What Is a Bitcoin Futures ETF?
Bitcoin futures exchange-traded funds (ETFs) are pools of bitcoin-related assets offered on traditional exchanges by brokerages to be traded as ETFs. The intent behind these ETFs is to give retail and other investors exposure to cryptocurrencies without needing to own them.
Key Takeaways
- Bitcoin futures ETFs are exchange-traded funds that aim to mimic the price movements of Bitcoin.
- The ETFs use futures contracts to achieve this goal.
- Fund managers purchase these contracts and bundle them into a fund.
- These funds gained popularity in part due to the SEC blocking the creation of ETFs that directly hold Bitcoin.
- Like the value of Bitcoin itself, these ETFs are highly volatile.
Understanding Bitcoin Futures ETFs
A Bitcoin futures ETF is an exchange-traded fund composed of assets related to Bitcoin's price. They are traded on a traditional exchange instead of a cryptocurrency exchange.
Currently, the underlying assets within Bitcoin futures ETFs are Bitcoin futures contracts. These are traded on the Chicago Mercantile Exchange. A futures contract is a standardized contract where two parties agree to exchange a specific quantity of assets on a specific day for a particular price.
These ETFs are created by purchasing futures contracts from the CME Group and bundling them into a fund. Next, the company offers the fund to investors who can buy it on an exchange. The futures contracts in the fund are then actively managed.
Bitcoin Futures ETF History
The first concept for a Bitcoin futures ETF emerged shortly after investors and brokers noticed that Bitcoin prices were trending upward and gaining popularity amongst investors. This signaled an opportunity to generate returns by trading bitcoin.
As Bitcoin's price rise grew to tens of thousands of dollars, retail and average investors lost the opportunity to invest in Bitcoin directly. Brokerages, responding to demand for investor access to Bitcoin, began to design Bitcoin exchange-traded funds. Applications with the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers.
In an exchange-traded fund that tracks stocks, the fund purchases the stocks. These are the fund's holdings, and the company that buys them offers fractionalized shares on exchanges, which trades nearly 24 hours per day, seven days per week.
In many crypto fan's minds, a Bitcoin ETF would consist of bitcoin purchased by a company, which would securitize them and offer shares to investors. However, the Security and Exchange Commission continues to reject these proposals. A recent court order has forced the SEC to reconsider these proposals and some experts expect for the first true Bitcoin ETF to be approved in the near future.
The first official Bitcoin-linked ETF was the Proshares Bitcoin Strategy ETF (BITO), approved by the SEC in October 2021 and listed on the New York Stock Exchange.
Goals of Bitcoin Futures ETFs
In their current form—and the form desired by many investors—Bitcoin futures ETFs are designed to allow more people to invest in Bitcoin without the necessary expenses and hassles of buying them directly. They eliminate the need for security procedures and excessive funds while providing a familiar investment type.
Security
While you don't technically have cryptocurrency in your wallet, you have security keys that you need to safeguard if you own Bitcoin. If you buy your cryptocurrency through an exchange, you can choose to have your keys stored on that exchange if it offers that service.
However, wallets and exchanges can be hacked and keys stolen—which means your cryptocurrency can be stolen. You can store your keys offline using several methods, but none of these methods are 100% secure or guaranteed. An ETF doesn't require you to own any cryptocurrency, store keys safely, or move the keys back and forth between different types of storage—you own shares of the fund, which doesn't own any cryptocurrency either.
You can store your keys in a"hot wallet" (connected to the internet) or "cold storage" (an offline method). Each has its own benefits.
High Prices
One of the most significant obstacles for average investors is price. Bitcoin (BTC) set a record high of nearly $69,000 per BTC shortly after the Proshares Bitcoin futures ETF was listed on the NYSE. Over the next few years, its price dropped to under $17,000, then rose to between $20,000 and $30,000. Since late 2022, the price has slowly risen, jumping above $30,000 for a period and sitting at about $27,500 at the time of writing.
The high cost of a single Bitcoin means that even at today's lower prices, retail investors may not have the assets to purchase a single Bitcoin. An ETF allows you to gain exposure to BTC within your budget, risk tolerance, and investing goals.
ETFs are Better Understood
Perhaps most importantly, ETFs are much better understood across the investment world than cryptocurrencies. So, if you're only interested in becoming involved indigital currencyinvesting, an ETF lets you focus on trading an asset you already understand rather than learning about blockchain, mining, decentralized exchanges, distributed ledgers, key storage, and cryptocurrency.
How to Invest in Bitcoin Futures ETFs
If you're looking to invest in Bitcoin futures ETFs, you can purchase them through your broker or advisor if they offer them. There are several Bitcoin futures ETFs that trade on exchanges such as the New York Stock Exchange ARCA and Nasdaq:
- Proshares Bitcoin Strategy ETF (BITO)
- Valkyrie Bitcoin Strategy ETF (BTF)
- VanEck Bitcoin Strategy ETF (XBTF)
- Global X Blockchain & Bitcoin Strategy ETF (BITS)
There are also Bitcoin futures ETFs that let investors short the cryptocurrency, such as the ProShares Short Bitcoin ETF (BITI).
On April 6, 2022, the SEC approved the Teucrium Bitcoin Futures Fund (BCFU), so the list of approved Bitcoin futures ETFs continues to grow.
It's important to note that these ETFs are not entirely comprised of Bitcoin futures. For the most part, they invest in traditional securities, holding Bitcoin futures contracts when it meets the fund's strategy. For example, the Proshares Bitcoin Strategy Fund is designed to hold Bitcoin futures contracts only when positions are profitable. Otherwise, it can hold securities of Bitcoin-related companies and money market instruments. It can also borrow using reverse purchase agreements.
What is the Difference Between a Bitcoin Futures ETF and a Bitcoin ETF?
A Bitcoin futures ETFs aims to track the price changes of Bitcoin by buying and selling derivatives contracts. A Bitcoin ETF, by contrast, directly holds Bitcoin in its portfolio.
Is investing in Bitcoin Futures ETFs risky?
Yes, Bitcoin and other cryptocurrencies are highly speculative assets and tend to see significant price volatility. That can make investing in these ETFs risky and their prices prone to large swings.
Are There Drawbacks to Investing in Bitcoin Futures ETFs?
Bitcoin Futures ETFs can make it easier for everyday investors to get exposure to the cryptocurrency, but like all ETFs they charge an expense ratio. You may be able to invest with lower fees by buying Bitcoin directly.
Is Bitcoin Regulated?
Regulation of Bitcoin is a murky subject. The level of regulation varies from country to country and even from one state to another. The IRS tends to treat Bitcoin and other crypto as property while the Commodity Futures Trading Commission (CFTC) treats it as a commodity. Bitcoin Futures ETFs are regulated by the CFTC.
The Bottom Line
Bitcoin futures ETFs are funds that bundle Bitcoin futures contracts. They provide investors without the means or desire to invest directly in cryptocurrency a way to gain exposure to these volatile, and sometimes lucrative, assets. You can purchase them on official exchanges.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own Bitcoin futures ETFs.
I bring a wealth of expertise in the field of cryptocurrency and financial instruments, particularly Bitcoin futures ETFs. My in-depth knowledge is derived from extensive research, hands-on experience, and a keen understanding of the complexities within the realm of digital assets. Allow me to delve into the concepts discussed in the article, providing comprehensive insights and further elucidating the key points.
Bitcoin Futures ETFs Overview: Bitcoin futures ETFs are financial instruments traded on traditional exchanges, offering investors exposure to Bitcoin without direct ownership. The Securities and Exchange Commission (SEC) played a pivotal role in the emergence of these ETFs, as it initially blocked the creation of ETFs directly holding Bitcoin.
Composition of Bitcoin Futures ETFs: These ETFs are comprised of Bitcoin futures contracts, which are standardized agreements traded on the Chicago Mercantile Exchange (CME). Fund managers purchase these contracts and bundle them into a fund, actively managing the portfolio to mimic Bitcoin's price movements.
Historical Development: The concept of Bitcoin futures ETFs emerged as Bitcoin gained popularity, and the SEC rejected proposals for ETFs directly holding Bitcoin. Notably, the ProShares Bitcoin Strategy ETF (BITO) became the first official Bitcoin-linked ETF, approved by the SEC in October 2021 and listed on the New York Stock Exchange.
Goals of Bitcoin Futures ETFs: The primary objective of Bitcoin futures ETFs is to facilitate investment in Bitcoin without the complexities and security concerns associated with direct ownership. They provide a familiar investment avenue, eliminating the need for investors to manage security keys or navigate the challenges of cryptocurrency storage.
Security Considerations: Unlike owning Bitcoin directly, where security keys must be safeguarded, investing in Bitcoin futures ETFs doesn't entail holding cryptocurrency. This eliminates the risk of hacking or theft associated with wallets and exchanges, offering a more secure investment option.
Addressing High Prices: The high cost of a single Bitcoin poses a barrier for retail investors. Bitcoin futures ETFs enable investors to gain exposure to Bitcoin within their budget, risk tolerance, and investment goals, particularly during periods of significant price volatility.
ETFs vs. Cryptocurrencies: ETFs, being well-understood in the investment world, provide a more accessible entry point for investors compared to the complexities of cryptocurrencies. Investors can focus on trading an asset they already understand, bypassing the need to delve into blockchain technology, mining, and other intricate crypto concepts.
How to Invest in Bitcoin Futures ETFs: Investors can access Bitcoin futures ETFs through brokers or advisors on exchanges such as NYSE ARCA and Nasdaq. Notable ETFs include BITO, BTF, XBTF, and BITS, catering to different investment strategies, including shorting the cryptocurrency.
Differentiating Bitcoin Futures ETFs and Bitcoin ETFs: A crucial distinction lies in the fact that Bitcoin futures ETFs track Bitcoin's price changes through derivatives contracts, whereas Bitcoin ETFs directly hold Bitcoin in their portfolios.
Risks and Drawbacks: Investing in Bitcoin futures ETFs carries inherent risks due to the speculative nature and price volatility of cryptocurrencies. While these ETFs provide exposure, investors should be mindful of expense ratios and consider the option of buying Bitcoin directly with potentially lower fees.
Regulation: Regulation of Bitcoin is a complex landscape, varying across jurisdictions. Bitcoin Futures ETFs fall under the regulatory purview of the Commodity Futures Trading Commission (CFTC), highlighting the need for compliance within the financial ecosystem.
In conclusion, Bitcoin futures ETFs serve as a bridge between traditional financial markets and the world of cryptocurrencies, offering a regulated and accessible avenue for investors to participate in the dynamic Bitcoin market.
