Others, such as Rayne Steinberg (Arca CEO), had mixed feelings about the events. He was pleased that the long-awaited crypto investment vehicle received regulatory approval. This ended eight years of futility by U.S. fund issuesrs. However, he had reservations about the product’s futures-based nature and inability to track Bitcoin’s price directly.
He stated that a futures-based ETF was not a good option to gain Bitcoin exposure.
Markus Hammer, principal of Hammer Execution Consulting firm and attorney, acknowledged that the event was significant, but cautioned that it was only one step in a long journey. He also stated that he preferred a fund that tracks physical Bitcoin, and not derivatives.
ProShares ETF bets on BTC’s future prices. This means that the product eventually deviates from BTC’s price. ProShares, as an issuer, is simply another intermediary, and therefore a counterparty risk for the investor.
What is the difference between a futures-based and a physical ETF?
Many institutional investors will likely wait for a physical Bitcoin ETF that is tied to the spot market and not the derivatives markets. This ETF tracks the actual price of cryptocurrency. Campbell Harvey, professor of international management at Duke University, said that many institutional investors will do so. He explained that the BTC futures market was relatively small and that the buying pressure in futures would lead to a negative “roll return,” meaning that:
You are paying a premium for futures when you ‘rollover’ to the next contract. The physical is much more straightforward to purchase, but the SEC has not indicated that they will allow it.
Interview with CNBC, shortly after Oct. 19’s launch, Gary Gensler, SEC Chair, stated that the agency allowed only an indirect route to crypto. “What you have is a product that has been oversaw for four years by a U.S. Federal regulator, the CFTC. It has been wrapped in something within our jurisdiction [i.e. the SEC] by The Investment Company Act of 1940 so that we have some ability of bringing it inside of investor protection.”
This means that the new product will be protected by two layers of regulatory protection, the CFTC or the SEC, against hackers, manipulators, and fraudsters.
The ProShares fund, regardless of its history, resonated with investors. By the close of the second day of trading it had $1 billion in assets under administration, which is the highest amount of any ETF.
“This is the first American ETF to track Bitcoin,” Jeff Dorman of Arca said to Cointelegraph. “But it’s not the product the market wanted nor one that financial advisors feel comfortable with selling. It will likely result in less adoption than a physical-backed fund would have.”
Harvey was one of those who saw the significance in Invesco’s announcement on Monday. Invesco, a major ETF provider, said that it had decided to abandon its bid to issue a BTC futuresETF and instead focus on “pursuing a physically backed digital asset ETF”, a spokesperson for Invesco told Bloomberg.
Are pension funds likely to rush in?
When Dorman was asked about pension funds, an extremely cautious, but large subgroup of institutional investors firmament, Dorman said that while pension funds had been doing their due diligence “for years” in regards to crypto, it is unlikely that a Bitcoin futures exchange traded fund “moves” the needle much with this investor group. The ETF will increase market liquidity and market cap, making it easier for pensions invest comfortably.
“ProShares’ Bitcoin futures ETF certainly raises the profile Bitcoin in institutional investment community,” Ben Caselin from AAX, head of strategy and research, said to Cointelegraph. It might also make it easier for pension funds gain crypto exposure. Caselin stated that there should be more Bitcoin ETFs available, including ones that are physically backed, to allow larger players to access the market through an ETF.
Related: Crypto and Pension Funds: Are they like oil and water?
In an email to subscribers, Nigel Green, CEO at financial solutions company deVere Group stated that the ProShares futures ETF would “inevitably draw in a growing number of and broader range active market participants, including pension funds and retirement and brokerage accounts.” But Dorman said that ETFs weren’t designed for institutional investors. It is more of a retail product.
Dorman stated that institutional investors who want to be exposed to Bitcoin already have options. Although I believe there will be greater institutional adoption of digital assets in the future, it is likely that Bitcoin adoption will be lower than other digital assets that are easier to understand and value. Already, we are seeing new onramps gain momentum — gaming, NFTs, and DeFi.
It will attract individual users.
Retail investors: Will a futures-based Bitcoin ETF appeal to them?
Caselin stated that there are many retail stock traders who use trading apps and aren’t comfortable buying Bitcoin on spot markets, let alone withdrawing funds to a private wallet. He also said that some jurisdictions may prohibit retail traders from trading on centralized crypto exchanges. ETFs offer new opportunities to get exposure to Bitcoin’s price action.
However, ProShares ETF’s complex and separate underlying derivatives might add an additional layer of complexity to those who want to buy Bitcoin. John Iadeluca, CEO at Banz Capital, said to Cointelegraph that the ETF’s “separately price, complex underlying derivatives” could be confusing. Harvey, CEO at Banz Capital, added that retail investors can use existing brokers such as Robinhood or Coinbase to get access to crypto. They can avoid futures by bypassing the ETF.
Hammer noted that an ETF is still a traditional financial product and can be traded publicly on the exchange just like stocks. This will make crypto trading more appealing for the untrained retail customer who doesn’t need to deal with hot/cold storage, crypto exchanges, taxation issues, fraud, or other issues. This is where convenience shines.
Are there any Ether ETFs in the cards?
Bitcoin isn’t the only star of the crypto galaxy. Its dominance is actually eroding over the last year and there is talk of a eventual BTC/ETH “flippening”, in which Ether(ETH) surpasses Bitcoin’s total market value. It is worth asking the question: Is there an SEC-approved Ether ETF available?
Jay Hao, CEO at OKEx, stated that Ethereum is the second largest cryptocurrency in the world. However, an Ethereum ETF would be possible.
Caselin stated that Ethereum has a track record following Bitcoin in terms price action and attention. However, Ethereum, unlike Bitcoin would not be legal tender. Ethereum is still in an experimental phase. While the project has performed exceptionally well, questions remain about how the transition to proof of-stake [consensus protocols] will be done.”
“Ethereum is more about platform than about asset. I don’t think an Ethereum ETF will be on the horizon soon, until the space matures more.
Iadeluca disagrees. “I believe the approval of an Ethereum Futures ETF would be much more likely now,” Iadeluca said. This is especially true considering that Ethereum-based investment products closely follow the institutional product development of Bitcoin in the mainstream markets. “However this could take some time.”
Critical turning point
All in all, where do the week’s events figure on the crypto historical-significance scale? This was a moment of “watershed” where everything changed.
Hao stated that this was a major milestone in the continued development of the cryptocurrency industry. Institutional investors should be more involved and pay attention to mainstream acceptance. The industry will thrive as Bitcoin and crypto grow in popularity.
Harvey warned against falling for the hype. Harvey warned against falling for the hype.
“As long there is no crypto taxonomy that is uniform, the responsibilities of the supervisory authorities aren’t clearly assigned, and there isn’t a legislative framework that regulates crypto, especially DeFi, then we lose everything.”
Dorman still finds it bittersweet that ProShares broke the ETF barrier. It’s great to see another milestone accomplished, but it’s also disappointing that “it’s yet another flawed product with high costs and significant tracking errors that trades only on an exchange handpicked by the SEC.”
The same goes for the trees. One doesn’t want the forest to be lost. Green said that this week’s events could be seen as a test to see if mainstream investors are willing to include cryptocurrency in their portfolios along with other assets like stocks and bonds. It appears that they are, as evident by the reactions.
New York saw a lot of excitement this week due to the launch of the first Bitcoin exchange traded fund (ETF), sanctioned and approved by the United States Securities and Exchange Commission. The ProShares bitcoin Strategy ETF (BITO), which was the second most traded opening-day fund in history, made a spectacular debut on New York Stock Exchange. Some called it “a watershed moment” for the crypto industry.