Crypto investors have long anticipated the introduction of an exchange-traded fund (ETF) that directly invests in bitcoin, hoping it would accelerate adoption and spark a price surge. However, Stuart Barton, Co-Founder and Chief Investment Officer at Volatility Shares, the issuer of the 2x Bitcoin Strategy ETF BITX, suggests that it may not have the desired impact.
Bitcoin Futures ETFs: A More Promising Path
Contrary to popular belief, Barton argues that a spot bitcoin ETF is not the “holy grail” for the industry. Instead, he believes that bitcoin futures ETFs offer a more promising way forward.
SEC’s Stance on Bitcoin ETFs
While the U.S. Securities and Exchange Commission (SEC) has previously approved several bitcoin futures-based ETFs, it has yet to give the green light to any ETF backed by actual bitcoin itself.
Asset Managers’ Hopes Dashed
In June, asset managers including BlackRock, Fidelity, VanEck, and WisdomTree filed applications for spot bitcoin ETFs. This sparked renewed hope among investors that the SEC might soon approve such a product in the United States.
Unlikely Approval for Spot Bitcoin ETFs
However, Barton suggests that it is unlikely for spot bitcoin ETFs to be approved. Asset managers have partnered with Coinbase in their surveillance sharing agreements, allowing information exchange on market trading activity, clearing activity, and customer identity. While this partnership was seen as a potential key to SEC approval, it’s worth noting that in June, the SEC charged Coinbase with operating an unregistered national securities exchange, brokerage, and clearing agency.
Counterproductive Outcome
Barton asserts that if the SEC were to approve an ETF tied to an underlying asset traded on an exchange deemed illegal by the agency itself, it would be counterproductive to their legal case.
Exploring the Approval Process for a Spot Bitcoin ETF
According to industry expert Barton, the approval of a spot bitcoin Exchange-Traded Fund (ETF) in the US is a complex and time-consuming process. In order for such an ETF to be approved, a regulated exchange registered with the Securities and Exchange Commission (SEC) must fulfill all compliance regulations. Barton believes that achieving this registration alone could take several years.
The Impact of a Spot Bitcoin ETF on Crypto Prices
Barton argues that even if a spot bitcoin ETF is approved, it may not necessarily lead to a significant price rally for the cryptocurrency. He suggests that the driving factor behind a bitcoin price rally would be the influx of new money into the market. He further explains that individuals who are seeking exposure to bitcoin through ETFs have already utilized futures products. If a spot ETF is launched and gains popularity, investors may opt to sell their futures-based ETFs in favor of the spot-based ones. Barton believes that this shift in preference would not have a considerable impact on the bitcoin price.
Costs Associated with Futures-Based ETFs
In contrast to spot bitcoin ETFs, futures-based ETFs come with additional costs for investors. These costs arise from the need to roll contracts over from one expiry to the next. As futures contracts have expiration dates, funds investing in bitcoin futures must constantly purchase new contracts to replace expiring ones. This mechanism could expose funds to “contango” risks, where longer-dated futures trade at a premium compared to front-month contracts, resulting in funds buying high and selling low.
Addressing “Contango” Risks
Barton contends that the potential risks associated with “contango” should not overly concern investors. He explains that institutions help maintain the correlation between futures and spot prices through cash and carry arbitrage. This strategy involves traders buying bitcoin in the spot market while simultaneously shorting it using a futures contract that is trading at a premium.
Crypto Performance Snapshot
As of Thursday, CoinDesk data shows that Bitcoin (BTCUSD) experienced a 1.9% decrease in the past seven days, with a trading price of approximately $29,127. Similarly, Ether (ETHUSD) saw a 1.4% drop during the same period, trading at around $1,859.
