-time high of $66,930 on Wednesday. Longer term, the SEC approval of multiple Bitcoin futures ETFs will be viewed as a vote of confidence in the asset class. That will encourage investors who had been on the sidelines to start putting capital into the crypto, increasing demand and helping push prices higher.

What the ProShares Bitcoin ETF Means for Other Cryptocurrencies: The prices of other cryptocurrencies, even the major ones like Ethereum, tend to follow Bitcoin’s lead. So if the new Bitcoin ETFs push Bitcoin higher, most cryptos will benefit from the halo effect. And as the ETFs draw more new investors into crypto, it’s likely at least some will branch out from Bitcoin and start dabbling in such coins as Ethereum, Cardano, and Polkadot.

What’s good news for Bitcoin is good news for crypto – and for you as an investor.

Take care,

David Zeiler

Advisory Board Member, Alternative Wealth Daily


Buying and holding stocks for decades is no longer the way to get rich. People are making millions off of cryptocurrencies, NFTs, collectables, precious metals, and other alternative investments. If you want to have the opportunity to make generational wealth and not wait 30…40…or 50 years for it to happen…now’s your chance. You can have moneymaking advice hit your inbox each week, for free, from the team at Alternative Wealth Daily.


Comments

3 responses to “5 Things to Know About the New Bitcoin Futures ETF”

  1. I don’t understand the crypto currency. Can I talk to someone to explain it to me, and tell me how to get started?

  2. great knowlege on the subject,thanks,I wish I had know the difference between LITO and COIN earlier I have some shares of both. When I came back in the afternoon my COIN dropped a lot oho well it’s life.

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