America’s first bitcoin ETF
The long wait is over. The United States, after eight years of back-and-forth, is getting a bitcoin ETF.
Beginning today, the ProShares Bitcoin Strategy ETF (BITO), will officially launch with trading expected to start on Tuesday. The fund was given a clear runway after the five politically appointed commissioners of the SEC said bitcoin futures ETFs were good to go. Commissioner Gensler prefers futures-based bitcoin ETFs as they can be wrapped in a 1940s Act fund structure.
BITO will invest in bitcoin futures, which will be rolled monthly. Bitcoin futures are issued by the CME Group and settled in cash. They have seen solid trading volumes, but less than actual bitcoins. The fund will charge 0.95%.
Fund managers have lobbied the SEC tooth and nail to give bitcoin ETFs a greenlight. Knowing the super profitability of Greyscale, the closed-ended bitcoin fund traded on the NYSE, fund managers have seen a once-in-a-generation profit opportunity in bitcoin ETFs.
Yet the SEC and other global regulators have been reluctant to allow bitcoin ETFs for three reasons. The first is the fact that the code can be changed. The second is the evidence of its use in crime—BlackRock boss Larry Fink’s view that bitcoin is an “index of money laundering” is shared by scholars. The third is its custody arrangements. Bitcoin uses a bitcoin wallet, which isn’t institutional grade custody the regulators have felt.
However with the launch of BITO, they appear to be coming around.
Bernie’s commentary – my guess is middling interest for futures ETFs
If the bitcoin rally the past several weeks is anything to go by, expectations are clearly high for this ETF. Bitcoin traders are anticipating big ETF inflows. They believe that bitcoin ETFs will drive up demand for bitcoins, and therefore prices. They have started buying up bitcoins to front run these ETF launches.
Yet for my part I’m not so sure about the uptake of futures ETFs. The problem, as I suspect readers of this email will be familiar with, is the futures contracts. From what I’ve been told, the contango on bitcoin futures is about 10% a year, which is a substantial implied cost. I think this will turn financial advisers off. I suspect it will also keep many retail punters preferring to trade bitcoins on high-fee Coinbase.
The other turn-off I think will be the fact that something better may be coming: physical bitcoin ETFs. If advisers and retail investors can see physical bitcoin ETFs around the pike, they may be inclined just to sit on their hands and wait. Why settle for less?
Don’t get me wrong: I still think there will be interest in BITO. I can see it becoming a $1 billion category. But not a $10 billion one.
Still, this is a step in the right direction. And whether the future holds something better – I suspect it will – we’ll have to wait and see.