Premium on bitcoin futures has doubled this month as investors wager that the SEC will approve the first futures-based bitcoin ETF
By Michael Wursthorn and Caitlin OstroffOct. 14, 2021 5:30 am ETPRINTTEXT21Listen to articleLength5 minutes
Investors are betting the first U.S.-listed bitcoin exchange-traded fund is about to get the go-ahead.
Securities regulators could rule as early as next week on as many as four applications for ETFs that will buy bitcoin futures contracts rather than the cryptocurrency itself. Over the next two weeks, the Securities and Exchange Commission may either approve, reject or delay the proposals ProShares, Valkyrie Investments, Invesco and VanEck submitted in August.
SEC Chairman Gary Gensler in August said he would be receptive to a futures-based ETF. He said so again two weeks ago while speaking at an asset-management conference in Washington, D.C.
In recent days, the annualized premium on CME bitcoin futures prices over bitcoin’s spot value was 15%, compared with about 7.7% on average over the first nine months of the year. Traders can make those returns by buying spot bitcoin and shorting the futures contract because the two prices will converge in the future, said Noelle Acheson, head of market insights at crypto lender Genesis Global Trading Inc. She chalks the gap in the premium up to institutions rushing to buy bitcoin futures in expectation of the ETFs’ approval.Institutions IndulgeTraders have piled into CME bitcoin futures, pushing the price further from bitcoin’sspot valuePercent difference between the futures and spot bitcoin price, annualizedSource: skewOct.-10-505101520%HuobiKrakenOKExDeribitCME
The Chicago Mercantile Exchange this month plans to raise the cap on the number of bitcoin futures contracts that a single firm can hold. The move could help make room for a new big player, such as an ETF, analysts said. Some of the asset managers involved in efforts so far have addressed several rounds of questions from the regulator about how the funds will work, said people familiar with the matter.
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“We’re on the edge of our seats to see whether the filings get through the SEC,” said Giang Bui, head of U.S. exchange-traded products at Nasdaq, which is working with Valkyrie to create a bitcoin futures ETF. “We’re all very hopeful.”
Expectations that the SEC will approve a bitcoin ETF have contributed to bitcoin’s roughly 25% climb this month, analysts said.
Over the past eight years, the agency has rejected or delayed decisions on numerous proposals for funds that directly hold bitcoin. Mr. Gensler has cited the agency’s lack of oversight over crypto trading venues that aren’t registered as exchanges in the U.S., which leaves regulators with no insight into where bitcoins are coming from and whether prices are being manipulated. That leaves investors vulnerable to potential fraud and manipulation in trading, the agency has said.
Oversight isn’t a problem with bitcoin futures, which enable traders to bet on whether the price of the cryptocurrency will rise or fall. Futures trade separately from the underlying asset they are derived from on exchanges, like the CME, that are overseen by the SEC.
‘This isn’t what everyone’s looking for in terms of a bitcoin ETF. But it’s a step in the right direction.’— Fundstrat Global Advisors’ Armando Aguilar
But futures-based ETFs are vulnerable to divergences in the prices of the futures and the underlying assets they track—in this case bitcoin, which is notoriously volatile.
ETFs may also lag the performance of bitcoin if it keeps rising. Longer-dated bitcoin futures have tended to trade above short-term contracts, a market dynamic known as contango. This can lead to lower returns for funds as they pay to roll over monthly contracts.
“A lot of people really don’t understand how futures work,” said Kathleen Moriarty, an ETF lawyer, of individual investors.
Investing returns on funds will also be hit by annual fund fees and potentially by some of the funds’ plans to also hold other assets, such as crypto-related equities and funds.CME Group share of bitcoin futures volumeacross all exchanges*Source: skewNote: *All exchanges include Binance, Bitfinex,bitFlyer, BitMEX, Bybit, CME, CoinFlex, Deribit, FTX,Huobi, Kraken and OKExMay 2021Oct.012345678%
Even so, analysts say there is likely to be a ready market for a futures-based ETF thanks to institutional investors looking to buy crypto assets. A recent survey of about 400 U.S. institutional investors by Fidelity Digital Assets found that 18% had invested in digital assets through an investment product this year. Nearly a third said they prefer investment products over direct investments in crypto for any future investing.
Asset managers are lining up to meet the demand. Following the initial batch of funds up for review, the SEC is expected to weigh in on three additional bitcoin futures ETFs in November. And analysts expect to see more. Just Wednesday, Cathie Wood’s ARK Investment Management filed plans to launch its own bitcoin futures ETF in partnership with European crypto asset manager 21Shares.
“This isn’t what everyone’s looking for in terms of a bitcoin ETF,” said Armando Aguilar, vice president of digital assets strategy at Fundstrat Global Advisors, adding that he believes some investors would prefer an ETF with direct exposure to bitcoin. “But it’s a step in the right direction.”