In-depth analysis of the first bitcoin futures ETF in the United States: characteristics, risks, impact and future

Editor of this issue | Colin Wu

Editor of this issue | Colin Wu

Since 2013, after years of waiting, it is finally coming, and the first Bitcoin ETF in the United States is about to be born. The Bitcoin strategy ETF approved by the US SEC for the first time and applied by ProShares this summer will officially start trading next week (October 18). This article will focus on the first Bitcoin ETF in the United States, and interpret its nature and potential significance.

What is the first Bitcoin ETF in the United States?

The full name of the first Bitcoin ETF in the United States is ProShares Bitcoin Strategy ETF (“Fund”), which was created by the asset management company ProShares. According to Linkedin, ProShares has been at the forefront of the ETF revolution since 2006. It has one of the largest ETF lineup teams in the United States and enjoys a wide reputation around the world. It provides investors with innovative strategic ETFs designed to manage risks and improve returns. Its products include various forward tracking index ETFs, as well as inverse ETFs that provide low leverage.

The main investment strategy of the ProShares Bitcoin Strategy ETF is to seek capital appreciation by managing exposure to Bitcoin futures contracts, but the fund does not invest directly in Bitcoin, so the so-called "Bitcoin ETF" is actually a Bitcoin futures ETF. This is a standardized and cash-settled Bitcoin futures contract registered with the Commodity Futures Trading Commission (CFTC) and traded on a commodity exchange. The value of Bitcoin futures is determined according to the CME Bitcoin Reference Rate (BBR), seeking to invest in cash-settled near-month Bitcoin futures (near-month futures refer to the futures market that is closer to the delivery month, but has not yet entered futures contract in the delivery month).

The ProShares Bitcoin Strategy ETF Fund (the "Fund") is expected to gain exposure by investing a portion of its assets in a wholly-owned subsidiary organized under the laws of the Cayman Islands and advised by ProShare Advisors. Generally, the Fund expects to invest approximately 25% of its total assets in the subsidiary. Of course, fund advisors have the decision-making power to obtain the best interests of the fund, so situations higher than this ratio may occur.

Things to note about the ProShares Bitcoin Strategy ETF:

1. The Fund does not take a temporary defensive position. Typically, foundations hold Bitcoin futures contracts during periods when the value of Bitcoin is flat or falling or rising. In order to maintain the exposure of the Bitcoin futures contract, the foundation sells its futures contract when it is about to expire and replaces it with a new futures contract with a later expiration date, which is commonly known as "Rolling". And there is a difference between newer futures contracts with later maturities and futures contracts with shorter maturities, known as "contango." If a futures contract with a later expiration date is priced higher than a futures contract with a shorter maturity date, during the rollover, the fund will sell the expiring contract at a relatively lower price and buy the expiring contract at a relatively higher price later-day contracts, and vice versa. In short, the foundation "renews" indefinitely without actively closing positions.

2. Funds typically seek to remain fully invested in these portfolios at all times, providing exposure to Bitcoin futures, regardless of market conditions, trends, or direction.

3. The Fund does not invest in or seek direct exposure to the current "spot" or cash price of Bitcoin. The Fund is classified as non-diversified, ie a relatively high proportion of assets are invested in financial instruments with a single or small number of counterparties.

4. There may be significant differences between the performance of the Bitcoin CME futures contract, the performance of the fund and the performance of Bitcoin spot, which may exist in investment strategy risks, the risk of price fluctuation differences between Bitcoin spot and futures, liquidity risk, and the Bitcoin futures market Risk, Bitcoin Futures Capacity Risk, Futures Investment Risk Cost, Bitcoin Own Risk, Cash and Money Market Instrument Risk, Affiliate Investment Risk, Borrowing Risk, Counterparty Risk, Non-Diversification Risk, Market Price Difference Risk, Authorized Participants Risk, cash purchase and redemption risk, early closing/delayed closing/trade suspension risk, active management risk, new fund risk, tax risk, valuation risk, etc.

There are several risks worthy of investors' in-depth attention:

1. Bitcoin futures capacity risk. In the event of limited liquidity in the Bitcoin futures market, interruption of the Bitcoin futures market or margin requirements, or position restrictions imposed by the Fund's Futures Commission Merchant (FCM), CME or CFTC, the Fund may not be able to achieve its investment objectives and may suffer significant losses.

Second, the risk cost of futures investment. Bitcoin futures have historically experienced long periods of contango, so Contango in the Bitcoin futures market can be disadvantageous if the price difference between the expiring contract and the longer-dated contract is significantly higher than the relative price of "rolling" other futures contracts Impact. Both futures premium and backwardation may affect the Fund's achievement of its investment objectives.

3. Tax risk. To qualify for special tax treatment for Regulated Investment Companies (RICs) and their shareholders, the Fund must derive at least 90% of its gross income each tax year from "qualified income" that meets certain asset diversification requirements at the end of each taxable quarter Take the test and meet the annual assignment requirement. If, in any year, the Fund does not qualify for the special tax treatment accorded to RICs and their shareholders, and fails to qualify or is unable to rectify such failure, the Fund will be taxed in the same manner as a regular corporation, all income of which is Funds are subject to U.S. federal income tax. The resulting taxes could significantly reduce a fund's net assets and income available for distribution.

The significance and impact of the first Bitcoin futures ETF in the United States:

1. It is a milestone. It is undeniable that in the cryptocurrency and blockchain upsurge, the United States is at the forefront of the world in terms of exchanges, venture capital funds, project innovation, regulatory levels, and rapidly growing mining computing power. Despite the high voice, the SEC has been refusing or delaying the arrival of the Bitcoin ETF with slogans such as disrupting the financial order of the market. However, with the approval of multiple Bitcoin ETFs in Europe, South America and other regions, the United States, which has gathered top resources, has intensified the contradiction between the mismatch between encrypted resources and encrypted financial instruments. The first Bitcoin futures ETF in the United States has finally arrived in the long-awaited. There is no doubt that this is an important moment, representing that the country with the most abundant encryption resources has finally ushered in the first encryption ETF. The news came out, fermented, and spread, and Bitcoin was once less than 1,000 points higher than before, which was the best response from crypto investors.

Second, the strength of the Bitcoin consensus makes the supervision "compromise". According to the market value ranking of listed companies, heavy metals and other assets, Bitcoin is already the eighth largest asset target in the world, not far from silver. It has only been more than ten years since its birth, and Bitcoin has gone from obscurity to consensus all over the world. During this period, it has experienced hundreds of policy suppressions in various countries, but it has become an existence that cannot be ignored in the world. Presumably the U.S. government also understands that killing is never the best way, but to look at it with a more innovative way of thinking and embrace it.

3. The historical significance may be greater than the practical significance. Behind the frenzy, we need to look rationally. Bitcoin futures ETF has undoubtedly greatly increased the attention of society and traditional investors, and also provided a channel for retail investors and institutions to participate in Bitcoin transactions in a compliant manner. But in actual operation, for retail investors, this may not be the best way to enjoy the long-term rise of Bitcoin; for institutions, Bitcoin futures ETF may become a hedge fund or asset management company to hedge its Bitcoin spot underlying or The underlying tools of other assets, or to put it bluntly, also provide more reasonable short-selling means for those who are long-term bearish on Bitcoin. From a short-term perspective, the first Bitcoin futures ETF in the United States has become a gimmick for "pull the market". As an ordinary investor, you should pay attention to Fomo.

Fourth, the further development of the encrypted derivatives market. Although there are CME Bitcoin futures in the United States, its trading volume does not account for a large proportion of the entire encrypted futures market, and it is still dominated by leading cryptocurrency exchanges such as Binance and FTX. The arrival of the first bitcoin futures ETF in the United States may not have an overly significant impact on the price of bitcoin, but the growth of its derivatives market and the trading volume of CME bitcoin futures may be due to institutional transactions attracted by the arrival of bitcoin futures ETF Quantitative and rapid development.

Conjectures about the future based on the birth of the first Bitcoin ETF in the United States:

1. The arrival of Bitcoin spot ETF or Ethereum ETF may not be too far away. As mentioned above, the bitcoin futures ETF is an important milestone, creating a precedent for the US SEC to deal with cryptocurrencies at the regulatory level, then the arrival of the bitcoin spot ETF (fund investment or tracking the current "spot" or cash price of bitcoin) Perhaps it is worth looking forward to by the majority of investors. The first bitcoin spot ETF in the United States may have greater practical significance for bitcoin prices, because it directly allows investors to legally hold bitcoin spot in a new and compliant way, perhaps without buying through an encrypted exchange. Direct purchases in traditional financial markets will undoubtedly greatly promote Bitcoin transactions, especially the entry of traditional investors.

In addition, with the rise of Ethereum and the DeFi ecosystem, the market value of Ethereum has also entered the top 20 in the world, surpassing Johnson & Johnson, the S&P 500 ETF, etc. I believe that Ethereum ETF can also do more.

According to the "Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions" issued by the central bank and other departments, the content of this article is only for information sharing, and does not promote or endorse any operation and investment behavior. Readers are requested to strictly abide by the laws and regulations of the region and do not participate in Any illegal financial conduct. Wu said that without permission, it is forbidden to reprint or copy the content, and those who violate it will be investigated for legal responsibility.

Reference article:

https://www.sec.gov/ix?doc=/Archives/edgar/data/1174610/000168386321006052/f10028d1.htm

According to the "Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions" issued by the central bank and other departments, the content of this article is only for information sharing, and does not promote or endorse any operation and investment behavior. Readers are requested to strictly abide by the laws and regulations of the region and do not participate in Any illegal financial conduct. Wu said that without permission, it is forbidden to reprint or copy the content, and those who violate it will be investigated for legal responsibility.