Bitcoin Strategy ETF, the first ETF dedicated to cryptocurrencies and provided by ProShares, a specialized provider of this type of financial products, recently made its debut. The fund will be traded on the NYSE (New York Stock Exchange), under the name of BITO. The ETF’s arrival on the stock market puts an end to a nearly decade-long push to get cryptocurrencies, in any form, into traditional finance squares. Specifically, the first efforts are to be traced in 2013, with the first request made by the Winklevoss brothers (former founders of Facebook and now founders of Gemini, a cryptocurrency exchange).
The SEC (Security and Exchange Commission), the US body responsible for regulating the markets, has always rejected any type of proposal. According to the SEC, in fact, bitcoin is a risky investment, supported by unregulated liquidity and with very high volatility. The approved ETF, in fact, is not directly linked to bitcoin, but to its futures, which have already been traded for years on the Chicago Mercantile Exchange (CME), a regulated market.
Fintech
From digital payments to state cryptocurrencies, the future of money
by Andrea Daniele Signorelli
What is an ETF?
An ETF, which stands for Exchange-traded Fund, is a managed investment fund with an active buying strategy based on the interest raised by investors. In a nutshell, an ETF has its own shares that an investor can buy on the markets, and to that share is linked the purchase of the underlying that is offered by the fund itself. In the case of the Bitcoin Strategy ETF, each share had an initial price of $ 40, and the ETF invests in futures contracts. The fund invests all of the proceeds from the sale of its shares, minus a fee that the fund retains for its profit and management expenses. An ETF is therefore a financial instrument that allows investors to expose themselves to a certain asset (in this case bitcoin futures contracts) without buying it directly.
What is a ‘future’?
A future is a financial derivative instrument with which investors can buy a certain asset at a certain price at a future date. Futures contracts typically expire on a monthly or quarterly basis. To give an example (purely indicative): a Bitcoin future traded on the CME (Chicago Mercantile Exchange) could have a price of 100,000 dollars and an expiration date of 31 December. This means that if an investor buys a future, they are reserving the option to buy bitcoin for $ 100,000 on December 31st. This could be a great opportunity, if the investor thinks that the price of bitcoin will rise much above $ 100,000 per unit (today a bitcoin is trading at around $ 64,000).
Conversely, if the price on December 31 is below $ 100,000, the investor will have to find a way to buy ‘real’ bitcoins on the market to compensate for the losses he is having due to a purchase at a higher price than the one at. which is traded.
The effects of the bitcoin ETF
Given that the Bitcoin Strategy ETF does not invest directly in bitcoins but in futures on the Chicago Mercantile Exchange, and that these have a monthly maturity, the fund is forced to invest every month in new futures and to incur contract commission fees. For these reasons, the ETF is indeed an excellent tool to increase the visibility of bitcoin to traditional investors, but its trend, and the trend of its underlying (i.e. futures) do not replicate the trend of bitcoin: there could be specific times when it is better to invest in the ETF rather than in bitcoin, or vice versa. Surely this dynamic will bring more movements around bitcoin, and its price has already suffered: from the news of the ETF’s approval to today, bitcoin has gone from a price of about 57,000 dollars to over 64,000 dollars, the maximum of the last 5. months.
The ProShares ETF is only the first in a long line: the SEC is also likely to approve other ETFs, equally based on futures. The news comes at a time of turmoil for cryptocurrencies, with some exchanges (including Bitfinex and Uniswap) being investigated by several US and European regulators. But also in a time of exponential growth for the crypto industry, with the recent listing of Coinbase and an exponential growth of the entire industry, which now has over $ 100 billion of value deposited in decentralized finance platforms (DeFi) .
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