Investors working in the stock market often resort to  using ETF. Buying shares of exchange-traded funds allows you to diversify your portfolio without acquiring the securities of a particular corporation. But now crypto investors have such an opportunity. They got the opportunity to work with bitcoin without buying the coin itself. The ProShares Bitcoin Strategy ETF is backed by Bitcoin futures. And this allows you to legally circumvent the legal restrictions of the United States and some other countries.

Understanding the terms

ProShares Bitcoin Strategy (ticker: BITO) became the first financial asset backed by bitcoin futures. It is traded on the New York Stock Exchange (NYSE).

The main feature is that BITO does not own the currency directly. Futures contracts with the Chicago Mercantile Exchange are used as collateral. These are obligations to purchase an asset in the future at a price that is set at the time of the execution of the futures.

The emergence of BITO is a milestone in the legalization of cryptocurrencies. This solves the question of how to invest in cryptocurrency if it is prohibited. Since 2013, the SEC has consistently rejected applications to open bitcoin spot exchange-traded funds. But now the attitude of the regulator towards this instrument has changed.

The difference between a spot ETF and a futures ETF is that in the first case, the price of real bitcoins is tracked. And in the second – futures contracts. But their price may differ from the real value of bitcoin on a certain date. The rate is formed by supply and demand, which is created by the market participants themselves.

Another important point is legislative regulation. For example, futures ETFs operate under the Investment Company Act of 1940. If the spot markets of cryptocurrency are not yet regulated, then the futures are strictly regulated. This gives more security to investors as all asset rules are set by the Commodity Futures Trading Commission. That is why the SEC granted the application.

Note that BITO is the first, but not the only exchange-traded fund associated with cryptocurrencies. Several more applications have been submitted to the SEC for consideration. And there is no reason to believe that they will be rejected, unlike spot ETFs.

BITO success on the exchange and alternative options

Immediately after the appearance of shares of an exchange-traded fund on the exchange, traders bought securities in the amount of 280 million dollars. And during the trading session, the volume of transactions exceeded 1 billion dollars. This was a record in the history of trading. Almost simultaneously with BITO, securities of another Valkyrie Bitcoin Strategy fund became available to investors. But he did not arouse the same enthusiasm among buyers.

However, this phenomenon also caused other changes in the markets. The exit of BITO provoked an increase in the rate of bitcoin, which on that day broke through another resistance line and updated the maximum. For investors, this means that the US is ready to accept cryptocurrency as a financial instrument. Albeit in an indirect form through futures.

In other words, if earlier investors could not legally invest money in cue ball due to US law restrictions, now they can make such purchases through ProShares Bitcoin Strategy ETF shares.

Benefits of Bitcoin Futures ETFs

The appearance on the exchange of funds that are backed by crypto futures provides several important advantages.

  1. First, thanks to futures ETFs , pension funds and other organizations that cannot purchase the coin directly due to legal restrictions will be able to invest in bitcoin. Hedge fund managers will be able to diversify risks and increase the return on their clients’ investments.
  2. Secondly, the expansion of the range of available instruments is beneficial for financial advisors and capital managers. In the United States alone, there are over $100 trillion under management. dollars. For example, some of them can be invested in BTC through futures and bring additional profit on commissions.
  3. Third, futures can be bought by private investors. Thus, they will receive much more profit than when incesting in stocks or real estate. But at the same time, there are no risks associated with insufficient legislative regulation of cryptocurrency turnover.
  4. Fourth, exchange-traded funds have less volatility than the rate of bitcoin itself or another cryptocurrency. Hence, they are less risky financial instruments. This is due to the fact that ETFs are formed not only from futures contracts, but also from other instruments.

Investing in cryptocurrencies through ETFs has many advantages.  Photo: Ivan Babydov / pexels.comInvesting in cryptocurrencies through ETFs has many advantages. Photo: Ivan Babydov / pexels.com

What’s the catch

 

The downside of investing in BITO is the increased cost of capital management. The exchange-traded fund charges the owner of the securities a service fee. Moreover, it is larger than that of ETFs with securities of various companies. For example, for a year of management, you need to pay about 1% of the invested funds.

The second disadvantage is contango, that is, the situation when the price of a futures contract exceeds the spot price of an asset. Because of this, the owner bears additional costs. But the benefits received make up for the small inconveniences, which was confirmed by the large trading volumes and the growth in the price of ETF securities already at the start of sales.

What is the result

 

Although Bitcoin futures ETFs were expected, they have become a revolutionary step in the field of investing in cryptocurrencies. Now you can buy crypto and earn on exchange rate fluctuations, being within the legal framework of the United States and other countries. Miners and  stakers, as well as ordinary investors with free capital, will be able to profit from a new phenomenon in the financial market .