Welcome back! This is Frances Yue, reporter at MarketWatch.
Crypto investors have long been hoping that an exchange-traded fund investing directly in bitcoin could boost adoption of the cryptocurrency and lead to a price rally.
But that may not happen, according to Stuart Barton, co-founder and chief investment officer at Volatility Shares, issuer of the 2x Bitcoin Strategy ETF
BITX,
-2.20%,
a leveraged bitcoin futures ETF.
A spot bitcoin ETF is not the “holy grail” for the industry; instead, bitcoin futures ETFs are the way to go forward, said Barton.
Find me on Twitter at @FrancesYue_ to share any thoughts on crypto or this newsletter.
Spot vs. futures ETF
The U.S. Securities and Exchange Commission approved several bitcoin futures-based ETFs in the past, but has yet to greenlight anything that is backed by bitcoin itself.
In June, several asset managers such as BlackRock
BLK,
-1.90%,
Fidelity, VanEck and WisdomTree
WT,
-0.85%,
filed applications for spot bitcoin ETFs, reigniting investors’ hopes that such a product may be approved in the U.S. soon.
Read: BlackRock is applying for a spot bitcoin ETF. Here’s why it matters to the crypto industry.
That is unlikely to be the case, noted Barton. The asset managers are partnering with Coinbase
COIN,
-7.08%
in their surveillance-sharing agreements, which would allow the sharing of information about market trading activity, clearing activity, and customer identity. Some speculated that such agreements could be the key to win the SEC’s approval, as the agency previously rejected dozens of spot bitcoin ETF applications, citing fraud and market manipulation risks.
However, the SEC in June charged Coinbase with operating an unregistered national securities exchange, brokerage and clearing agency.
“If the SEC approves an ETF that was going to be available to the whole country when its underlying asset was being traded on an exchange that the agency already said is operating as an illegal securities exchange, it would almost be counterproductive for the SEC’s legal case,” Barton noted.
For a spot bitcoin ETF to be approved, “there has to be at least one exchange in the US registered with the SEC as a regulated exchange and fulfill all the compliance regulations. And I think that’s a multi year process,” said Barton.
Even if a spot bitcoin ETF is approved, it is unlikely to trigger further price rally for the crypto, said Barton. The token has gained over 16% since BlackRock filed for the application on June 15, according to CoinDesk data.
“You could argue that what would drive the bitcoin price rally would be new money coming into the bitcoin space,” said Barton.
“But for people wanting bitcoin exposure through ETFs, they’ve already done it through the futures products that exist. If one launches a spot ETF and people really liked the idea, they could sell their future-based ETF and buy spot-based one. That will have a zero net impact on the price of bitcoin,” noted Barton.
Still, some argued that unlike spot bitcoin ETFs, the futures-based ones will confer additional costs to investors.
Such costs include those incurred from rolling the contracts from one expiry to the next. As all the future contracts have expiry dates, funds that invest in bitcoin futures will have to buy new ones to replace the ones that are expiring.
The mechanism may also expose the funds to “contango” risks, which means when longer-dated futures trade at a premium than the front-month contracts, leading the funds to sell low and buy high.
Barton argued that the “contango” risks do not matter much to investors in reality.
“Ultimately institutions keep the price of the futures in line with the price of the cash through cash and carry arbitrage,” where traders buy bitcoin in the spot market and short the crypto using a futures contract that is trading at a premium, Barton said.
Crypto in a snap
Bitcoin
BTCUSD,
+0.20%
has lost 1.9% in the past seven days and was trading at around $29,127 on Thursday, according to CoinDesk data. Ether
ETHUSD,
+0.36%
dropped 1.4% during the same period to around $1,859.
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