Bitcoin Futures ETF (Exchange Traded Fund) is again in discussion now as the United States Securities and Exchange Commission (SEC) has approved the first-ever Bitcoin-based ETF in the US on October 18, 2021 (Monday). It took many years for the SEC to approve BTC-based exchange-traded funds as the journey to approval included multiple delays and setbacks.
On Monday, SEC approved the ProShares Bitcoin Strategy ETF and it made its debut at NYSE (New York Stock Exchange) on Tuesday. This marks a watershed moment for the cryptocurrency industry as a whole. It is trading under the BITO ticker on the leading stock exchange. The most important thing about this BTC-based ETF is that it is based on futures contracts of bitcoin instead of BTC’s spot price.
SEC Chairman Gary Gensler has said that ProShares had filed their bitcoin-based ETF under the mutual fund category, thereby bringing it under the purview of rules and regulations of the MFs. Gensler underscored the point that filing ProShares BTC Futuresbased ETF fund under mutual funds has provided investors with significant amounts of protection.
By the end of trading at NYSE, 24.313 million shares of ProShares Bitcoin Strategy ETF (BITO) changed hands on the first day of trading (on October 19, 2021). The 24-hour volume of BITO crossed the US$1 billion mark by the end of opening day. This has also positively affected the price of Bitcoin, helping it to hit a new all-time high (ATH) price. At US$66,930.39. At press time on October 21, 2021, the Bitcoin price was hovering around US$65,039.33.
FTX Exchange’s CEO, Sam Bankman-Fried, said:
“It’s an incredibly bullish week -- there’s been really positive sentiment around the ETF in particular.”
Now, the question comes, what’s so special about Bitcoin Futures ETFs? Why is its approval in the US positively affecting the price of each bitcoin (BTC)?
A Bitcoin Futures ETF enables you to participate in the bitcoin market indirectly. This is a type of regulated financial product. To know what it is, you must know the concepts of bitcoin futures as well as ETF. You don’t invest directly in bitcoin but take the ETF route to invest indirectly.
These are financial derivative products where two traders enter into a contractual agreement of buying or selling bitcoin at a certain price on a future date, say after 1-month, 2-months, 3-months, or so on. BTC Futures are derivative products because they track the price of Bitcoin, which is the underlying asset here.
As per the futures contracts, you agree to buy or sell a financial asset (any stock, cryptocurrency, or any other asset class) on a specific date at a price that is predetermined and agreed upon by both the buyer and seller of the Futures contract. On the agreed-upon date, the agreement of buying/selling must be honored. This is known as the expiration date or Settlement date of the Futures contract.
As per a Futures Contract, anyone trader of that contract can sell the contract to any other buyer. In fact, there is no compulsion to hold the contract up to the settlement date. You can sell the contract to anyone else before the contract expiration date.
Once the Futures contract expires, both parties have to honor the contract. In that case, any one of them makes a profit and the other incurs a loss. Whether you have to buy the underlying asset at a premium or discount depends upon the spot price of the asset.
An exchange-traded fund tracks the movement of the price of an underlying asset. ETF price usually maintains a high correlation with the price movement of the underlying asset.
In the case of a Bitcoin ETF, it tracks the price of bitcoin (BTC) in the spot market. The best thing about buying ETFs is that you can make a profit by speculating on them without having to own the underlying asset.
ProShares Bitcoin Strategy ETF approved by the SEC recently doesn’t track the BTC price in the spot market but that of the Bitcoin Futures market. BITO tracks the price of bitcoin futures on the Chicago Mercantile Exchange (CME).
Instead of the spot market price of BTC, Bitcoin Futures ETF mimics the movement of the Bitcoin Futures price. The company that issues a Bitcoin Futures ETF (in the recent case is ProShares) has to:
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