Bitcoin is up about 36% so far in October and more than 100% year-to-date. It hit an all-time-high on Oct. 20. But since then, the digital asset has lost about 8%. It is now hovering around $59,000.
The run-up in price in October was triggered by the launch of two exchange traded funds (ETFs) that now enable investors to participate in the moves in Bitcoin futures. These funds are not physically backed ETFs, meaning the funds don't hold the actual digital tokens. Rather, they provide exposure to price moves in Bitcoin futures contracts. To date, futures-based Bitcoin ETFs have been the only ones to get approval from the U.S. Securities and Exchange Commission (SEC).
For readers interested in cryptocurrency, especially Bitcoin, today we're introducing these funds. We recently covered the ARK Next Generation Internet ETF (NYSE:ARKW), a fund that holds the the Grayscale Bitcoin Trust (OTC:GBTC).
1. ProShares Bitcoin Strategy ETF
- Current Price: $38.09
- Expense Ratio: 0.95% per year
The ProShares Bitcoin Strategy ETF (NYSE:BITO) started trading on Oct. 19 at an opening price of $40.88. The next day, it hit an intraday record high of $43.95.
Then, Oct. 22 brought an intraday low of $38.90. Now, BITO is hovering around $40, having lost about 2% since inception. This is all to say, the fund’s short-term volatility is high.
BITO is the first Bitcoin-linked fund to be listed in the U.S. However, as we have already noted, it does not directly invest in Bitcoin. And as we have previously discussed in various exchange-traded products that give access to the futures of a commodity, the performance of Bitcoin futures will not exactly follow the spot price of Bitcoin.
Such futures funds have to roll the forward contracts regularly, usually monthly. And futures markets typically trade “in contango,” where the futures price of a given asset is higher than the spot price. This difference creates a contango risk. This rolling cost mostly holds true for Bitcoin futures, too.
As a result of contango, the futures price does not fully mimic the spot price, and ETFs that are based on futures can easily lose between 5%-8% (possibly even more) in a year due to rolling. In other words, the futures curve comes with a hefty performance tag on top of the current high annual expense ratio of 0.95%.
Therefore, as an asset class, ETFs based on Bitcoin futures may not be appropriate for everyone. Moreover, prices of both Bitcoin and Bitcoin futures are highly volatile, especially in the short run.
Nonetheless, the ETF wrapper makes Bitcoin a lot more accessible to long-term investors as they can now invest in the asset class through their regular brokerage accounts in a convenient and transparent way. However, investors need to appreciate the risks that come with investing both in cryptocurrencies and futures markets.
2. Valkyrie Bitcoin Strategy ETF
- Current Price: $23.47
- Expense Ratio: 0.95% per year
The Valkyrie Bitcoin Strategy ETF (NASDAQ:BTF) started trading on Oct. 22 at an opening price of $25.50, which has been the record high so far. It currently hovers at $23.50, down more than 7.5%.
BTF also invests primarily in Bitcoin futures contracts, tracking the value of Chicago Mercantile Exchange Bitcoin futures. The futures contracts held by the ETF are cash delivered.
Like BITO, BTF has also come under pressure in its early days of trading as Bitcoin holders have been selling the news of the launch of these two funds. Yet, despite the short-term choppiness, BTF is also likely to attract the attention of many retail investors.
Bottom Line
October has so far witnessed two Bitcoin-related ETFs debut both on the New York Stock Exchange and the NASDAQ to significant fanfare. As a result, Bitcoin has reached all-time highs during the month, and the rising tide has also meant new highs for many altcoins.
For instance, Ethereum, the second-largest crypto in terms of market cap, is also up about 35% month-to-date. Now, Wall Street is wondering whether an Ethereum-linked ETF could also join BITO and BTF.
We will possibly not yet see a physically-backed ETF that has physical ownership of Ethereum, either. However, a regulated ETF through a futures-based strategy might be a possibility in the months ahead, and would be a significant boost to the price of Ethereum as well as many other digital currencies.