But others, like Arca CEO Rayne Steinberg, had “mixed feelings” about the events. While pleased that a much-awaited crypto investment vehicle final
But others, like Arca CEO Rayne Steinberg, had “mixed feelings” about the events. While pleased that a much-awaited crypto investment vehicle finally received regulatory approval — ending eight years of futility on the part of U.S. fund issuers — he had some misgivings about the product that finally met the approval of the SEC, specifically the fact that it was futures-based and didn’t track the price of Bitcoin (BTC) directly.
“We do not think a futures ETF is a good way to get Bitcoin exposure,” he said in a blog, adding, “Futures based ETFs work for short term trading, but have massive tracking error issues over long periods, which is what most investors are looking for when it comes to Bitcoin exposure.”
Markus Hammer, an attorney and principal at Hammer Execution consulting firm, agreed with some others that the event was a milestone yet cautioned, “It is only one milestone with quite a journey ahead,” further informing Cointelegraph, “As an investor, if you want to go long in crypto — and many do — you prefer a fund that tracks ‘physical’ Bitcoin and not a derivative of it.”
The ProShares ETF is a bet on BTC’s future price movements. That is, “the product ultimately deviates from the BTC price itself, next to the fact that ProShares as the issuer is just another intermediary and thus counterparty risk to the investor.”
Futures-based vs. physical ETF — Does it matter?
Many institutional investors will probably wait for a physical Bitcoin ETF — tied to the spot market, not the derivatives market — that tracks the actual price of the cryptocurrency, Campbell Harvey, professor of international business at Duke University, told Cointelegraph. The BTC futures market is relatively small, he explained, “and the buying pressure in the futures will lead to a negative ‘roll return,’” meaning that:
“You are paying a premium to buy the futures each time you ‘roll over’ to the next contract. It is far more direct to buy the physical, but the SEC has given no indication they are willing to allow that.”
In an interview with CNBC shortly after the Oct. 19 launch, SEC Chair Gary Gensler suggested why the agency had permitted only this indirect path to the crypto space: “What you have here is a product that’s been overseen for four years by a U.S. federal regulator, the CFTC, and that has been wrapped in something that is within our jurisdiction [i.e., the SEC] by the Investment Company Act of 1940, so we have some ability to bring it inside of investor protection.”
In other words, the new product will have two layers of regulatory protection — the CFTC and the SEC — against potential hackers, manipulators and fraudsters.
Whatever its pedigree, the ProShares fund obviously resonated with investors — by the end of its second day of trading, it had reached $1 billion in assets under management, the earliest any ETF has reached that mark.
“This is the first American ETF that is designed to track Bitcoin, and that certainly means something,” Jeff Dorman, chief investment officer of Arca, told Cointelegraph, “but it definitely isn’t the product that the market wanted nor is it one that financial advisors feel comfortable selling, so it will likely lead to less adoption than a physical-backed ETF would have.”
Some, including Harvey, saw significance in the fact that Invesco, a leading ETF provider, announced on Monday that it was abandoning its bid to issue a BTC futures ETF — at least for the time being — and focus instead on “pursuing a physically backed, digital asset ETF,” an Invesco spokesperson told Bloomberg.
Will pension funds rush in?
Asked about pension funds, a cautious but huge subgroup within the institutional investor firmament, Dorman told Cointelegraph, “Pension funds have been doing their due diligence for years” with regard to crypto, but it is unlikely that a Bitcoin futures ETF “moves the needle” much with this investor class. “But if the ETF leads to larger market caps and increased liquidity, then the sheer growth in size of the market will make it easier for pensions to invest comfortably.”
“ProShares’ Bitcoin Futures ETF surely raises the profile of Bitcoin in the institutional investment community,” Ben Caselin, head of research and strategy at cryptocurrency exchange AAX, told Cointelegraph, and it might make it easier for pension funds to gain crypto exposure. “However, there would have to be a wider variety of different Bitcoin ETFs, including physically backed for larger players to enter the market on the back of an ETF,” said Caselin.
Related: Crypto and pension funds: Like oil and water, or maybe not?
Nigel Green, CEO of financial solutions company deVere Group, said in an emailed statement to subscribers that the ProShares futures-based ETF would “inevitably bring in a growing number and broader range of active market participants, including those using pension funds, and retirement and…
cointelegraph.com