The Bitcoin Futures ETF Explained - How Does It Work & Should You Buy It?
A day after the first Bitcoin futures ETF started trading in the US, Bitcoin hit a record high above $66,000.
If the risks of buying bitcoin deter you, but you’re keen to take advantage of the rising price, a Bitcoin Futures ETFs may be for you.
Read on to learn what Bitcoin futures ETFs are, how they work, and if they are the right choice for you.
What is the New Bitcoin Futures ETF?
A Bitcoin Futures ETF is an exchange-traded fund that allows investors to gain exposure to the price of bitcoin via a regulated investment vehicle that invests in Bitcoin futures contract to replicate the price development of bitcoin.
The ProShares Bitcoin Strategy ETF (BITO) is the first US-based exchange-traded fund that tracks the price of bitcoin by managing exposure to bitcoin futures contracts. With BITO, rather than owning Bitcoin directly, investors own shares of the first Bitcoin futures contracts ever.
Unlike a “physical” Bitcoin ETF, which would buy and custody bitcoin, Bitcoin Futures ETFs tracks the price of bitcoin by investing in CME Bitcoin futures on behalf of their investors.
A futures contract is an agreement to buy or sell goods at a fixed price in the future; such contracts secure better prices for participating parties. BITO, although also futures contracts, are not used to arrange a price but serve as a regulated investment vehicle for Bitcoin instead.
The ProShares Bitcoin Strategy ETF is not the only recently listed futures-based Bitcoin ETF in the US. Following ProShares listing, Valkyrie Funds and Van Eck both also received listing approval for their Bitcoin Futures ETFs.
The Valkyrie Bitcoin Strategy ETF (BTF) is an actively managed ETF that invests in CME Bitcoin Futures. The ETF trades on Nasdaq and comes with an expense ratio of 0.95%.
The Van Eck Bitcoin Strategy ETF (XBTF) is also actively managed and tracks the value of CME Bitcoin Futures. However, Van Eck’s Bitcoin ETF trades on Cboe Global Markets and comes with an annual expense ratio of 0.65%.
How a Bitcoin Futures ETF Differs From a Bitcoin ETF
Although Bitcoin Futures ETFs and Bitcoin ETFs both aim to provide investors with exposure to the price of bitcoin through a regulated investment vehicle, they differ in how they track the price of bitcoin (BTC).
Bitcoin ETF
A Bitcoin ETF buys and stores bitcoin (BTC) to track the price of bitcoin as accurately as possible. The funds then sells shares in the ETF to investors to provide them with indirect investment exposure to the spot price of bitcoin.
Bitcoin Futures ETF
A Bitcoin Futures ETF doesn’t involve bitcoin storage. Instead, the funds buys (and rolls over) bitcoin futures contracts to provide bitcoin price exposure to their investors.
The main difference between the two types of Bitcoin ETFs is that the latter doesn’t track the actual price of bitcoin as accurately as the former because futures contracts typically don’t trade at the same price as the underlying asset.
Buying Bitcoin Futures ETFs vs Buying Bitcoin
If exposure to bitcoin is your goal, you must understand the difference between buying into a Bitcoin ETF or Bitcoin Futures ETF and buying bitcoin directly.
Custody
When you buy bitcoin directly, you’re taking responsibility for storing that bitcoin. Such a responsibility requires you to secure a private key.
If anyone else gets access to this private key, they control your bitcoin, and if you forget your private key, you lose access to your coins.
When you buy Bitcoin ETFs, the fund you purchased the ETFs from takes responsibility for managing your shares. Although this takes a lot of weight off your shoulders, it means that you don’t actually hold any bitcoin.
Management Fee
Buying Bitcoin is subject to a vastly different fee structure than buying a Bitcoin ETF since one asset is available through the crypto market while the other is through brokerages.
When you buy bitcoin directly, there is no fee for holding your coins, no matter for how long. However, you may encounter a fee if you withdraw your bitcoin from an exchange or if you trade your bitcoin for another cryptocurrency.
When you buy Bitcoin ETFs, a management fee is charged every year proportional to the size of your shares. Although the management fee for Proshare’s BITO is only 0.95%, that still means that almost 1% is taken off your annual expected returns each year.
Regulation
ProShare’s BITO is the first Bitcoin Futures ETF approved by the SEC. Many investors rushed to take advantage of this release spiking the bitcoin price to a record-high on Oct 20.
The Securities and Exchange Commission and the Commodity Futures Trading Commission of the U.S regulate the Bitcoin Futures ETFs.
Bitcoin, on the other hand, still operates with some regulatory uncertainty in many jurisdictions.
Convenience
If you invest through a brokerage and are unfamiliar with the ecosystem of the crypto industry, Bitcoin ETFs will be much more convenient for you.
Buying bitcoin on a crypto exchange for the first time can be quite daunting and complicated.
Where Can You Trade Futures Bitcoin ETFs?
Bitcoin Futures ETFs trade on regulated stock exchanges in the US.
For example, BITO is listed on the New York Stock Exchange (NYSE), BTF trades on Nasdaq, and XBTF trades on Cboe Global Markets.
Considering the SEC just approved Bitcoin futures ETFs for the first time, more funds are hopping on the opportunity to take advantage of the Bitcoin Futures ETF market in the US. Meanwhile, BITO has made history by becoming the fastest ETF to reach $1b in assets.
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