Should you buy a bitcoin-futures ETF versus actual bitcoin or crypto stocks? Experts weigh in on the advantages of each.
Bitcoinfutures ETFs burst onto the scene this week, marking a new milestone for the crypto market.
- Insider talked to market experts about how the new ETFs compare to owning actual bitcoin.
A new type of exchange-traded fund sprang into the public
Bitcoin futures ETFs invest in contracts used to speculate on future prices for bitcoin. They can be purchased and sold like a stock and don't require buyers to hold an account at a cryptocurrency exchange or to have a crypto wallet.
The ProShares Bitcoin Strategy ETF, which tracks CME bitcoin futures, launched on Tuesday and quickly pulled in $1 billion in assets under management. Valkyrie's Bitcoin Strategy ETF began trading Friday and asset management firm VanEck's Bitcoin Strategy ETF looks set to debut next week.
"When you look at the market and its entirety, bitcoin is … one of the best-performing assets in history," Christopher Perkins, president of blockchain-focused investment firm CoinFund, told Insider this week. "Now, as I look at this asset class, you have to ask yourself, if you're an investment manager, 'What's the reputational risk of not being able to have exposure to the best-performing asset in eight of the last 10 years?'" he said.
As companies bring their products to market, Insider talked to three experts about the advantages and disadvantages of buying bitcoin-futures ETFs, the digital coin itself, or stocks in companies with exposure to bitcoin.
While the debut of the futures ETF was a momentous occasion for the crypto market, there are some important differences and complexities investors should be aware of.
According to Naeem Aslam, chief market analyst at AvaTrade, for mom-and-pop investors, "this is not the ETF for them."
"A futures market trades on margin because you don't have the actual product, you are trading on a synthetic price movement," he said, and investors should anticipate that the price of bitcoin futures can differ from spot bitcoin prices.
While bitcoin futures ETFs give investors some bitcoin exposure they have "deficiencies" and can be complex products for many retail investors, said William Cai, a partner at investment firm Wilshire Phoenix, which has an application for a registered spot-bitcoin product under review at the SEC.
The key characteristic of futures markets is that contracts have expiration dates, said Cai, who previously traded commodities futures and other assets during his more than 10 years at JPMorgan. A fund has to roll contracts, meaning selling out the closest future before it expires, and then buy the next one.
"This process runs into trading costs and the potential for front-running issues where other market participants know you are going to do this and they can … position it to take advantage of your actions," said Cai.
Bitcoin-futures ETFs "were so easy out of the gate to get some of that synthetic exposure," to bitcoin, said Perkins, who before recently joining CoinFund was Citigroup's global co-head of futures, clearing, and foreign exchange prime brokerage. "It's not perfect cash exposure and costs do come with this … but by cash settling the future you don't have to worry about custody because you're not holding the assets," he said.
Retail investors largely sat on the sidelines of the ProShares' product launch, according to Vanda Research, which tracks retail investing activity. Retail investors may be aware of the 'contango trap,' Vanda said, referring to a market condition where prices for futures contracts are higher than the spot price.
In addition to the complexities of the underlying contracts, futures ETFs have some quirks. Strong demand for the ProShares Bitcoin Strategy ETF has already pushed the fund toward the limit of how many contracts it can hold, according to a Bloomberg report. The fund could spread out holdings into longer-dated contracts but that risks pulling the fund further away from bitcoin's spot performance.
Bitcoin and crypto-linked stocks
Aslam, a London-based former hedge fund trader, said he may use bitcoin-futures ETFs in the options market for puts when the time is right to venture into more complex strategies. Puts give an investor the right to sell an underlying asset.
But Aslam suggested average retail investors who want bitcoin exposure purchase the digital currency itself. "The way that we have been buying bitcoin - through regulated exchanges, or exchanges that exist within those regulatory boundaries - is the best way to really go to buy bitcoin," he said.
Many investors have gone the stock route to get exposure to bitcoin, including picking up shares of bitcoin miners Marathon Digital Holdings and Riot Blockchain as well as MicroStrategy, a data analytics company run by CEO and bitcoin bull Michael Saylor. The company held roughly 114,042 bitcoins as of last month.
"I think going into stocks is a second-hand exposure," said Aslam. [Investors] are not going to get to enjoy the actual flavor of bitcoin, the actual momentum, or the volatility that we have in terms of bitcoin," he said.
Buying crypto-linked stocks can add risks faced by individual companies along with systematic market risks, said Cai.
"If you go through … companies that invest a lot of their money in bitcoin, I would say that is a proxy. But sometimes proxies can be useful if don't have access to other ways to do things you want to do."
"But I would caution you really do have to know the risk that you're taking on," from buying crypto-linked stocks. "That is, it is only a proxy and not a direct reflection of bitcoin's price. They can diverge wildly," said Cai.
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