First Bitcoin Futures ETF is Here and It's Just the Beginning
According to JPMorgan, the highly anticipated Bitcoin Futures ETF may become excessively large for its own good and distort the financial derivatives.
- The ProShares Bitcoin Strategic plan ETF’s inception was a massive success, with both the fund becoming the fastest ETF to reach $1 billion in capital.
- So, according to JPMorgan, the success of an organization is a double-edged blade that might harm its shareholders.
- “Because the derivatives carry a cost, contango in the BTC derivatives curve can exert a drag on profitability for these products,” JPMorgan stated.
When the ProShares Bitcoin Approach ETF Ticker Symbol: BITO debuted the other week, it received a rush in inflows, making it the leading ETF to surpass $1 billion in annual revenue.
However, the outcomes ETF has a significant fault that might result in poorer returns for investors if the treasury’s assets become too large, according to a report issued by JPMorgan this week.
This is due to the fact that the ETF does not hold bitcoin as an underlying asset. Instead, the ETF holds bitcoin derivatives that attempt to mimic the cryptocurrency’s process and can be implemented through commodity futures. SEC Chief Gary Gensler has opposed requests for a speculative bitcoin ETF, preferring a futures-based fund.
“Because the derivatives carry cost/roll yield, contango in the BTC options contracts curve might stymie profitability for these products. This additional drag can be many times the instruments’ administration costs, and it may grow even greater if these product lines amass significant assets as a result of their market impact, “JPMorgan said.
To effectively manage a position of BTC futures and options that are strongly connected with bitcoin price changes, the ETF must transfer over BTC commodity futures to the following month right before expiration. This incurs a variety of trading expenses and is less efficient than just purchasing BTC and keeping it, as most precious metals ETFs do.
According to JPMorgan, the average yearly cost to rollover over futures contracts has been over 9% through mid-2019, roughly ten times the annualized expenditure ratio of the ProShares Bitcoin Strategy ETF, which is 0.95 per cent. As a result, investors may be unhappy with their profits, which may trail substantially behind those of bitcoin.
Prolonged variance ETPs, according to the bank, are an excellent example of how long-term earnings may be reduced as the expenses of swing trades build up. “The more investors that position long, the more expensive it is to hold owing to the ETFs’ own market impact,” JPMorgan explained.
As per the bank, the ProShares Bitcoin Strategy ETF already holds nearly 25% of the long positions in bitcoin futures contracts, and the fund recently requested a dispensation from the CME to allow it to acquire more than the mandated maximum of 4,000 futures contracts.
If the ETF does not receive its exemption from the CME, it may abandon its future methodology and invest in stocks with crypto exposure to better follow the price of bitcoin, according to the fund’s description. The Bitcoin Futures ETF is another sign of progress and adoption in bringing the cryptocurrency world to mainstream finance. While the Bitcoin Futures ETF may not be the be all end all crypto investment it shows the progress in bridging together TradFi and Web 3.0/crypto.