You don’t own bitcoin directly when you invest in a bitcoin futures ETF, as you would with a stock or bond ETF. Bitcoin futures, on the other hand, are what you own.
Futures contracts are essentially wagers between two investors on the price of an item be it wheat, oil, or bitcoin at a specific point in the future (hence the name). Bitcoin futures contracts, which are traded on the Chicago Mercantile Exchange, normally have a six-month expiration date. As a result, one group of contracts expires each month, and the exchange prepares a new batch that will expire several months later.
Naturally, the price of bitcoin futures contracts can increase above or fall below the current spot price for bitcoin, depending on whether investors believe the cryptocurrency will be worth more or less in six months than it is now. However, as the contract’s expiration date approaches, the price of the contracts should converge with the market price of bitcoin, until they finally coincide on the final day.
The bitcoin ETF operates by purchasing futures contracts with expiration dates within a month or two of the current bitcoin price, which should roughly, but not precisely, mirror the current bitcoin price. As the expiration date approaches, the ETF sells the contracts that are about to expire and buys a new set of contracts that will expire in a month or two effectively “rolling” them over.
This isn’t unusual; several commodity ETFs operate in this manner. The United States Oil Fund (USO), the most popular oil ETF, invests in crude oil futures rather than crude oil. These pricing differences normally don’t amount to much over short periods of time – think days or weeks. They can, however, become important over longer periods of time, such as six months or a year, according to Hougan.
What is the Bitcoin Strategy ETF?
Buying and selling Bitcoin on a digital exchange might be hard and perplexing for some individuals. One of the reasons for the rise of Bitcoin exchange-traded funds is this. Investors can gain exposure to Bitcoin through an ETF rather than purchasing the cryptocurrency itself. So, much like any other ETF, Bitcoin ETFs follow the price of Bitcoin rather than the performance of an asset category.
What is the ProShares Bitcoin ETF’s structure?
The ProShares Bitcoin ETF is a futures ETF, meaning it does not hold bitcoin directly. Instead, the fund purchases futures contracts, which allow it to acquire exposure to bitcoin prices without really owning the currency. Futures contracts will expire, requiring the ETF to roll these futures contracts into later maturities. This puts the fund at risk of rolling over, especially if the futures curve is upward sloping (an upward sloping futures curve is said to be in “contango”).
Investors can trade BITO shares on an exchange in the same way they can trade equities because it is an ETF.
Important: Futures markets allow you to get exposure to an underlying asset without really owning it. Regardless of whether an investor transacts directly in the futures market or invests in ETFs that hold futures holdings, futures rollover risk exposes the investor to potential value loss.
There is no guarantee that the BITO ETF will track the price of Bitcoin continuously and precisely.
Are bitcoins held by Bitcoin ETFs?
A Bitcoin ETF would function similarly, with the price of one share of the exchange-traded fund fluctuating in lockstep with the price of Bitcoin. If Bitcoin’s value rises, so does the ETF’s, and vice versa. However, rather of trading on a cryptocurrency exchange, the ETF would trade on a stock exchange such as the NYSE or TSX.
Diversification
An ETF can hold a variety of assets. A Bitcoin ETF, for example, might own Bitcoin, Apple stocks, Facebook stocks, and other assets, allowing investors to diversify their portfolio while reducing risk. A Bitcoin ETF, meanwhile, would allow investors to diversify their existing equities portfolios by trading on a regulated market exchange.
Tax efficiency
The bulk of the world’s tax havens and pension funds do not allow Bitcoin purchases due to its uncontrolled and decentralized nature. A Bitcoin ETF traded on standard exchanges, on the other hand, would almost certainly be regulated by the SEC and qualify for tax benefits.
What impact will the Bitcoin ETF have on price?
If the bitcoin ETF holds a big portion of the futures market, it may increase price volatility and pose hazards to investors. When futures-based ETFs have a substantial footprint in the underlying asset, history suggests that they might aggravate price fluctuations and add to volatility. Heavy ETF-induced trading, for example, unsettled VIX futures prices and contributed to the VIX surge in February 2018.
Is it wise to invest in Bitcoin ETFs?
If you want to invest in Bitcoin, look into a Bitcoin ETF. A Bitcoin ETF is a better option than buying Bitcoin directly if you don’t want to actively manage your crypto investment but want to diversify your portfolio with a high-risk, high-reward asset.
What is the price of a Bitcoin futures contract?
The value of a single BTC contract is five times that of the BRR Index, and it is quoted in US dollars per bitcoin. The tick increments are expressed in $5 increments per bitcoin, therefore a one-tick move in the BTC future is worth $25.
What is the total number of Bitcoin ETFs?
There are presently 12 bitcoin ETF applications in the works. Any of those items might be the first to market, or numerous products could be approved at the same time, as some have hypothesized.
Is the Bitcoin ETF identical to Bitcoin?
- An exchange-traded fund (ETF) for bitcoin tracks the price of the digital currency, allowing investors to invest in the ETF without having to trade bitcoin.
- Investing in a bitcoin ETF eliminates the need for cryptocurrency investors to deal with complicated storage and security processes.
- On Oct. 19, 2021, ProShares, a provider of specialist exchange traded products, started trading the Bitcoin Strategy Fund, making it the first Bitcoin ETF to trade in the United States.
How do ETF funds function?
The underlying assets are owned by the fund provider, who then creates a fund to track their performance and offers shares in that fund to investors. An ETF’s shareholders own a portion of the fund but not the underlying assets. Nonetheless, investors in an ETF that tracks a stock index may get lump dividend payments or reinvestments for the index’s stocks. (Related: Find out how to)