By Mark DeCambre
A futures ETF would incur the cost of “rolling” soon-to-expire contracts to future months, which are likely passed on to the end user. Both ProShares and the coming Valkyrie fund have a 0.95 basis point expense ratio. That means it would cost an investor $9.50 annually for every $1,000 invested. The VanEck fund will carry an expense ratio of 0.65%.
In addition to “roll” issues are conditions that are unique within futures known as contango and backwardation that will result in the fund’s performance at points diverging from spot bitcoin values.
When prices for a futures contract are higher for contracts in future months, the market is said to be in contango. That is to say you will pay more to exit out of the expiring contract and into the new one.
Conversely, when shorter-dated contracts cost more than the longer-dated ones, it is referred to as backwardation. Contango is a relatively natural state of most futures markets because investors tend to pay added costs for someone to “store” the underlying asset.
“Because of contango the fund will actually be buying bitcoin at higher prices than the market,” D.A. Davidson’s Luria said. “That means it’s not an efficient way to get exposure to [bitcoin],” the analyst said.
Despite those factors, Luria said that if investors are comfortable with those concepts then a futures ETF might be the next best thing to investing in a spot ETF.
“If you want to get exposure now…it is not a bad way” to test out the market, but prospective investors should know that bitcoin futures are “a suboptimal way to get exposure” to the digital assets, he added.
Charlie Silver, who helped to create Siren Nasdaq NexGen Economy ETF /zigman2/quotes/208017739/composite BLCN -0.68% , one of the first ETFs focused on blockchain, the distributed-ledger technology that underpins most decentralized assets, said that futures ETFs are drawing interest because of the perceived convenience of the asset.
“The only reason a crypto-minded investor would invest into an ETF is convenience,” he said.
“ETFs trade like stocks so they are super easy to get in and out of. However, an ETF involves counterparty risk up and down the spectrum. A real crypto investor will want to own the crypto outright in their own control,” Silver, who is also the CEO of Permission.io, a crypto advertising platform, told MarketWatch via email.
He noted that one popular futures ETF, U.S. Oil Fund LP /zigman2/quotes/203483736/composite USO -1.10% , which had spectacular “roll” problems in April of 2020, is down 90% since its inception in April of 2006, compared with its underlying asset oil, which is up 18.3% over the same period, FactSet data show.
Rochard endorses direct ownership of crypto over an ETF of any sort but acknowledges that not everyone can stomach it and some investors might not feel sufficiently tech-savvy to deal with the gadgetry associated with storing their own crypto, if they aren’t comfortable custodying virtual assets with another party.
“If a person doesn’t feel confident in going to an exchange and owning their own private keys…if that starts to seem really overwhelming,” then a bitcoin ETF might be “a good place to start,” said that Origin Wealth Advisers founder.
So, what about other assets like Grayscale Investments’ Grayscale Bitcoin Trust /zigman2/quotes/203330852/delayed GBTC +1.20% ? Grayscale has been around since 2013 and is structured as a grantor trust and was technically intended for accredited investors, those who meet certain income and asset requirements that would make them theoretically able to weather losses.
GBTC, referring to its ticker symbol, is the largest bitcoin pegged fund in the world and believes that it has a shot at getting the SEC’s blessing to launch a “spot” bitcoin soon.
However, GBTC, due to its structure, doesn’t always precisely track bitcoin prices and in the past has traded at a premium to bitcoin. It currently trades at a discount to spot bitcoin. A fact that Luria says might make it an attractive bet for someone who believes GBTC’s value will ultimately converge with bitcoin prices.
GBTC fees are hefty though, 2% annually, and the tax treatment for the product may not be as favorable as a traditional ETF.
GBTC has been trading at a discount to bitcoin partly because investors are selling out of the product to make room for ETFs like ProShares.
“People got so excited about a bitcoin futures ETF that they have sold faster than GBTC is selling its assets,” Luria said.
There are tons of other funds that also provide exposure to blockchain technologies and companies that are associated with crypto. Some popular ones include Amplify Transformational Data Sharing ETF /zigman2/quotes/204122720/composite BLOK -0.28% , Bitwise Crypto Industry Innovators ETF /zigman2/quotes/226726487/composite BITQ -0.98% , /zigman2/quotes/226726487/composite BITQ -0.98% as well as Invesco Alerian Galaxy Crypto Economy ETF /zigman2/quotes/230087819/composite SATO -0.89% and Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF /zigman2/quotes/230087835/composite BLKC -0.96% .
Luria said, and many crypto bulls agree, that the approval of futures bitcoin ETFs may be a prelude to the regulator eventually approving a “spot” ETF. “I believe that,” the futures ETFs are “step toward that,” the D.A. Davidson analyst said. He speculated that the approval of a spot bitcoin ETF could be months away, assuming that there are no anomalies in the futures products.
New ETF records
Outside of crypto markets have been rallying. Frank Cappelleri, executive director and technical analyst at Instinet, said that the 22 ETFs Instinet tracks made new 52-week highs on Wednesday, marking the most since early September.
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