The odds are higher than ever that the US Securities and Exchange Commission (SEC) will approve a Bitcoin Exchange Traded Fund (BTC) ETF before a Bitcoin ETF is created, thanks to Chairman Gary Gensler now on a permanent basis. prefers the first.
But here’s the problem: ETFs based on cryptocurrency futures are not the most efficient, economical and easy way. There are financially supported products. They can attract more assets and open up the crypto market to more investors. It’s also easy for investors to understand.
This is why fund issuers are better off pushing the SEC to be clear about what it takes to get an approved bitcoin spot ETF, rather than rushing to be the first to come to terms with the more complex and expensive futures backed by the product.
Full frame – but with imperfect reflections?
One of the main arguments in favor of a crypto ETF is that the regulatory framework for futures is now clearly and well established, especially when compared to physical cryptocurrencies.
Futures contracts fall under the jurisdiction of the Commodity Futures Trading Commission. Standard contracts. When it comes to CME futures, there is no need for digital wallets, and the lack of physical assets means fewer questions about the cryptocurrency storage mystery. Knowing your customer, or KYC, is not a problem, because there is no decentralized resource that can be moved from one address to another. In general, the futures markets are more regulated and controlled than the spot markets are today.
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These futures ETFs will be registered under the Investment Company Act 1940. This will make them “liquid alternatives” and allow them to invest using more sophisticated instruments or strategies. Mutual funds, including those with strategies similar to hedge funds, are registered as funds under Law 40.
What is the advantage of registering bitcoin futures ETFs as Law 40 money? They avoid many regulatory hurdles, in part because they are mandated to invest primarily in futures contracts that are listed on a regulated US stock exchange like the Chicago Mercantile Exchange.
More complexity with futures
Simplicity is definitely a good thing, especially when the goal is to attract new money that is patiently waiting on the sidelines. But futures contracts present a complexity that initially runs counter to ETF ideals.
ETFs are designed as an affordable and highly liquid alternative to actively managed funds. However, futures contracts are not particularly profitable. They require margin as collateral at a disproportionately higher price than other asset classes.
In addition, trading volumes on US-regulated stock exchanges are relatively small, and most transactions take place overseas. This begs the question: Will there be enough liquidity on SEC-approved exchanges like the Chicago Mercantile Exchange to meet demand, especially during periods of high volatility?
In practice, this first generation of futures ETFs will likely consist of a basket of various assets in addition to Bitcoin futures. Due to the complexity of taxation and diversification of assets, a subsidiary must also be established to hold these investments, usually in a low tax jurisdiction such as the Cayman Islands. Obviously, complexity means higher costs for investors.
There is also the issue of discrepancies between futures prices and spot prices. Futures contracts do not accurately track the underlying asset. In particular, with bitcoin, there can be significant discrepancies between the expected price of bitcoin in 30 days (as indicated by the futures contract) and the actual price on that date. During the year ending September 2, 2021, the Bitcoin futures contract traded 38 percentage points below the same Bitcoin price (from 295% to 333%, respectively).
Finally, it should be noted that, historically, investor demand for futures ETFs has been much lower than for spot counterparties. One clarification: the largest spot gold ETF currently has over $ 50 billion in assets, while the largest gold futures ETF has nearly $ 40 million.
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A smart step in the right direction
But does this mean bitcoin futures ETFs are doing more harm than good?
of course not. While it won’t be as easy and cheap as a spot ETF, the Bitcoin Futures ETF is still a step in the right direction to provide potential investors with access to cryptocurrencies.