What is a Bitcoin Futures ETF and How Does It Work?
What is an ETF?
An exchange-traded fund or ETF is an investment vehicle made of various investment products. This pool of assets issues shares to allow investors to gain exposure and operates in a similar manner as a mutual fund.
For the most part, ETFs track an index for a given asset such as commodities, securities, tokens, etc. ETFs are also listed on stock exchanges like traditional stocks.
What is a Bitcoin Futures ETF?
It is important to establish the definition of futures ETF first. Futures ETFs are a type of investment pool that tracks the value of futures contracts. Futures contracts are derivatives that allow investors to purchase the rights of selling or buying an underlying asset as a predetermined price before a set time period.
Bitcoin futures ETFs track the value of BTC futures and allow investors to gain exposure in the flagship cryptocurrency without trading them on the spot market.
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How does Bitcoin Futures ETF Work?
Bitcoin futures ETF can contain various assets that are pegged to the price of BTC. Fund managers create a basket of Bitcoin futures contracts and issue shares after listing it on a stock exchange. The value of Bitcoin futures ETF prices can depend on the spot prices of BTC and the supply and demand dynamics of its shares.
ETFs are created by purchasing futures contracts from Chicago Mercantile Exchange. The shares issued by this ETF are not listed on cryptocurrency exchange but on traditional financial markets. Fund managers supervise the sale and purchase of futures contracts added to the ETF.
Origin of Bitcoin Futures ETFs
Bitcoin Futures ETFs were first created on account of increasing traction and trading volume gains in BTC spot market. Brokerage houses created BTC futures ETFs to allow investors to gain exposure in BTC without trading it on a digital currency platform. The first Bitcoin Futures ETF application was submitted by Winklevoss Brothers in 2013 at SEC.
ETF managers purchase the underlying asset that the investment vehicle is tracking. These assets are added to the holding account of the ETF and the firm issues fractionalized shares on exchange market.
The trading hours for these shares are 24/7. The first Bitcoin futures ETF were approved by Securities and Exchange Commission in October 2021. This ETF was a Bitcoin Strategy ETF issued by ProShares trading under the ticker BITO on New York Stock Exchange.
Main Features of Bitcoin Futures ETF
Bitcoin future ETFs can have varied dynamics based on their issuers and market conditions. However, all Bitcoin futures ETFs have these fundamental features:
Security
When investors purchase Bitcoin futures ETF shares from a stock market they do not have to buy and secure cryptocurrencies. It means that the investors do not have to worry about the security of their digital currency reserves. The fund managers bear the responsibility of maintaining cryptocurrencies.
In this manner, the investors are secured against the threat of hack attacks and losing their funds in case of forgetting their private keys.
Investors who are using a crypto exchange to purchase digital currencies can be locked out in case of bankruptcy, technical error, regulatory interference, or other issues. Investing in ETFs guards investors against such threats.
High Prices
Bitcoin spot market prices are volatile and can vary depending on various factors. Bitcoin unit prices were trading near $17K at their lowest during the bear market. It means that many investors may not be able to invest in Bitcoin on account of budget constraints.
Therefore, Bitcoin futures ETFs bring more financial inclusion by allow a greater number of investors to seek exposure in BTC at lower risk tolerance and smaller budget.
Ease of Investing
Bitcoin futures ETFs are easier to understand for investors with limited exposure. ETFs allow beginner investors to gain exposure in digital currencies without learning about blockchains, mining, DeFi, and custodial services etc. Since ETFs are regulated they retain lower risk for investors who have started trading recently.
Conclusion
Bitcoin futures ETF are listed and regulated investment option. They are risk-averse and economic option for investors to trade digital currencies. However, investors should account for expense ratio that ETF charges to manage the investment instrument.
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