Bloomberg: You need to understand these risks before investing in the first BTC ETF

If the first Bitcoin ETF approved by the US Securities and Exchange Commission has the same characteristics as a commodity fund, it means that investors need to understand some risks, such as “futures premium” (contango) and “spot premium” (backwardation).

The first Bitcoin exchange-traded fund ProShares Bitcoin Strategy ETF will start trading on Tuesday. It is no exaggeration to say that this matter has attracted much attention in the crypto industry. However, it should be noted that the fund is not an exchange-traded fund backed by physical bitcoin, but is backed by futures related to cryptocurrency.

Therefore, before you head into this market, you must first understand the significant differences between the two.

Most traditional commodity-based mutual funds and ETFs also have futures support. However, the reason for the launch of futures ETFs is mainly because most physical commodities, such as oil, are difficult to store. In addition, most of the trading activities and liquidity of almost all commodities basically occur in the futures market, rather than the spot market. For example, the world’s largest oil ETF-The United States Oil Fund LP (The United States Oil Fund LP) is a commodity fund backed by futures. Due to shrinking demand, embargoes and price wars between crude oil merchants and other reasons, when crude oil prices will fall, the wrong investment strategy was adopted and the relevant risks were not disclosed to investors, which caused investors to suffer losses. Investors filed a lawsuit to the court, causing notoriety.

From the above examples, we may understand that launching a futures Bitcoin ETF may not be a good idea, because it is difficult for you to accurately predict what will happen in the futures market. Not only that, futures-based ETFs often have higher holding costs. When commodity futures are at a futures premium, or when the price of a deferred monthly contract is higher than a front month future, many futures-based ETFs will The futures contract rolls over from one month to the next, and the resulting huge costs will be passed on to investors. In fact, this has been one of investors’ biggest complaints about commodity futures ETFs for many years. Note: The previous month is a term used in futures trading. It refers to the month closest to the current date specified in the futures contract. This means that the previous month is the shortest period of time during which the contract can be purchased. When the current date and expiry date are not In the same calendar hour and month, the contract is usually called the next month contract, not the previous month contract. )

Commodity futures are more commonly traded at a futures premium, but they can also be traded at a spot premium, which means that the trading price of the deferred reading contract will be lower than the previous month’s contract. In this case, the investor gets a positive roll yield. Although Bitcoin is currently at a futures premium, many commodity futures are currently in spot trading, so there is no reason to believe that Bitcoin will not have a spot premium in the future.

A gold ETF is one of the best examples of spot ETFs. ETFs hold spot physical gold because the storage and accounting of physical gold is quite simple. So the question is, why can’t Bitcoin ETFs hold physical Bitcoins? The answer is simple, because the US Securities and Exchange Commission believes that the underlying market for physical bitcoin is not regulated. But the question is, is the gold market better regulated? Haven’t the physical gold ETFs been successfully listed? Maybe cryptocurrency practitioners can solve this problem in the future.

In fact, the market should indeed have a spot-based Bitcoin ETF. As early as 2013, the brothers Cameron Winkelvoss and Tyler Winklevoss submitted an application for a spot Bitcoin ETF to the SEC. At that time, the Bitcoin transaction price was still low. To $1,000, and it has now risen to about $62,000. If their fund received regulatory approval at that time, it is now probably the largest and most liquid ETF in the world and will bring excess returns to a whole generation of investors. ——It can be said that this is a mistake of the US regulators. However, at that time, Bitcoin technology was still relatively primitive, cyber attacks were happening all the time, and market sentiment generally believed that Bitcoin was dangerous, insecure, and uncontrollable. Now the cryptocurrency market has matured a lot.

In addition, investing in physical bitcoin on trading platforms such as Coinbase can also be unsatisfactory, not only because these platforms are often interrupted, customer service is not satisfactory, some user assets are lost, and some user accounts are inexplicably locked. Therefore, when the Bitcoin ETF appears, it should attract many people to buy it. On the other hand, people have a lot of expectations for Bitcoin ETFs, because as ETFs, many American citizens can participate in transactions. More importantly, trading ETFs is still a tax-saving method, because the use of 401 K investment in the United States can avoid taxation, and ETFs are included in this investment tool, especially when Americans receive formal 1099 tax documents at the end of the year. There may be many surprises.

Some people believe that spot Bitcoin ETFs will definitely be approved one day, but the reality may be “cruel”. At least until the crypto market has a regulatory framework (which may take several years), it is difficult to see spot Bitcoin ETFs. But for investors, the Bitcoin futures ETF will not get worse, as you can see from the performance of the commodity market over the past 15 years. For regulators, the Bitcoin futures market is regulated, while the Bitcoin spot market is not. Although Bitcoin spot transactions mostly occur on platforms that are not under federal supervision of the United States, Bitcoin futures transactions are conducted on the Chicago Mercantile Exchange, and the Chicago Mercantile Exchange is regulated by the U.S. Commodity Futures Trading Commission.

In layman’s terms, owning a spot Bitcoin ETF is similar to owning a spot hog ETF.

The last thing to say is that ETF issuers may face bigger problems. There are still dozens of cryptocurrency funds waiting for SEC approval. There is no doubt that this will be a gold rush, just like we are in traditional ETFs. The same as seen in the world.


Posted by:CoinYuppie,Reprinted with attribution to:
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