Just how significant is this development for the cryptocurrency markets, and where do we go from here?
In EQONEX’s Bitcoin ETF round-up piece last month, we discussed the lengthy history of Bitcoin ETF applications (and denials) and noted that SEC Chair Gary Gensler had made his position clear of favoring a BTC futures ETF rather than a spot. This, he argued, was because BTC futures are traded on regulated exchanges like the CME that fall under the jurisdiction of the U.S. regulator, meaning that investors would be less vulnerable to manipulation and fraud.
After his public comment and in the weeks running up to the Bitcoin futures ETF approval, the SEC received a flurry of applications. Speculation was rife as to whether the ProShares Bitcoin Strategy ETF would be the first to receive approval or whether the SEC would also deliver its verdict on other applications, including asset managers Valkyrie Investments and VanEck. There was also the chance that the application would be denied. However, most experts believed this would not be the case.
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Finally, the ProShares Bitcoin Strategy ETF received approval last Friday and began trading on Tuesday, rising by nearly 5% and capturing almost $1 billion in trading volume in a heavily traded fund debut that took the price of BTC to $64,367.14 (close to its previous all-time high of $64,895).
The following day, on Wednesday, BTC hit a new all-time high of $67.276,79, with the Proshares Bitcoin Strategy ETF trading over $1.2 billion—the quickest an ETF has reached the $1 billion mark—and the second BTC futures ETF, VanEck, receiving the go-ahead from the SEC.
The jury is still out on just how good futures-based ETFs will be for the industry longer term. Both cryptocurrency advocates and the traditional asset management industry have pushed for a Bitcoin ETF since the Winklevoss twins filed the first application in 2013. They argued that such a familiar investment vehicle would allow for greater participation from traditional investors in the cryptocurrency markets as they don’t have to take possession of the underlying asset.
Moreover, in today’s uncertain economic climate with rising inflation and the alarming debasement of the world’s reserve currency, allocating some of their portfolios into this new asset class is increasingly appealing to institutional investors. Many have hailed the launch of the ProShares Bitcoin Strategy ETF as a “watershed moment for cryptocurrencies,” and the notable hike in price and record-breaking trading volume would seem to reflect this sentiment.
Approval of a Bitcoin ETF (albeit futures-based) helps legitimize the cryptocurrency markets. As initial trading figures have shown, this type of investment vehicle could make it easier for institutional investors to gain exposure to digital assets.
However, others in the industry are less impressed, citing the many trade-offs between a Bitcoin futures ETF and a physical Bitcoin ETF, most notably, issues surrounding contango, backwardation, and the high costs of buying and selling futures contracts. Rather than protect retail investors (as is the raison d'étre of the SEC), a futures-based BTC ETF presents them with a complicated and expensive way of gaining exposure to this asset class.
Founder and CEO of Grayscale digital asset management giant Barry Silbert stated, “Friends, don’t let friends buy and hold futures-based ETFs.” While CEO of Onramp Invest Tyrone Ross told CNBC “this is not something for retail investors to buy.” One outspoken article by crypto media outlet Decrypt went as far as to say that:
“In a misguided bid to “protect” small investors, SEC approved an exotic derivatives product rather than a basic ETF that tracks the price of Bitcoin… retail investors were hoping to buy a boring Vanguard-style ETF, one that would let them buy Bitcoin just like a stock. What they got instead is an exotic investment option they may not understand, one that will cost them more in fees.”
As more futures-based Bitcoin ETFs are launched, the debate will continue as to how significant they are for the cryptocurrency markets. But it’s safe to say that their approval is a step in the right direction and could even pave the way for an SEC approval of a physical Bitcoin ETF. Shortly after expressing his disapproval of the futures-based ETF, Silbert made public Grayscale’s SEC filing to convert its Bitcoin Trust (GBTC), the largest Bitcoin investment vehicle in the world, into a Bitcoin ETF.
First launched in 2013, GBTC currently has almost $40 billion of assets under management, representing roughly 3.44% of all BTC in circulation. The SEC has 75 days to respond to the application, which means that 2022 could be shaping up to be another interesting year for the cryptocurrency markets. However, given Gensler’s position on regulated futures contracts, it seems unlikely that the SEC will approve a spot-based ETF containing bitcoins that are traded on global exchanges. We’ll have to wait and see.