Analysis of the first US Bitcoin futures ETF: characteristics, risks, impact and the future

From 2013 to the present, after waiting year after year, it is finally coming, and the first Bitcoin ETF in the United States is about to be born. The Bitcoin strategy ETF approved by the US SEC for the first time and applied by ProShares this summer will officially start trading next week (October 18). This article will focus on the first Bitcoin ETF in the United States and interpret its nature and potential significance.

What is the first Bitcoin ETF in the United States?

The full name of the first Bitcoin ETF in the United States is the ProShares Bitcoin Strategy ETF (“fund”), which was created by the asset management company ProShares. According to Linkedin, ProShares has been at the forefront of the ETF revolution since 2006. It has one of the largest ETF team in the United States and enjoys a wide global reputation. It provides investors with innovative strategic ETFs aimed at managing risks and improving returns. Its products include various forward tracking index ETFs, as well as inverse ETFs that provide low leverage.

The main investment strategy of ProShares Bitcoin Strategy ETF is to seek capital appreciation by managing the exposure of Bitcoin futures contracts, but the fund does not directly invest in Bitcoin, so the so-called “Bitcoin ETF” is actually a Bitcoin futures ETF. This is a standardized and cash-settled Bitcoin futures contract registered with the US Commodity Futures Trading Commission (CFTC) and traded on commodity exchanges. The value of Bitcoin futures is determined based on the CME Bitcoin Reference Exchange Rate (BBR), seeking to invest in cash-settled near-month Bitcoin futures. The futures contract of the delivery month).

The ProShares Bitcoin Strategy ETF Fund (hereinafter referred to as the “fund”) is expected to obtain risk exposure by investing part of its assets in a wholly-owned subsidiary established under the laws of the Cayman Islands and consulted by ProShare Advisors. Under normal circumstances, the fund expects to invest approximately 25% of its total assets in the subsidiary. Of course, the fund adviser has the decision-making power to obtain the best benefit of the fund, so a situation higher than this ratio may occur.

The notable points of ProShares Bitcoin Strategy ETF:

1. The fund does not adopt a temporary defensive position. Normally, the foundation holds Bitcoin futures contracts when the value of Bitcoin is flat or falling or rising. In order to maintain exposure to Bitcoin futures contracts, the foundation sells its futures contracts when it is about to expire and replaces them with new futures contracts with a later expiration date, commonly known as “Rolling”. There is a difference between a new futures contract with a later expiration date and a futures contract with a shorter expiration date, that is, “futures premium.” If the futures contract with a later expiration date is priced higher than that with a shorter expiration date, during the rollover, the fund will sell the expiring contract at a relatively low price and buy the expiring contract at a relatively high price Contracts with a later date, and vice versa. In short, the foundation “renews” indefinitely and does not take the initiative to liquidate positions.

2. Funds generally seek to maintain full investment in these portfolios at all times, providing exposure to Bitcoin futures, regardless of market conditions, trends or directions.

3. The fund does not invest or seek direct access to the current “spot” or cash prices of Bitcoin. Funds are classified as non-diversified, that is, a relatively high proportion of assets are invested in financial instruments with a single or a small number of counterparties.

4. The performance of Bitcoin CME futures contracts, the performance of the fund and the performance of Bitcoin spot may be significantly different, which may exist in investment strategy risk, the risk of difference in price fluctuations between Bitcoin spot and futures, liquidity risk, and the Bitcoin futures market Risk, Bitcoin futures capacity risk, futures investment risk cost, Bitcoin’s own risk, cash and currency market instrument risk, affiliated company investment risk, borrowing risk, counterparty risk, non-diversification risk, market price difference risk, authorized participants Risks, cash purchase and redemption risks, early closing/delayed closing/trading suspension risks, active management risks, new fund risks, tax risks, valuation risks, etc.

There are several risks worthy of in-depth attention of investors:

1. Bitcoin futures capacity risk. If the Bitcoin futures market has limited liquidity, the Bitcoin futures market is interrupted or margin requirements, or the fund’s futures commission merchant (FCM), CME or CFTC imposes position restrictions, the fund may not be able to achieve its investment objectives and may suffer significant losses.

2. The risk cost of futures investment. Historically, Bitcoin futures have experienced a long futures premium period. If the price difference between the expiring contract and the longer-term contract is much higher than the relevant price of “rolling” other futures contracts, Contango in the Bitcoin futures market may be unfavorable Impact. Both futures premiums and spot premiums may affect the Fund’s investment objectives.

3. Tax risk. In order to comply with the special tax treatment of a regulated investment company (RIC) and its shareholders, at least 90% of the total income of the fund in each tax year must come from “qualified income”, to meet a certain amount of asset diversification at the end of each taxable quarter Test and meet annual allocation requirements. If, in any year, the fund does not qualify for the special tax treatment granted to RIC and its shareholders, and is not eligible or unable to correct this failure, the fund will be taxed in the same manner as an ordinary company, and all the company’s income is in The fund level is subject to US federal income tax. The resulting taxes may greatly reduce the fund’s net assets and the income available for distribution.

The significance and impact of the first Bitcoin futures ETF in the United States:

1. It is of milestone significance. It is undeniable that in the cryptocurrency and blockchain boom, whether it is at the exchanges, venture capital funds, project innovation, or regulatory level, as well as the rapid growth of mining power, the United States is at the forefront of the world. Despite the high voices, the SEC has been rejecting or delaying the arrival of Bitcoin ETFs with slogans such as disrupting market financial order. However, with the adoption of many Bitcoin ETFs in Europe, South America and other regions, the United States, which has gathered top resources, has intensified the contradiction between the mismatch of encrypted resources and encrypted financial instruments. The first Bitcoin futures ETF in the United States is finally coming under constant calls. There is no doubt that this is an important moment. It means that the country with the most abundant crypto resources finally ushered in the first crypto ETF. The news came out, fermented, and spread. Bitcoin was less than 1,000 points higher than the previous one. This is the best response from crypto investors.

2. The strength of the Bitcoin consensus makes regulation “compromise”. According to the market value ranking of listed companies, heavy metals and other assets, Bitcoin is already the 8th largest asset target in the world, and it is not far from the previous silver. It has only been more than ten years since its birth. Bitcoin has gone from obscurity to consensus all over the world. During this period, it has experienced hundreds of times of policy suppression by various countries, but it has become an existence that cannot be ignored in the world. Presumably the US government also understands that strangulation is never the best way, but to look at it with a more innovative way of thinking and embrace it.

3. The historical significance may be greater than the actual significance. Behind the enthusiasm needs to be treated wisely. Bitcoin futures ETFs have undoubtedly greatly increased the attention of the society and traditional investors, and also provide a channel for retail investors and institutions to participate in Bitcoin transactions in a compliant manner. But in practice, for retail investors, this may not be the best way to enjoy the long-term rise of Bitcoin; for institutions, Bitcoin futures ETFs may become hedge funds or asset management companies to hedge their Bitcoin spot targets or Other asset-based tools, or straightforwardly, also provide a more reasonable short-selling method for those who look down on Bitcoin for a long time. In the short term, the first Bitcoin futures ETF in the United States has become a “pull” gimmick, and ordinary investors should pay attention to Fomo.

Fourth, the further development of the encrypted derivative market. Although there are CME Bitcoin futures in the United States, its trading volume does not account for a large proportion of the entire crypto futures market, and it is still dominated by leading cryptocurrency exchanges such as Binance and FTX. The arrival of the first Bitcoin futures ETF in the United States may not have an excessively significant impact on the price of Bitcoin, but the growth of its derivatives market, CME Bitcoin futures trading volume may be due to the arrival of Bitcoin futures ETF attracted institutional transactions. Quantities and rapid development.

Conjectures about the future based on the birth of the first Bitcoin ETF in the United States:

1. The arrival of Bitcoin spot ETF or Ethereum ETF may not be too far away. As mentioned above, the Bitcoin futures ETF has an important milestone and created a precedent for the US SEC in the supervision of cryptocurrencies. Then the Bitcoin spot ETF (fund investment or tracking the current “spot” or cash price of Bitcoin) is coming. Perhaps it is worth the expectation of investors. The first Bitcoin spot ETF in the United States may have greater practical significance for the price of Bitcoin, because it directly allows investors to legitimately hold Bitcoin spot in a new and compliant way, perhaps without having to purchase it through a crypto exchange. Direct purchase in the traditional financial market will undoubtedly greatly promote Bitcoin transactions, especially the entry of traditional investors.

In addition, with the rise of Ethereum and DeFi ecology, the market value of Ethereum has also entered the top 20 in the world, surpassing Johnson & Johnson, S&P 500 ETF, etc., I believe that Ethereum ETF can also do more.

Second, the regulatory burden of ETFs may be temporarily closed. Will other regulatory aspects such as stablecoins, DeFi, and exchanges be paid more attention. Although the United States passed the first encrypted ETF, its regulatory measures may not slow down. Instead, the focus of supervision will be on places that are likely to cause systemic risks in the traditional financial market, such as stablecoins, DeFi lending, etc. . (The head picture comes from CoinPost)

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