Bitcoin has reached an all-time high of $66,000. Rafael Henrique/SOPA Images/LightRocket via Getty Images
This week saw the debut of Bitcoin futures ETFs, which marked a significant milestone in the crypto market.
Insider spoke to market experts to find out how ETFs compare with owning bitcoin.
ProShares launched Valkyrie and Valkyrie's ETFs this week. VanEck will follow.
This week, a new type of exchange traded fund was introduced to the public markets: ETFs linked to bitcoin futures.
ETFs that invest in Bitcoin futures ETFs are used to speculate about future bitcoin prices. They can be bought and sold as stocks and do not require that buyers have an account on a cryptocurrency exchange.
ProShares' Bitcoin Strategy ETF tracks CME bitcoin futures and launched Tuesday. It quickly accumulated $1 billion of assets under management. Valkyrie's Bitcoin Strategy ETF started trading Friday, and VanEck, an asset management firm VanEck, looks set to launch the Bitcoin Strategy ETF next week.
Christopher Perkins, president and CEO of CoinFund, a blockchain-focused investment company, said this week that bitcoin is among the most successful assets in history. "Now, when I look at this asset type, you have to think about whether you are an investment manager and what reputational risks you face if you don't have access to the best-performing asset for the past eight years." He said.
Insider spoke to three experts as companies introduce their products to the market. They discussed the benefits and disadvantages of purchasing bitcoin-futures ETFs or the digital coin, as well stocks in companies that have exposure to bitcoin.
ETFs for Bitcoin-futures
Although the launch of the futures ETF was an important moment for crypto markets, investors need to be aware of some key differences and complexities.
Naem Aslam is chief market analyst at AvaTrade. "This ETF is not for mom-and pop investors."
He said that a futures market trades with margin. "A futures market trades using a synthetic price movement because you don’t have the actual product." Investors should expect that bitcoin futures prices could differ from spot bitcoin prices.
Although bitcoin futures ETFs offer investors some exposure to bitcoin, they also have "deficiencies" that can make them difficult products for retail investors. William Cai is a partner at Wilshire Phoenix and has submitted an application for a registered spot bitcoin product. The SEC is currently reviewing the application.
Cai said that the key feature of futures markets are contracts with expiration dates. He previously traded commodities futures as well as other assets over his more than 10 year tenure at JPMorgan. A fund must roll contracts. This means that it sells the nearest future and then purchases the next one.
Cai stated that this process can lead to trading costs and front-running problems. Other market participants will know that you intend to do it and can position themselves to profit from your actions.
Perkins said that Bitcoin-futures ETFs were "so easy out of the door to get some of this synthetic exposure," to bitcoin. Perkins was previously Citigroup's global cohead of futures and clearing. He said that while it is not ideal cash exposure, and there are some costs associated with this, cash settlement of the future means you don't need to worry about custody since you're not holding any assets.
According to Vanda Research which tracks retail investing activity, most retail investors were not present at the ProShares product launch. Vanda stated that retail investors might be aware of the "contango trap", which refers to a market situation in which futures prices are higher than spot.
Futures ETFs are not only complicated because of the nature of their underlying contracts but also have some peculiarities. According to Bloomberg, the fund has already reached the limit for how many contracts it can keep due to strong demand for its ProShares Bitcoin Strategy ETF. Although the fund could diversify its holdings into longer-dated contracts, this could lead to the fund moving further away from bitcoin's spot performance.
Bitcoin and crypto-linked stock
Aslam, an ex-hedge fund trader based in London, suggested that he might use bitcoin-futures ETFs on the options market to purchase puts when he feels the time is right for more complicated strategies. An investor can sell an underlying asset by using put options.
Aslam recommended that average retail investors, who desire to have exposure to bitcoin, purchase the currency. He stated that the best way to purchase bitcoin is to do so through regulated exchanges or exchanges that are within these regulatory boundaries.
Stock investors have taken the stock route to gain exposure to bitcoin. This includes buying shares in bitcoin miners Marathon Digital Holdings, Riot Blockchain, as well as MicroStrategy (a data analytics company headed by Michael Saylor, who is a bitcoin bull). As of the end of December, the company had approximately 114 042 bitcoins.
Aslam stated, "I believe that going into stocks will be a second-hand experience." He stated that investors will not be able to experience the real flavor of bitcoin, the actual volatility, or the momentum of bitcoin.
Cai stated that buying crypto-linked stocks could increase the risks of individual companies as well as systematic market risk.
If you look at companies that have a lot of money invested in bitcoin, it is likely that they are a proxy. Sometimes proxy can be helpful if you don't have other options to do the things that you want.
But I caution you that you must be aware of the risks involved in buying crypto-linked stock. It is a proxy for bitcoin's price and is not an actual reflection. Cai said that they can diverge greatly.
