Bitcoin Futures ETFs are Already Here… The battle of fintech and governments is Just Beginning

October 19 was an important date in the history of cryptocurrency assets, because on this day the ProShares Bitcoin Strategy ETF (NYSE:BITO) debuted on the New York Stock Exchange. BITO trading started at $40.89, and bitcoin futures were worth $61,905 at that moment. This ETF provides market participants with indirect access to the leading cryptocurrency, which does not require direct participation in the futures market, the presence of a digital wallet or depository vaults.

BITO does not work with bitcoin directly, instead focusing on the futures of the Chicago Mercantile Exchange

There are no guarantees of a complete correlation of futures and BITO itself with spot bitcoin prices. However, listing a futures—based product is another step towards traditional ETFs.

A similar ETF represented by Valkyrie Bitcoin Strategy Fund (NASDAQ:BTF) debuted on October 22 already on NASDAQ. However, today we will focus in more detail on BITO.

Cryptocurrency supporters met the new funds with a fair amount of skepticism, as they would prefer a product that includes “real” tokens (similar to the SPDR ® Gold Shares ETF (NYSE:GLD) investing in gold). Nevertheless, BITO is another step towards promoting cryptocurrencies to the broad masses of investors.

In 2017, CME launched the first futures contract for the leading cryptocurrency, as a result of which bitcoin has updated a record high. On April 14, Coinbase Global (NASDAQ:COIN) was listed, which again pushed prices to new peaks. A similar reaction was observed last week.

The first ETF based on Bitcoin futures

According to fund managers, the ProShares Bitcoin Strategy ETF is the first exchange-traded fund based on bitcoin futures, allowing investors to join the bitcoin market in a convenient, liquid and transparent way. The fund is aimed at capital gains primarily through managed investment in bitcoin futures contracts. What makes this debut even more impressive is the start-up capital of $1.224 billion. The commission is 0.95%.

The SEC is able to monitor and control futures markets

The Commodity Futures Trading Commission (CFTC) approved the launch of bitcoin futures in 2017, which began trading in December. In 2021, the CFTC allowed the Chicago Mercantile Exchange to place futures on Ethereum, which started trading in February.

CFTC supervision allows regulators to monitor all activities.

Meanwhile, the US Securities and Exchange Commission (SEC) has considered many applications for ETFs in recent years, the underlying asset of which was to be bitcoin and ether. Gary Gensler, now the head of the SEC, previously served as chairman of the CFTC. The Securities and Exchange Commission decided that the best way of supervision is to approve futures ETFs, since derivatives are already regulated, which ensures consistency of the process.

At the same time, ETFs that involve storing tokens pose a special regulatory problem for the SEC.

Storage and security issues have not yet been resolved

The two main challenges facing the digital asset market are storage and security. Hacks, ransomware and other related dangers pose a unique challenge to regulatory authorities.

Legalizing a futures fund kills two birds with one stone. The ETF satisfies the market demand for derivative products, and at the same time reflects futures rather than spot prices, providing regulators with a sufficient standard of control and protection against potential price manipulation and other threats.

By launching BITO, SEC has bought itself some time. Henry Clay, who lived in the 19th century, was nicknamed “The Great Master of Compromises” when he was a US senator. According to him, the ideal compromise assumes that both sides left the negotiating table dissatisfied. BITO fits this definition perfectly.

Cryptocurrency fans would prefer to get a product similar to the successful SPDR Gold Trust ETF. Opponents believe that cryptocurrencies have no intrinsic value, and therefore any market products are a priori useless.

Moreover, governments whose one task is to maintain the status quo are probably concerned about the threat to their control over the money supply coming from a rapidly growing asset class. Thus, governments would like the “crypt” to remain a secondary asset.

Square (NYSE:SQ) is one of the largest electronic payment processing platforms. SQ founder and CEO Jack Dorsey said that his company is creating a bitcoin mining system, the software of which will help users in using the leading cryptocurrency. On October 15, Dorsey, who is also the founder and CEO of Twitter (NYSE:TWTR), wrote:

Mr. Dorsey is a well—known proponent of cryptocurrencies, which he calls the “currency of the Internet.” The storage and security solution will be crucial as part of the development of the entire asset class and the expansion of the target market available to companies, individuals and even governments.

Cryptocurrencies are a global exchange tool that, according to Dorsey, “will unite the world.” Last weekend, he warned that hyperinflation poses a clear and real danger, saying: “Hyperinflation will change everything. It’s happening right now.”

The limited supply of bitcoin makes it an effective means of protection against inflation (as long as it enjoys wide acceptance). Apparently, this is what motivates Mr. Dorsey.

If the storage and security issues are successfully resolved, Square can pave the way for launching ETFs that will own cryptocurrencies directly. ETFs provide individuals with alternative investment options using their usual brokerage accounts and expand the audience of investment and trading activities.

Mr. Dorsey is a globalist, a “visionary” and one of the leaders of the technological revolution. Regardless of whether you accept his global vision or not, he changes the established order of things. Governments are probably not among his fans, since his efforts are directed against their control over citizens’ wallets. Money and power are inextricably linked. The return of control over the money supply to people with the help of cryptocurrencies will violate the status quo, and governments do not intend to give up without a fight.

First successes and failures

The dynamics of BITO in the first days after the listing suggests that the market is experiencing a shortage of digital products. The bitcoin rally has caused a surge of speculative frenzy, as everyone wants to ride a “bullish” wave. And few assets could boast growth rates comparable to the leading cryptocurrency.

The ideological side of the issue is perhaps more significant. The rejection of fiat currencies, the value of which is determined by trust in issuers, causes their “erosion”. If Mr. Dorsey is right, hyperinflation will quickly destroy fiat assets.

On October 19, bitcoin futures opened at $61,905, and on the 20th they reached $67,680, after which they fell to $60,210 (by October 22). On October 26, one token cost $62,000. From the high of October 22, bitcoin fell by 11.04%, after which it recovered by 2.97%. At the time of writing, the value of the currency was $60 1875.

On October 19, BITO debuted at $40.88, after which it rose to $43.95 on October 20, and fell to a low of $38.90 by October 22. Accordingly, the ETF grew by 7.51%, after which it dropped 11.5%. By the 26th, the fund recovered by 2.98% to $40.06, but yesterday’s trading ended at $38.09.

As can be seen from the chart, trading volumes were impressive in the first two days. The volume has been declining since reaching a peak of almost 20 million shares on October 20 (that’s when bitcoin reached a record high).

BITO generally follows the dynamics of bitcoin futures, but there is still a slight deviation. Bitcoin is traded around the clock, seven days a week, but derivatives are traded only during trading sessions. An ETF is only available when the stock market is open.

In the first days, the volume was steady, but it tended to decrease. Bitcoin futures are a derivative instrument, which makes BITO a “derivative squared”.

BITO is a step in the right direction, and an ETF with real tokens on its balance sheet will be the next step in the evolution of the asset class. Mr. Dorsey is an industry revolutionary, and he is working to address storage and security issues that will allow regulators to approve relevant products. Meanwhile, no product will fill the “ideological gap”.

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