Bitcoin Eyes Record Highs as Futures-Based ETF Within Sight

By Yasin Ebrahim

Investing.com – Bitcoin scaled $60,000 this week and is closing in on all-time highs, amid growing optimism a futures-based bitcoin exchange-traded fund could be approved as soon as next week, and eventually lay out the carpet for a bitcoin ETF.

BTC/USD jumped 8% to $61,097, and is just shy of its all-time of high of 64,778.

The Securities and Exchange Commission is widely expected to green light the futures-based bitcoin exchange-traded funds, or ETFs, proposed by ProShares and Invesco, to start trading next week, CNBC reported late-Friday, citing unnamed sources familiar with the matter. 

The road to bitcoin ETF has been paved with rejections and countless delays, but the prospect of an ETF that holds bitcoin futures, a regulated security, has grown on the SEC in recent months.

“One of the reasons regulators will like a BTC futures-based ETF is the fact that the underlying asset, a BTC futures contract, is already regulated by the Chicago Futures and Trading Commission,” Seamus Donoghue, vice president strategic alliances at Metaco, told Investing.com in an interview on Friday.

What is good for the regulator, however, isn’t necessarily appealing for the long-term investors. Unfortunately, bitcoin futures have a bad reputation as they don’t do a very good job of matching the price performance of bitcoin.

Unlike a spot bitcoin ETF, a bitcoin futures exchange-traded fund doesn’t directly own or hold bitcoin, but rather bitcoin futures.

As a futures contract is an agreement to buy or sell an asset for a set price at a set date, there are added complexities, or costs that need to be factored into the price of futures contract.  

These costs, or “carry” in trading parlance, include interest, financing costs, and storage costs in the case of commodities that lead to a futures price that is higher, or trades at a premium above the spot price of the underlying asset -- a dynamic known as contango.

As bitcoin is increasingly scarce, investors expect the price in the future to be higher than today's price, exacerbating this contango dynamic.

For institutional investors who want to buy and hold bitcoin for the long-term, but aren’t permitted to directly hold BTC, a futures-based bitcoin ETF can lead to significant underperformance – particularly when the price of bitcoin moves sideways.

“If the price of Bitcoin moves sideways, but you've always had very positive premiums in the futures price, you'll have significant losses,” Donoghue said.

Futures, however, aren’t typically used for long-term investing, but rather for speculating, or hedging, the latter of which has proved valuable for bitcoin investors.

"I don't think anybody would say, if you want to a position in an asset class, a long term way to buy and hold is through the futures market," Donoghue said.

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A futures-based bitcoin ETF, however, could provide investors with more tools to manage the wild swings in the price of bitcoin, which has a notorious reputation of large 30-to-50% drawdowns.

“One of the issues of crypto for institutional investors has always historically been the difficultly in hedging away some of the volatility or at least manage that volatility,” Donoghue added. "Futures enabled a little bit more risk management around the delta of the underlying risk."

The added flexibility, however, isn’t what has added a spring the step of bitcoin bulls.

The bigger bet for investors is that the successful launch of a futures-based bitcoin ETF could eventually pave the way to a U.S. listed bitcoin ETF, which will not only more closely match the price performance of bitcoin but may open the floodgates to further crypto adoption.  

"I think it's the first step, and probably in the next step, we'll be getting a spot bitcoin ETF, although timing is unknown," according to Donoghue. “A spot bitcoin ETF would be a very close proxy to trading the underlying bitcoin, and provides better access to everybody if its listed."