Bitcoin, a pioneer in the world of cryptocurrency, has garnered immense attention from investors, traders, and financial enthusiasts.
As the digital asset continues to evolve, so do the financial instruments associated with it. One such instrument that has gained prominence is the bitcoin futures Exchange-Traded Fund (ETF).
In this lesson, you’ll learn what bitcoin futures ETFs are, how they work, their benefits, and the potential risks involved.
🤔 What is a bitcoin futures ETF?
Bitcoin has come a long way from its inception, evolving into a legitimate investment opportunity. A huge milestone in this journey was the emergence of bitcoin futures ETFs (Exchange-Traded Funds).
A bitcoin futures ETF is an exchange-traded fund that tracks the price of bitcoin futures contracts, rather than the spot price of bitcoin itself.
Bitcoin futures are contracts that speculate on the future price of Bitcoin. These contracts are traded on regulated exchanges such as the Chicago Mercantile Exchange (CME).
💡 WTF is an ETF?
An ETF is a type of investment fund that is traded on stock exchanges, similar to stocks.
It’s designed to track the performance of a specific index, sector, or asset class, such as stocks, bonds, or commodities.
When you buy shares in an ETF, that represent a portion of the assets held by the fund.
In the case of a Bitcoin Futures ETF, the assets are bitcoin futures contracts.
⚙️ How does a bitcoin futures ETF work?
A bitcoin futures ETF operates by investing in bitcoin futures contracts rather than buying bitcoin directly.
These futures contracts are agreements to buy or sell bitcoin at a predetermined price on a specific future date.
The ETF’s performance is tied to the price movements of these futures contracts.
When you buy a bitcoin futures ETF, you’re essentially speculating on whether the bitcoin market will rise or fall.
For example, consider a bitcoin futures ETF that has a contract to buy 5 bitcoin at a predetermined price of $65,000 in six months.
- If the current price of bitcoin drops to $55,000, the value of the ETF will decline.
- If the current price rises to $75,000, the value of the ETF will increase.
- Your share’s value changes based on how much of a profit the ETF is likely to make.”
The ETF manager typically rolls over the futures contracts before they expire. This means that as one contract nears its expiration date, the manager sells it and buys another contract with a later expiration date.
This process helps the ETF maintain exposure to bitcoin’s price movements without actually holding the cryptocurrency.
👍 What are the benefits of bitcoin futures ETFs?
- Accessibility: Bitcoin futures ETFs make it easier for investors to gain exposure to bitcoin without needing to set up a digital wallet or navigate cryptocurrency exchanges. They can be bought and sold through traditional brokerage accounts.
- Convenience: You can trade the ETF like any other stock or ETF.
- Regulation: Since bitcoin Futures ETFs are traded on regulated exchanges, they offer a level of oversight and security that is often lacking in the broader cryptocurrency market. This can provide peace of mind to more conservative investors.
- Diversification: Including bitcoin futures ETFs in a diversified investment portfolio can provide exposure to the cryptocurrency market without the need for direct investment in bitcoin, thereby potentially reducing risk.
- Liquidity: ETFs are generally highly liquid, meaning you can easily buy and sell shares on the open market. This liquidity extends to bitcoin futures ETFs, providing a convenient way to trade.
⚠️ What are the risks of bitcoin futures ETFs?
- Volatility: Bitcoin is known for its extreme price volatility, and this characteristic extends to bitcoin futures. You should be prepared for significant price swings.
- Contango and Backwardation: The process of rolling over futures contracts can lead to contango or backwardation. Contango occurs when futures prices are higher than the spot price, leading to potential losses over time. Backwardation is the opposite, where futures prices are lower than the spot price, which can sometimes work in your favor.
- Tracking Errors: Bitcoin futures ETFs may not perfectly track the spot price of bitcoin due to the complexities of managing futures contracts. This can result in discrepancies between the ETF’s performance and the actual price movement of bitcoin.
- Fees: ETFs typically charge management fees, and bitcoin futures ETFs are no exception. These fees can eat into potential returns and should be considered when evaluating the investment.
🔑 No direct ownership of Bitcoin: A benefit?
While it may seem counterintuitive, not directly owning bitcoin can be a benefit for some investors. Here are a few reasons why:
- Security risks: Directly owning bitcoin requires storing it in a digital wallet, which can be vulnerable to hacking, theft, or loss due to technical issues.
- Custody and storage: You must securely store your bitcoin, which can be a challenge, especially for institutional investors.
- Regulatory compliance: Direct bitcoin ownership may require additional regulatory compliance, such as Anti-Money Laundering (AML) and Know-Your-Customer (KYC) procedures.
- Complexity: Buying, storing, and managing bitcoin directly can be complex and time-consuming, especially for those new to cryptocurrencies.
- Counterparty risk: Direct ownership means you are exposed to counterparty risk, such as the risk of default by a exchange or custodian.
By investing in a bitcoin futures ETF, investors can gain exposure to Bitcoin’s price movements without directly owning the underlying asset. This can provide a more convenient, secure, and regulated way to invest in bitcoin.
However, it’s essential to note that this benefit may not apply to all investors, especially those who:
- Are comfortable with the risks and complexities of direct bitcoin ownership
- Want to hold Bitcoin for the long term.
- Value the decentralized nature of bitcoin and want to control their own assets
Ultimately, whether no direct ownership is a benefit depends on individual investor preferences and goals.
🏢 What are examples of bitcoin futures EFTs?
Several bitcoin futures ETFs have been launched in recent years, providing investors with various options to gain exposure to bitcoin’s price movements through regulated financial instruments.
Here are a few notable examples:
| Ticker | ETF Name | Description |
|---|---|---|
| BITO | ProShares Bitcoin Strategy ETF | Launched in October 2021, BITO was the first bitcoin futures ETF approved by the U.S. SEC. It invests primarily in bitcoin futures contracts traded on the CME. |
| BTF | Valkyrie Bitcoin Strategy ETF | The Valkyrie Bitcoin Strategy ETF invests in bitcoin futures contracts to track bitcoin’s performance. |
| BITS | Global X Blockchain & Bitcoin Strategy ETF | Combines investments in bitcoin futures contracts with exposure to blockchain companies, offering diversified exposure to both sectors. |
| BITC | Bitwise Bitcoin Strategy ETF | The Bitwise Bitcoin Strategy ETF seeks long-term capital appreciation through managed exposure to bitcoin futures contracts. |
📋 Bottom Line on bitcoin futures ETFs
Bitcoin futures ETFs represented a significant step in the evolution of cryptocurrency investment products.
They offer a regulated, accessible, and potentially less risky way for crypto investors to gain exposure to bitcoin’s price movements. However, they come with their own set of risks and complexities that investors must understand.
As with any investment, it is important to do your own research (“DYOR”) and consider your own risk tolerance and investment goals before diving into bitcoin futures ETFs.