Review of the launch of Bitcoin futures ETFs and more importantly, what are the obstacles to spot ETFs?

Wu Shuo Author | Wu Zhuocheng

Editor of this issue | Colin Wu

The ProShares Bitcoin Strategy ETF (ticker: BITO) was officially launched on October 19, with a trading volume of over $1 billion on the first day, the second highest trading volume on the first day of issuance in history. The first-day trading volume of the Valkyrie Bitcoin Strategy ETF (ticker: BTF), which followed BITO, was much lower, at only about $78 million. Subsequent Bitcoin ETFs will gradually lose their first-mover advantage.

Source: https://twitter.com/EricBalchunas/status/1450460291750371336

On the second day, BITO transaction volume continued to hit a new high, reaching 1.294 billion, with a two-day increase of 5.87%. As of the close of November 3, the price of BITO was $40.4, down 3.67% since the opening on the 19th. During the same period, the spot price of Bitcoin fell by 2.13%, slightly less than the decline of BITO. However, since BITO tracks the near-month Bitcoin futures, and as the near-month expiration date approaches, the futures price will gradually converge to the current price, it is understandable that the yield during this period is slightly lower than the spot price of Bitcoin. Comparing the premium trends of BITO and GBTC, it can be found that BITO is more effective at least in terms of price tracking.

Source: TradingView

As of November 1, GBTC has outperformed spot, which achieved a positive return of 2.66% in this wave of crypto market decline. GBTC is a trust with Bitcoin as its investment target. In theory, it should closely track the price of Bitcoin, so the phenomenon of large discounts or premiums will create a lot of arbitrage space. Obviously, for investors in the traditional financial market who want to invest in crypto assets, futures ETFs are a better alternative to crypto assets, which will grab GBTC's market share to a certain extent.

For this reason, Grayscale immediately submitted documents to the SEC to convert the trust into an ETF the day after BITO went public. The difference is that Grayscale applied for a spot Bitcoin ETF instead of futures, on the grounds that futures-based ETFs have some shortcomings, namely the futures premium risk mentioned above. The closer to the expiration date of the current contract, the smaller the futures premium, and when rolling to the next near-month futures, the premium will increase significantly, so this interferes with the tracking effect. However, SEC Chairman Gary Gensler currently said that he prefers to pass an ETF that only passes Bitcoin futures. Therefore, there is still great resistance to the passage of crypto asset spot ETFs.

In fact, this resistance may not only come from regulators, but also from ETFs themselves. According to statistics, if the Bitcoin held by trust funds, listed companies, governments, and digital currency projects is added together, Wall Street already held 47.9% of the Bitcoin supply at the end of 2020. If spot ETFs are allowed to be approved on this basis, the holdings of Bitcoin by whales will continue to soar. Whether the gradual centralization of holdings is a blessing or a curse for the crypto world itself is still unknown.

In addition, the development of futures ETFs will hinder the passage of spot ETFs to a certain extent. Although futures ETFs have rolling costs, spot ETFs also charge an additional management fee, and the latter may not be superior in terms of cost. For ordinary investors, they don’t care whether the ETF they buy holds Bitcoin. What they care about is whether this ETF can bring them the same amount of returns as the appreciation of Bitcoin. Therefore, the expansion of the scale of futures ETFs will meet the needs of a large number of ordinary investors, which in turn reduces people’s demand for spot ETFs. In the first quarter of 2021, the trading volume of perpetual contracts reached 14.32 trillion US dollars. This 14.32 trillion did not actually hold encrypted assets, but it did not bring the same investment effect to investors. Therefore, instead of raising the price of the currency by establishing a spot ETF, it is better to drive the contract funds to the spot to contribute more to the price of the currency. Of course, this is impossible to achieve. Similarly, spot ETFs are not very attractive to futures ETF investors.

At present, the popularity of BITO has faded slightly, but as of the close of November 3, the daily trading volume has always been able to maintain more than 200 million US dollars. With the subsequent listing of Bitcoin futures ETFs, the scale will further expand, which may reduce the demand for spot ETFs by retail investors. (Head image from Marco Verch Professional Photographer)