The first Bitcoin ETF on Wall Street is crazy or the bitter snake of retail investors. Insiders do not recommend buying

After the launch of the first Bitcoin exchange-traded fund on Wall Street , market funds flocked to this product that tracks Bitcoin futures contracts. In just 4 trading days, 1.2 billion US dollars of funds poured into the ProShares Bitcoin Strategy ETF and pushed the Bitcoin price to a record high.

This product has successively set several major fund industry records: the world’s fastest fund to exceed 1 billion US dollars; the first day of issuance turnover exceeded 100 million US dollars, the second highest in history. Such a scale of capital inflows can’t help but make people full of reveries about its market space. To make a simple estimate, with the global ETF assets of 9 trillion US dollars as the upper limit, if Bitcoin ETF occupies 1% of the global market, its market size will reach 90 billion US dollars, accounting for almost 10% of Bitcoin’s recent market value of 1.1 trillion US dollars. .

In the period of rising asset prices, Bitcoin ETFs are undoubtedly the golden bowl for fund companies to make quick money; but for the majority of retail investors targeted by ETFs, such products are not necessarily a fast lane for peace of mind. Many financial regulatory agencies worry that this product form for a wide range of investors may bring the high volatility and high risk behind virtual currencies into the global financial system, and become a “Pandora’s Box” that constitutes a risk affecting the financial system.

The top of the virtual asset feast behind the ETF carnival

The crazy pursuit of Bitcoin by funds has a big background. On the one hand, since the COVID-19 pandemic, central bank releases have pushed up the prices of various assets including virtual currency assets. Bitcoin has risen by nearly 400% in the past 12 months. Since this year, many Wall Street institutions have announced their support for Bitcoin trading. This highly volatile alternative asset has never been integrated into the financial system like it is now.

On the other hand, Tesla President Musk , who has a celebrity effect, continues to speak up. Bitcoin has gained more and more attention from ordinary people, and many investors even buy with a gambler mentality and leverage. Not only the United States, Europe, even in Asian countries like South Korea, there are many young people willing to bet on their wealth to participate in this game, Bitcoin participants are already global.

The peak of this market turmoil is the successful release of the product. In the past week, the Bitcoin Fear and Greed Index reached its highest point in six months, showing the “extreme greed” of market participants.

However, this is not the world’s first Bitcoin fund. As early as 2013, Grayscale Company issued the “Grayscale Bitcoin Trust Fund” in Canada. Compared with this new product, there are several shortcomings. First of all, it has set a minimum investment threshold of US$50,000 to keep the most enthusiastic retail investors out of the door. Liquidity cannot be compared with ETFs. Secondly, as a traditional fund, investors can only redeem them directly in the primary market and then sell them in the secondary market, which brings trading risks to investors. The most important thing is that, far away from the capital center of Wall Street, it is difficult for products to gain attention on a global scale.

The current listed Bitcoin ETF has improved the defects of the previous products, the participation threshold is greatly reduced, the application for redemption is convenient, and the liquidity is strong. The product issuance has attracted widespread attention, which is conducive to attracting more mainstream institutions to enter the market and superimposing the enthusiasm of retail investors to participate. The popularity of virtual assets has reached a peak.

Make money, fund companies, large and small funds, quickly step up

The product form of ETF makes many fund companies coveted. It opens a window for investment advisers to add virtual assets to their fund management accounts. It can be seamlessly integrated into a variety of investment portfolios. Many popular robo-advisors can add it to In the asset management account. After the US Securities and Exchange Commission approved the first Bitcoin product, more asset management companies are eager to try.

It is precisely under the stimulus of good feedback that the second Bitcoin ETF on Wall Street will be listed soon on October 22, and subsequent products will be launched one after another. At present, there are already more Bitcoin futures ETFs waiting in line. For example, female technology investor “Mu Mu Jie” has also applied for related products. At the same time, the two largest spot Bitcoin fund promoters, Grayscale and Bitwise, have actively applied for the issuance of related ETFs in the US market in the past few weeks.

The two companies stated that the futures and spot markets are mature enough to meet the standards required by the US Securities and Exchange Commission. They believe that the futures market and the spot market are currently basically synchronized, reducing the possibility of market manipulation or arbitrage from one market to another. They believe that if Bitcoin futures can be included in the ETF, then Bitcoin spot can also be completely.

However, if spot ETFs want to be recognized by regulatory agencies, they still need to prevent market manipulation and strengthen basic market supervision mechanisms. But this may still be challenging, because the Bitcoin spot market is far more decentralized and arbitrary than the futures market. In essence, Bitcoin has overturned national borders and is an asset that is difficult to be regulated.

Professional investors’ arbitrage tools can get 30% annualized return

When retail investors want to take the small money in their pockets to ride the rapid rise of Bitcoin, professional investors find that this ETF has created an opportunity to make huge profits.

In essence, after the Bitcoin ETF is linked to futures, as new funds flow into the Bitcoin ETF, the fund must purchase futures to gain exposure to the price of Bitcoin. Futures contracts expire every month, which means that the fund must regularly “roll” its holdings to the next month’s contract. The recent surge in demand has pushed up the price of Bitcoin’s short-term futures and may disconnect it from the underlying spot market-creating a gap between the two prices that can be profitable.

In the traditional market, high-frequency traders quickly entered the market to make up for the price gap, eliminating spreads and arbitrage opportunities. But the lack of large players in virtual assets means that few people are willing to spend additional funds to eliminate pricing discrepancies. In addition, the Chicago Mercantile Exchange has higher requirements for margin. Therefore, the price difference between Bitcoin spot and futures has become a favorite of arbitrageurs.

Bitcoin is widely traded around the world, with different pricing in different trading venues, which means that traders can buy Bitcoin at the lowest price in the spot market, which undoubtedly magnifies the opportunity to profit from this type of transaction. Some institutional investors even pointed out that the “simple arbitrage” of buying Bitcoin ETFs and selling futures traded on the Chicago Mercantile Exchange can achieve an annualized rate of return of 30%.

Putting aside arbitrage opportunities, for professional investors, the good liquidity of ETF products and the leverage that comes with futures will undoubtedly make it a more convenient investment tool.

Or retail bite snakes, industry insiders do not recommend buying

Driven by funds and optimism, the skyrocketing price of Bitcoin has provided enough reasons for retail investors to buy this ETF: the threshold is low, it is easy to buy, and the underlying assets are still on the rise. But professionals advise retail investors not to buy lightly.

First of all, the existing ETF has its own problems. It does not invest directly in Bitcoin, but in Bitcoin futures traded on the Chicago Mercantile Exchange futures market. Currently, the fund has nearly 45% of its risk exposure in November futures contracts. If the fund maintains this inflow rate, due to position restrictions, it will have no futures to buy by the end of this month. If this happens, there will be a considerable tracking error between the net value of the fund and the price of Bitcoin.

Secondly, when the old contract expires, the fund must continue to buy the next period. This process has costs. When the price of a futures contract is higher than the previous month, this situation is called a futures premium. The “negative rolling rate of return” brought about by the futures premium actually erodes long-term returns.

Compared with the small problem of income loss, futures ETFs may also face unpredictable troubles under certain circumstances. A recent prominent example is the United States Petroleum Fund (USO), which plummeted 44% in a few days in April 2020 due to a brief drop in crude oil prices. Although the sell-off was triggered by the decline in oil demand and inventory shortages caused by the epidemic, the peculiarities of the crude oil futures market amplified price fluctuations and led to huge losses in the fund.

Compared with the unprecedented negative oil price of oil, Bitcoin’s high volatility is even worse: it plummeted by more than 30% earlier this year. Facts have proved that since their inception, prices have been extremely unstable and vulnerable to various internal and external factors. Once the market turns and funds flee the virtual currency on a large scale, the Bitcoin ETF is likely to experience a similar rapid decline, and retail investors who do not know the market well will suffer heavy losses.

Many people in the currency circle pointed out that the form of ETFs does not make high-risk assets safer; if you do not understand the complex product structure of ETFs or futures, retail investors are not recommended to buy them.

The positions of China and the United States are not consistent. What does the change in regulatory attitudes reflect?

In the first half of this year, the market also expects that US regulators will not approve such products. The approval of the Bitcoin ETF this time is considered an important step in the mainstreaming of virtual assets, which has also pushed the price of Bitcoin to a record high. The rise of the virtual market has led supporters to believe that even futures-based ETFs are a big victory for the industry, which will push blockchain technology into the mainstream financial system.

The change in the US regulatory system’s attitude towards Bitcoin is surprising, and this is related to the attitude of the newly appointed US Securities Regulatory Commission Chairman Gensler. Compared with the previous regulators, he is more willing to embrace new technologies. His latest statement on Bitcoin ETFs is “strive to include them in the scope of investor protection.” He still has a backhand for Bitcoin regulation, and this time he did not approve spot Bitcoin products.

It is understood that most of the current Bitcoin trading volume comes from spot trading. Trading occurs on newly established exchanges with a short period of time. Many exchanges are scattered around the world and are not under the control of traditional regulatory agencies, and they are often not mature. All of the transactions have a complete trading mechanism, and the protection of investors is also lackluster. Recently, the price of Bitcoin on the platform has plummeted by nearly 90% due to a quantitative transaction error on Binance in the United States, and some customers who are forced to close their positions may face losses of millions of dollars.

Judging from the current regulatory situation: On the one hand, the futures market is a highly regulated market in the United States. For political and practical reasons, it is expected that the physical Bitcoin ETF will not be approved by US regulators soon. This is an important prerequisite for the opening of the US supervision.

On the other hand, the hype caused by the US regulatory release has concealed the fact that Bitcoin still faces huge doubts in terms of financial legitimacy. Although its use in the real world has expanded, it is still a digital virtual token with no tangible value. China and many other countries regard Bitcoin as a destabilizing factor and have recently banned it. All related transactions. Under this premise, although the popularity of this product can bring huge benefits to a small number of investors and institutions, once it spreads through the developed financial system in the United States, the risks brought by it will require the global financial system to come. Commit together.

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