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Oct. 24, 2021, 5:11 p.m. EDT

An Ether futures ETF is next likely step after ProShares watershed bitcoin moment, a former SEC official explains

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By Frances Yue

Hi there!  Welcome to the fourth and final installment of Need to Know Crypto Edition, ahead of the launch of a new weekly crypto newsletter “Distributed Ledger,” which will kick off in November. I’m Frances Yue, crypto reporter at MarketWatch, and I’ll walk you through the latest and greatest in digital assets this week so far.

Use  this link to subscribe  to Distributed Ledger.

One other thing, MarketWatch and Barron’s are gathering the most influential figures in crypto to help identify the opportunities and risks that lie ahead in digital assets on Oct. 27 and Nov. 3.  Sign up  now!

Crypto in a snap

We witnessed two historical moments for bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.25% last week. ProShares Bitcoin Strategy ETF /zigman2/quotes/230440344/composite BITO -0.34% , the first bitcoin-linked exchange-traded fund in the U.S., made its debut on Tuesday. After that, bitcoin hit an all-time high on Wednesday, trading near $67,000, surpassing its previous record high of $64,889 in April, according to CoinDesk data, before slipping over the weekend. As of 5 p.m. Sunday, bitcoin stood $61,257, down 7% over the past five days, but up 43% for the past month.

Ether /zigman2/quotes/108573964/realtime ETHUSD -0.06% also neared its all-time high, topping $4,300 Thursday, slightly below its record high of $4,379.11 in May. Ether was trading at $4,090 on Sunday.

Crypto Metrics

Biggest Gainers Price % 7-day return
OKB $28.3 70.6%
THORChain $10.9 38.9%
Huobi Token $10.2 33.6%
Fantom $2.6 31.2%
Nexo $2.3 30.3%
Source: CoinMarketCap.com as of Oct. 22
Biggest Decliners Price % 7-day return
Flow $13.6 -22.8%
Telcoin $0.02 -15.9%
Celsius $5 -14.2%
Perpetual Protocol $16 -12.44%
dYdX $19.9 -12.3%
Source: CoinMarketCap.com as of Oct. 22

A Grayscale bitcoin ETF?

On the same day of BITO’s debut, digital asset manager Grayscale filed to turn Grayscale Bitcoin Trust /zigman2/quotes/203330852/composite GBTC +0.98% , the world’s largest bitcoin fund, to a spot bitcoin ETF, which is different from ProShares’s bitcoin futures ETF greenlighted by the SEC. 

Grayscale has a good reason. A conversion to an ETF from its current trust structure will help mitigate GBTC’s long-lasting problem: shares haven’t always aligned with the price of bitcoin. GBTC has been trading at a discount to its net asset value, or its underlying bitcoin holdings since February, as investors turn to alternatives in the equity market to gain exposure in bitcoin, such as bitcoin ETFs in Canada.

On Monday, when the crypto market celebrated the SEC’s approval for BITO, GBTC’s discount to its net asset value widened to 20.5%.

Different from close-end funds, an ETF allows designated organizations to create and redeem shares of the ETF to keep its price in line with the net asset value. So GBTC’s discount will no longer be a problem, if its plan gets the regulatory go-ahead.

Grayscale’s conversion efforts have been in the works for years—it submitted a bitcoin ETF application back in 2016 only to withdraw it—and it has repeatedly expressed its commitment to change its fund structure to retain its dominant position as the largest crypto asset manager.

“At Grayscale, we believe that if regulators are comfortable with ETFs that hold futures of a given asset, they should also be comfortable with ETFs that offer exposure to the spot price of that same asset,” Dave LaValle, global head of ETFs at Grayscale Investments said on Tuesday.

However, some analysts argue that a spot bitcoin ETF may still be far away.

Bitcoin futures have been regulated by the Commodity Futures Trading Commission since 2018, while such products are traded at the Chicago Mercantile Exchange, one of the world’s largest exchanges for derivatives. “That’s what got the SEC comfortable with allowing this [bitcoin futures ETF] product. You don’t see that with the underlying [physical bitcoin],” Carlo di Florio, global chief services officer at compliance advisor ACA Group and a former officer at the SEC, told MarketWatch in a phone interview.

“I think there’s going to be a lot more work that needs to be done by firms to design products that provide investor protection and market integrity assurance before we see a green light on [bitcoin] spot [ETFs],” di Florio said. 

Ether futures ETFs, which are also traded at CME, might be more foreseeable than spot bitcoin ETFs, according to di Florio. “Because it’s futures,” di Florio said. “And it follows the same path that got the SEC comfortable with the Bitcoin futures ETF. So they’re likely to benefit from the same regulatory comfort.”

In August, VanEck and ProShares both dropped their applications for ether futures ETFs two days after they filed the application. Some analysts suspected that the SEC reached out to both issuers and indicated that ether-linked ETFs wouldn’t likely to be approved, at least not before any bitcoin-linked ETFs get the nod.

Darius Sit, managing partner at digital asset trading firm QCP Capital, echoed di Florio’s point, saying that an ether futures ETF might be approved before the middle of next year.

Three’s a crowd?

VanEck is slated to be the next fund provider to roll out a bitcoin futures ETF. It will be the third futures-linked bitcoin ETF since BITO made its debut last Tuesday.

VanEck Bitcoin Strategy ETF is expected to start trading on Oct. 25 (though that could change) and will be listed on the Cboe Global Markets BZX Exchange under the ticker symbol “XBTF,” according to a post-effective filing with the SEC. The expense ratio for the ETF is 0.65%, which means that an investor would pay annual fees of $6.50 for every $1,000 invested, which is lower than the expense ratio for the Valkyrie Bitcoin Strategy, which kicked off on Friday, and ProShares, which both carry a 0.95% expense ratio.

US : CoinDesk
-58.00 -0.25%
Volume: 0.00
Jan. 28, 2023 2:06a
US : U.S.: NYSE Arca
$ 14.65
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Volume: 13.77M
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US : Kraken
-0.94 -0.06%
Volume: 43.10M
Jan. 28, 2023 2:06a
US : U.S.: OTC
$ 12.36
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Volume: 2.31M
Jan. 27, 2023 4:00p
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