Why a Bitcoin ETF On Futures Might Not Be Such a Good Idea

Tomorrow morning, the ProShare Bitcoin Strategy ETF is scheduled to begin trading. "Before you rush headlong into this market, it's important to understand that there are crucial differences" between an exchange-traded fund that's backed by actual Bitcoin and an exchange-traded fund like ProShare's that is backed by futures tied to the cryptocurrency," says Jared Dillian via Bloomberg. Here's why he says "a Bitcoin ETF on futures might not be such a good idea: The vast majority of commodity-based mutual funds and ETFs and are also backed by futures, but that's because the actual physical storage of most commodities is impractical, like with oil. Also, with almost all commodities most of the trading action and liquidity tends to happen in the futures market, not the spot market. The United States Oil Fund LP is the classic example of a commodity fund that is backed by futures. The fund earned some notoriety in 2020 when it scrambled to roll its futures contracts out the curve (in violation of its prospectus) in order to prevent the fund's bankruptcy in the event that the price of oil went negative -- which it did.

The United States Oil Fund case is an example of why a Bitcoin ETF on futures might not be such a good idea; it's impossible to predict what will happen in the futures market. But the main reason that people oppose futures-based ETFs is the cost of carry. When commodity futures are in contango, or when the price of deferred month contracts trade above front-month contracts, there is a significant cost to roll futures contracts from one month to the next, and that underperformance is passed to the investor. This has been a major complaint about commodity ETFs for years.

While commodity futures frequently trade in contango, they can also trade in backwardation, which is when deferred month contracts trade below front month contracts. In this case, investors earn a positive roll yield. Many commodity futures are trading in backwardation at the moment, although Bitcoin is in contango. There is no reason to believe that it might not one day be in backwardation. Gold is an example of a commodity where the ETFs hold the actual metal and not futures, because the storage and accounting of physical gold is fairly straightforward. So why can't a Bitcoin ETF hold actual Bitcoin? The reason is because the U.S. Securities and Exchange Commission's primary objection to physical Bitcoin funds is that the underlying market is unregulated. Well, the gold market is unregulated and we have physical gold ETFs, so what gives? The Bitcoin people are trying to figure this out. Dillian says there should be a physical Bitcoin ETF. "The Winkelvoss twins were the first to apply for one, back in 2013, when Bitcoin was trading below $1,000 (it's now around $62,000). If their fund had been approved, it would now likely be the largest, most liquid ETF in existence, and would have provided supercharged returns to a whole generation of investors."

Vocabulary lesson!

[Geoffrey.landis]

Wow, this post was a vocabulary lesson!

"contango", "backwardation"-- I can't wait to use these new words in conversation!

Re:

[Frank Burly]

"If their fund had been approved, it would now likely be the largest, most liquid ETF in existence, and would have provided supercharged returns to a whole generation of investors."--The words of a man selling the hell out of something. (Not that BTC won't jump as filthy casuals try to ride the bubble.)

Re:

[IdanceNmyCar]

These are trading terms. They have fairly straight-forward definitions and are included in major dictionaries. You won't use these words in your daily life but you also don't use antidisestablishmentarianism either though that's a perfectly valid word to.

You sound like some dude who hates the reality that languages aren't static. "Back in my day we just said 'That's great'. Now people say 'That's cool' and some of these hipsters even spell it with a 'k'.

Re:

[gosso920]

contango- n. The act of checking to see if Nancy Pelosi's husband holds any shares in the ETF in question.

Enough amateur investors willing to loose money

[thesjaakspoiler]

But investing in BitCoin is no different from other investment products.
If you don't fully comprehend what your doing, you should stay out of it.

Re:

[IdanceNmyCar]

I know exactly what loose is. It's what your sister is, looser.

ProShares is not for everyone

[Mean Variance]

Their ETF products are quite different from the common ones you might see from Vanguard or iShares.

Buyer beware. Investors really should "read the prospectus" in the case of their products - and that doesn't make them bad, but their utility can be quite different. For example their double and triple leverage indext ETFs (and inverse) are meant for day trading, but people will hold for days and not understand why they lost money or aren't up 3x of the QQQ gain when QQQ is up for the week.

I've read the prospectus. It's interesting and calls out the risks. It can be a good product for trading in and out without the overhead of setting up a crypto or futures trading account. That's what the management fees provide - convenience. It'll generally correlate with the price.

Re:

[IdanceNmyCar]

Futures trading is not for the common man. That's for sure. These are for people who can sit and watch stocks all day and have an extensive understanding of indicators.

Personally, I think futures in general are stupid in terms of a "market" because it's betting on something that effectively is short-term noise. It's also something an inside trader can more easily leverage.

Re:

[DarkOx]

Futures contracts play an important role for real produces or commodities. Its a valuable tool that gives them *some* ability to project forward revenues. They would not have that if their only option was taking spot prices on the day the harvest is brought in for example.

The flip side of that is buyers of those deliver contracts need some ability to hedge against a collapse in the spot price in order to affordably make those commitments. Its also important they have some way to exit the marketplace if thei

Re:

[IdanceNmyCar]

Fair.

GBTC is a fund that holds actual Bitcoin

[ayesnymous]

n/t..

Impractical to trade

[ceoyoyo]

The vast majority of commodity-based mutual funds and ETFs and are also backed by futures, but that's because the actual physical storage of most commodities is impractical, like with oil.

So is bitcoin. It costs too much and is too slow per transaction, so you need to do your trading mostly on paper, through an intermediary, like an exchange.

Re:

[excelsior_gr]

Hmm... Thus again becoming dependent on a central entity, that is in actual possession of all the assets and you have absolutely no control over, to say who owns how much coin. Not exactly how Bitcoin was envisioned.

Corrected title:

[Anonymous Coward]

" Why Bitcoin Might Not Be Such a Good Idea "

There, FTFY.

Re:

[IdanceNmyCar]

The "devil is in the details", where the difference between bitcoin as a theory meets the practicality. Cryptocurrencies will likely succeed anyways because governments have retarded economic policies though adopting it as a national currency is still probably a stupid ploy to address that issue.

coulda shoulda woulda

[algaeman]

If the ETF had been allowed in 2013, bitcoin would no longer exist, and would have tanked the economy during a pandemic. This is better timing. It even allows the GOP to capitalize on the cratering.

You can all stop spouting obvious things...

[superdave80]

...as we have an all-time winner:

... it's impossible to predict what will happen in the futures market.

I mean... wow.

ETF?

[Bu11etmagnet]

WTF is an ETF?

Re:

[Admiral Krunch]

WTF is an ETF?

*confused look*
Eh, The Fuck?

Re:

[dasunt]

WTF is an ETF?

Exchange Traded Fund.

More are like mutual funds, but come in individual shares that can be traded on the open market.

This is a futures fund, which means it doesn't hold the assets, but is instead based on futures - that is, the option to purchase an asset at a certain price in the future.

To use an analogy, use oil. One could buy a gallon of gas for $3. Or one could buy an option for a gallon of gas for $3 six months from now for, say, $0.10. If in a few months, gas goes to $4/gallon

Re:

[Tony Isaac]

ETF is a WTF "on a computer."

Re:

[account_deleted]

Comment removed based on user account deletion

Proshares can also close the EFT

[Poisonous Drool]

I had some shares in a Proshares EFT. I got an email they were closing the fund. Be prepared. You might not be able to wait out a position that is upside-down.

Re:

[Fly Swatter]

Is an EFT like an Elmer Fudd Trade or something?

tl;dr

[JasterBobaMereel]

Betting on a useless slow CryptoCurrency is not meta enough, so we want to bet on weather it will change instead ....

Backed by Futures is a better idea

[gurps_npc]

Yes, there are problems with backed by Futures, as written.

But backed by actual bitcoins gives you all the disadvantages of owning actual bitcoins, without any of the advantages of owning actual bitcoins.

Bitcoins have the following problems: 1) The hardware the bitcoins are on can easily be stolen, 2) the password can be lost, 3) someone that knows the password but who does not own them can steal the bitcoins. All of those things are far worse risks than the equivelent for say oil. Hard to back up a f

Re:

[mbkennel]

Except in reality the professional custody of crypto has been succcessful.

There are multi-signature wallets (so that K of N separate keys are needed to unlock) and now well established procedures with very strong security. Grayscale has been doing this for 5+ years and hasn't ever lost anything. There is a long standing GBTC trust which holds physical bitcoins except its more like a closed end fund, there isn't a mechanism to peg the market price to the underlying price through arbitrage. The physical ET

Re:

[gurps_npc]

The fact that one or more people have not lost money does not meant the risks are not real. Basically, you are saying X bank did not get robbed, so the danger of robbery is not real. Does not matter how many people have not been robbed, as long as one case exists, it is a real problem.

The solutions they have come up with are good, but not perfect. No matter what, a fire at the location that holds the physical bitcoin can destroy them. It can never destroy a contract.

What most people care about is irr

Ya think?

[cjonslashdot]

Like we need yet another table at that casino?

I have a plan

[cellocgw]

And it has nothing to do with ETFs. I'll start by buying International Nitrate and Trowbridge Helicopter and Electra Bakeries.
I'll sell when they double.

Futures trading?

[whitroth]

Let me see if I have this right: you're betting on the futures for something that's neither a product nor a service, right? So, basically, you're betting on the futures of a Ponzi scheme.

As the noted sf author Charlie Stross wrote, "quick! hurry to invest now, or you'll lose your chance to lose everything!"

Good idea for the people running the fund

[Tony Isaac]

They win no matter what, because they make money on the trades.

Re

[MarkUltraBlack]

I think the bitcoin era is gradually coming to an end. Its growth can't continue forever, and my guess is that it will crash in mid-2022. Therefore, I decided to trade other cryptocurrencies, and I found the platform thanks to the British Bitcoin Profit review [coininsider.com] . There are many strategies here that I use on a daily basis in my trading.