A full eight years after the first application for a Bitcoin Exchange-Traded Fund (ETF) was filed by the Winklevoss twins, the first Bitcoin ETF in the United States (BITO, by ProShares) started trading on the NYSE. The fund had a whopping $1 billion volume in the first day of trading – the highest first-day organic volume in ETF history, prompting Bitcoin to reach an all-time high above $66K.
This past Friday, October 22, the second Bitcoin futures ETF - Valkyrie's Bitcoin Futures ETF (BTF) started trading in the US. Both BTF’s and BITO’s price went down on Friday by 2.8% and 3.23% respectively, same as Bitcoin’s price (-2.8%).
There are more than four additional Bitcoin futures-based ETFs waiting for SEC approval that are likely to start trading in the coming weeks – indicating a surge of interest and participation in the DeFi industry by mainstream investors that otherwise tend to shy away from direct crypto investments.
What are Bitcoin ETFs and what is all the noise about?
A Bitcoin ETF mimics the price of the digital currency, allowing any investor to buy into the ETF and get exposure to Bitcoin without trading Bitcoin itself. This makes Bitcoin exposure more accessible to institutional investors as well as to the average investor as it eliminates any issues of complex storage and security procedures required of cryptocurrency investors. It also shields investors from any potential regulatory risks.
The road to approval of a Bitcoin ETF has been long, dating back to 2013. Many applications for Bitcoin ETFs have been submitted over the years, with many rejections and some still pending SEC approval. The approval of the first few futures-based Bitcoin ETFs is cause for celebration for many who’ve been waiting. IT also represents a significant shift in the forward-progress towards a fund based on bitcoin spot prices.
Futures-based ETF vs. Spot ETF
Futures based Bitcoin ETFs track Bitcoin prices through futures contracts traded at the Chicago Mercantile Exchange (CME). These contracts are settled in USD, not Bitcoin. When futures are held in an ETF, they must be rolled at the end of each month, which can result in some inefficiencies. That’s the reason futures-based Bitcoin ETFs will have a difficult time tracking the spot Bitcoin price and will be an expensive way to achieve Bitcoin exposure in a portfolio.
On the flip side, spot-based ETFs (i.e., ETFs holding actual Bitcoin) are more efficient and can more accurately track Bitcoin prices. However, many analysts believe that it will be a while before spot-based Bitcoin ETFs are approved, as the SEC has been consistently leery of approving ETFs that hold actual Bitcoin. Gary Gensler, chairman of the SEC, has said futures-based Bitcoin ETFs provide better protections for individual investors. One of the key cited reasons is the lack of ample regulation and supervision over cryptocurrency exchanges where futures are traded on the CME which is regulated by the CFTC.
However, what I’ve learned from participating in this new but growing market is that one development leads to another given enough time and demand.
What to watch for now?
The impact on Bitcoin transaction volume
Will BITO and BTF (as well as the other Futures-based ETFs that will follow) approval have a noticeable impact on Bitcoin transaction volume of Bitcoin? Many analysts believe that this will allow more institutional and retail exposure to Bitcoin and may increase the cycle of bitcoin investors, resulting in larger transaction volumes.
The impact on Bitcoin price
What impact will it have on Bitcoin price, and will it be a one-time impact or something that’s long lasting? Price obviously went up to an all-time high, much of it was touted as “in anticipation for BITO’s launch”, but was it truly due to the Bitcoin ETFs beginning to trade, or due to inflation fears as JPMorgan and some other analysts think?
The impact on Bitcoin holding distribution
We’ve already seen a shift in holding distribution over the past year. The on-chain market analysis group Glassnode claims that the number of Bitcoin whales with more than BTC 10,000 has fallen to 82 — a figure that hasn't dipped to such lows since mid-December 2012. Will the introduction of Bitcoin ETFs drive more institutional investors into the market and change the makeup and distribution of Bitcoin across investors and investor type?
The impact on Bitcoin price behavior
Will the introduction of Bitcoin ETFs impact Bitcoin correlation and behavior as a financial asset? Bitcoin Whales tend to hold on the average 75 percent of their Bitcoin for the long run, reducing the effective supply and impacting price dynamics. Will larger investments in Bitcoin ETFs by institutional investors, as well as the reliance on Bitcoin Futures and the ETFs’ need to ‘recycle’ them impact Bitcoin price volatility and correlation?
And of course, the 21 million Bitcoin question: What about spot Bitcoin ETFs? Are they next?
Whether you are considering investing in one of the new ETFs, directly in Bitcoin, or not at all – we are all collectively in the midst of a fascinating and potentially history changing moment unfolding in front of ours eyes. The digital transformation driving the current trends in finance is here to stay, so make sure to take advantage of the early benefits.