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Bitcoin ETF’s ‘almost perfect’ debut nudges spot price closer to record; Grayscale joins the fray


Bitcoin sits above $64,000 on Tuesday, zeroing in on a record high as excitement over its first exchange-traded fund (ETF) — and another soon to come — reached a fever pitch.

As the largest cryptocurrency by market capitalization rallied by over 4% on the day, The Proshares Bitcoin Strategy ETF (BITO) launched on the the New York Stock Exchange (NYSE) — the first ever BTC (BTC) related fund available to U.S. investors. While some market participants have questioned the utility of the new product, it will offer people a new way to gain exposure to BTC via brokerage accounts.

BITO’s debut was the second largest ever for an ETF, reflecting massive interest in the crypto sector. However, incoming buyers — especially first-time crypto owners — should be forewarned: the new Bitcoin ETF(s) won’t trade exactly like the market digital coin that tends to fluctuate wildly. 

The Securities and Exchange Commission (SEC) approved the new ETF as futures based, meaning they’re derivative, based on the underlying BTC price. That makes them more complex and expensive to own than holding Bitcoin outright.

But Grayscale Investments and the New York Stock Exchange is moving to convert the world’s biggest Bitcoin fund into a spot-based ETF, capitalizing on the market’s embrace of the new fund and a regulatory environment that appears to be shifting in favor of cryptocurrency.

“The daily correlation of BITO to spot Bitcoin is going to be almost perfect,” Eric Balchunas, senior ETF analyst at Bloomberg, told Yahoo Finance Live, even if BITO will probably miss the price of Bitcoin by 5 to 10% over the course of a few years, he added.

“Advisors probably won’t buy it,” said Balchunas. “Its going to get exciting but that excitement will be driven by traders, not longterm investors.”

Investors have been clamoring for a fund based on spot prices that would better serve retail investors. However, the SEC chose to approve BITO first because, as futures-based products they are governed by a 1940s law act that gives investors a higher degree of protection. 

Other Bitcoin ETF contenders — including Grayscale, which offers (GBTC) — remain optimistic that the futures-based ETF will pave the way for a spot product. But near-term, Balchunas remains bearish given that SEC Chair Gary Gensler appears less interested in the spot ETF for Bitcoin, because it falls under a 1933 securities provision which grants less investor protection.

“Gary Gensler just isn’t really comfortable with the 1933 act,” said Balchunas. Referring to the possible timeline for offering for a Bitcoin spot ETF, he added: “If you forced me to pick a date for that I would probably go with a year to eighteen months.”

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If you’ve never traded futures or owned a futures-based ETF, the key difference is that the returns of BTC futures contracts don’t mirror the returns of the underlying Bitcoin market price longer term. 

Two key terms the novice investor might need to know are “contango” and “backwardation.” The former is a condition where the futures price is above the expected future spot price, while the latter refers to the reverse (the spot price is above the futures price). 

Taken together, it means investors will sometimes gain or lose value longer term by owning the futures-based BTC ETF, even while the price of Bitcoin won’t fluctuate the same way.

But contango and backwardation also open another opportunity for a trade called “cash and carry.” The point is to profit from this price difference between BTC futures and the underlying Bitcoin price, also called the futures premium.

Traders could employ the cash and carry strategy for years. But now with the release of the futures-based ETF, the premium is expected to get much larger. Once it does, it will serve another way for U.S. funds and pro-traders to earn profit off BTC futures.

Yet crypto investors believe that most retail investors who aren’t active futures traders probably aren’t interested in the cash and carry trade. However, they will need need to understand that an increasing premium in BTC futures means that longer term, it will likely fluctuate based on the additional factor of professionals commodity traders making more sophisticated plays on the product. 

Open interest on CME Futures at an all-time-high

Shiliang Tang, Chief Investment Officer at the crypto hedge fund LedgerPrime, is nonetheless optimistic for how the futures-based ETF might spur the price of Bitcoin over the near-term, with Wall street investors piling into this new type of fund. 

The Chicago Mercantile Exchange (CME), where the new fund is listed, “is generally reflective of institutional capital,” Tang told Yahoo Finance. He explained that the open interest on CME Bitcoin futures is a solid way to gauge the level of participation that pro-traders and institutional investors are showing in BTC Futures — at least in part to capitalize on the cash and carry trade.

Vaulting past its previous all-time high of $3 billion, the open interest in BTC Futures on the CME currently sits at $3.6 billion according to the crypto exchange Bybit.

The aggregated open interest in Bitcoin futures across all major exchanges now sits above $23 billion and climbing, not far from this year’s all-time-high ($27.3 billion) set just before before Coinbase’s (COIN) initial public offering in April.

David Hollerith is a senior reporter covering the cryptocurrency and stock markets. You can follow him @DsHollers.

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