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After the debut of the first US futures-based crypto ETF, Bitcoin reached a new record high.
Two experts say that the new fund might not be the most profitable or smartest strategy for retail investors.
A private equity CEO stated that it was better to buy bitcoin than to invest in the futures.
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Investors are eager to learn what the structure of the bitcoin futures exchange-traded funds will mean for their portfolios as the long-awaited product hits the market.
When it was first introduced in 1990, the ETF structure was one of the most important financial innovations. It allows investors to access passive, indexed funds. Although Bitcoin has opened up a new world of innovation, it is still in its infancy.
On Wednesday, the asset hit a record high of $66,000. This was just one day after the ProShares Bitcoin Strategy ETF (the first of its kind) was launched on the New York Stock Exchange.
This is a significant achievement in acknowledging legitimacy of the asset type. However, it is notable that a bitcoin within these types ETFs is not bought or sold during execution of trades and has therefore no direct effect on market supply.
Futures contracts are not like stocks or bitcoin. Investors must "roll" their positions to the next month in order to avoid physical delivery. However, institutionalization of bitcoin is a positive sign for investors, at least in theory.
Is a futures-based Bitcoin ETF a smart strategy?
Eric Schiffer, CEO at private equity firm Patriarch Organization, believes that it might not be.
Insider spoke to him in an interview. He stated that for the average retail investor, it's better to just buy bitcoin than to invest in futures. They'll want to be far more educated, and leave the work to quants.
However, there is a lot of interest among the public for regulated financial services that are based in the crypto world.
Schiffer, who has personally invested in crypto, stated that the US launch of the first bitcoin-based ETF has "boosted the hormonal levels of investors and taken away some of the apocalyptic upside that crypto painted in people's minds.
He anticipates that more institutions and hedge funds will be willing to use futures to hedge against the "upside of the next internet version."
Morningstar's global director for ETF research Ben Johnson stated that these ETFs were approved because they do not directly invest in Bitcoin, but rather in a well-established financial product.
Investors who choose to invest in this fund would need to manage not only the volatility of the asset but also how to maintain their exposure to cryptocurrency.
He said that if you invest in bitcoin futures you will see that there are many issues, most notably regarding maintaining that exposure.
"If the next futures contract or futures contracts are trading at prices higher than the ones the fund currently has, it could lead to the fund systematically selling low and buying expensive."
Johnson was referring specifically to the structure and operation of the futures market. Investors in the ETF who are in contango (where the futures price is higher than the spot) will have to sell their current contracts and purchase the next contract at a premium. The opposite is backwardation. This is when the futures contract's spot price is higher than its forward price.
He said that this approach could be very costly. Another factor to consider is tax implications. Investors are no longer able to take advantage of the traditional ETF tax benefit.
Cathie Wood seems to be waiting and seeing what happens with tax implications.
