Investors in cryptocurrencies have long hoped that a direct investment in bitcoin by an exchange-traded fund would increase usage of the digital currency and drive up prices.
However, that might not occur, according to Stuart Barton, co-founder and chief investment officer at Volatility Shares, the company that produces the leveraged 2x Bitcoin Strategy ETF.
According to Barton, bitcoin futures ETFs are the way to go forward rather than a spot bitcoin ETF being the “holy grail” of the business.
Spot versus futures ETF
Although the U.S. Securities and Exchange Commission has previously approved a number of ETFs based on bitcoin futures, it has not yet approved any that are backed by the bitcoin itself.
A number of asset managers, including BlackRock Fidelity, VanEck, and WisdomTree, submitted proposals for spot bitcoin ETFs in June, rekindling investors’ expectations that a product of this kind would be accepted in the U.S. in the near future.
Barton said it was unlikely to be the case. The surveillance-sharing agreements between the asset managers and Coinbase would permit the sharing of data regarding market trading activity, clearing activities, and customer identity. Given that the SEC previously turned down dozens of applications for spot bitcoin ETFs due to fraud and market manipulation issues, some people theorized that such agreements might be the secret to getting the organization’s approval.
Although Coinbase was accused by the SEC of running an unlicensed national securities exchange, brokerage, and clearing service in June.
For the SEC’s legal case, Barton pointed out, it would almost be counterproductive if the agency approved an ETF that was going to be available to the entire nation while its underlying asset was being traded on an exchange that the agency has already declared to be acting as an illegal securities exchange.
The SEC must have at least one US exchange registered as a regulated exchange and all compliance requirements met in order for a spot bitcoin ETF to be approved. Barton remarked that he believed the procedure would take several years.
Even if a spot bitcoin ETF is approved, Barton believes it is unlikely to lead to a further rise in the cryptocurrency’s price. Since BlackRock submitted the application on June 15, the token has increased by more than 16%.
It’s possible to claim that fresh capital entering the bitcoin market will cause a price increase, according to Barton.
However, those seeking exposure to bitcoin through ETFs have already done so through the use of existing futures instruments. People could sell their futures-based ETFs and acquire spot-based ones if one introduces a spot ETF and they genuinely like the concept. According to Barton, there will be no overall effect on the price of bitcoin from that.
Even still, some claimed that futures-based bitcoin ETFs will charge investors more fees than spot bitcoin ETFs.
Costs incurred from rolling the contracts from one expiration to the next are among them. All future contracts have expiration dates, so funds who invest in bitcoin futures will need to purchase fresh ones to replace the expired ones.
The mechanism might also expose the funds to “contango” risks, which occur when longer-dated futures trade at a premium to front-month contracts, forcing the funds to sell low and purchase high.
According to Barton, investors actually do not give much consideration to “contango” risks.
In the end, Barton said, institutions use cash and carry arbitrage, in which traders buy bitcoin on the spot market then short the cryptocurrency using a futures contract that is trading at a premium, to maintain the price of the futures in line with the price of the cash.
Crypto in a snap
The price of bitcoin on Thursday was approximately $29,127, a loss of 1.9% over the previous seven days. Over the same time frame, Ether fell 1.4% to about $1,859.
