Investing in Bitcoin Futures ETF: Good or Bad?

Is investing in Bitcoin Futures ETF good or bad for investors and Bitcoin? There is a lot of difference between buying Bitcoin directly from an exchange and buying a Bitcoin Futures ETF or Exchange Traded Fund.

And, it is this difference that could cost you heavily.

If you do not want to experience such losses in your endeavor, you will need to know about these differences and how exactly it will affect you as well as the underlying asset, Bitcoin in this case.

This is fortunately one of the right places to be in order to gain such knowledge and know how exactly you should plan your moves.

Both crypto advocates and financial experts warn investors to go ahead with Bitcoin futures ETFs without having a better, if not the best, understanding of what it is and what they are getting into.

This will allow them to know what exactly they can expect from their activities in return. Most people do not have the required knowledge and often end up on the losing side.

It is not easy and a lot of planning and speculation is needed to be successful in Bitcoin futures ETF investing and deal with the intricacies and complications that may arise down the road.

It is true that a lot of crypto users have been advocating for a Bitcoin futures ETF and have been pushing for its approval from the Securities and Exchange Commission who put the proposals aside for a long time.

However, the crypto enthusiasts were adamant and said that it would give the everyday investors the opportunity to track the price of the crypto and effectively invest in it without needing to purchase the digital coins actually for it.

Is Investing in Bitcoin Futures ETF Good or Bad for Investors and Bitcoin?

Bitcoin Futures ETF Good or Bad

There is a lot of way in which you can buy Bitcoin today or invest in this specific digital coin.

For example, you can buy the coins on an app but for that you will need to pay commissions.

You can even purchase them through a specific product such as the Grayscale Bitcoin Trust and even get a trade discount in the process and therefore pay less than the actual value of Bitcoin.

And, of course, now you can buy them through the newly introduced Bitcoin futures ETFs.

However, at this point, you should remember that none of the ways mentioned above is to be considered to be the perfect one to invest in Bitcoin today.

Therefore, as it is said by the crypto experts, you should first have to understand what you are getting into as well as the pros and cons related to each of these processes.

It is only after making a proper and accurate comparison between the different processes that you should choose the one that is best suited for you and your trading style and personality.

This will help you to trade more confidently and at the same time get adequate exposure to this exciting crypto market space, experts say.

Now, talking about the Bitcoin futures ETFs, the SEC was highly apprehensive right from the very beginning about the adverse effects the Bitcoin futures ETFs would have on the investors and were therefore reluctant initially.

They warned the investors about the volatile nature of Bitcoin as well as the potential for fraud and price manipulation in it that would leave the investors flabbergasted and devastated.

It is for this reason the SEC delayed the approval for the Bitcoin futures ETF for years and ignored a dozen applications from different companies.

However, they gave in to the continuous and ever growing pressure for its approval and gave their nod to it in December 2017 for the first Bitcoin futures Exchange Traded Fund.

When the SEC cleared the first Bitcoin futures ETF from ProShares it was considered by many as a milestone for the crypto industry on the whole.

The investors thought that the US would not fall behind the other countries.

And, the retail investors thought that they will not miss out on the opportunities to make more profits from their investments with less risk since they will not have to own and hold the coins actually.

Ideally, the Bitcoin futures ETFs are pretty similar to other futures ETFs of other investment products.

Much like the stocks, the futures ETFs are also available to the public on the public exchanges where these are traded.

This means that the public can buy or sell these ETFs only during regular market hours.

Now, here is the catch. In the case of Bitcoin futures ETFs, the underlying asset, Bitcoin in this case, is accessible across a large number of crypto exchanges from all over the world.

It is also available to trade at any time of the day since the crypto market is open around the clock for 365 days of the year.

But the Bitcoin futures ETFs do not come with this opportunity.

This means that there is a high chance of the price of the Bitcoin to swing dramatically over the weekend or on holidays when the futures market is closed.

This may lead to a lot of confusion and even price manipulation when the market reopens and starts trading on the following Monday morning.

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This could be a bit of a concern for the retail investors in the Bitcoin futures ETFs.

Add to that, there is another significant distinction that you should be aware of which involves the working process of the Bitcoin futures ETFs.

These Bitcoin futures ETFs are not actually a financial product as you know them. There is no actual Bitcoin underlying these contracts as their basis.

It is typically the ETF of the company that is tied to these Bitcoin futures contracts.

This means that there is no direct connection to Bitcoin or to the actual price of Bitcoin.

The primary purpose of these ETFs is to track the price of the stocks and other assets and commodities such as oil, precious metals such as gold and crypto coins such as Bitcoin.

Every future ETF is designed in such a way that it will track the price of the underlying asset but, in reality, these ETFs do not always track the price of these assets that they are targeted to, especially in the long run.

In other words, this means that, there are a few specific things that you should keep in mind when you buy one of the new Bitcoin futures ETFs.

These may be convenient to buy but you should not expect to reap the same benefits as you would have if you invested in Bitcoin directly when the price of Bitcoin reaches a new record high.

However, in spite of all these issues, it will be unwise to label investing in Bitcoin futures ETFs as bad outright.

This is because it is quite good and offers a great potential for those traders who want to profit in the short term.

And, as far as the long-term traders are concerned, the Bitcoin futures ETF is considered to be just a good enough product as of now.

However, the crypto professionals and financial experts warn that investors should not consider these Bitcoin futures ETFs as the perfect product in any way.

There is a lot to understand regarding the intricacies and complications in it and to be well aware of the fact that these products will eventually fail to track the price of Bitcoin effectively and precisely, especially over a long period in time. 

Tracking the Price of Bitcoin 

Now you may ask why do the Bitcoin futures ETFs fail to track the price of Bitcoin in the first place if it is designed to do so.

Well, the most significant reason is that when you invest in a Bitcoin futures ETF, you do not own any Bitcoin directly. Instead, you simply own Bitcoin futures.

This is much unlike the ETFs that hold bonds and stocks as the underlying asset which makes it much easier to track the price of the particular stock.

Any type of futures contracts, including Bitcoin futures contracts, is in essence bets placed between two parties.

These investors speculate on what the price of the underlying asset of the contract, whether it is gold, oil, wheat or Bitcoin, will be at some time in the future.

This is basically what gives it the name – futures contracts.

The Bitcoin futures contracts, particularly those that are traded on CME or the Chicago Mercantile Exchange last typically for six months.

This means that a particular batch of these contracts expires every month and the exchange creates a fresh batch that will expire in the following months in the future.

Therefore, it is quite natural and probable that the price of the Bitcoin futures contracts will increase or decrease in comparison to the price of Bitcoin in the market today, often referred to as the spot price.

The entire thing however depends wholly on whether the investors think that the crypto will be able to prove itself worthy enough to sustain for a period of 6 months, more or less, than what it is worth at the moment.

Now, here is something that you should take note of.

As and when the date of expiry of the Bitcoin futures contract comes near, the price of the futures contracts should come close together with the prevailing price of Bitcoin in the market, until they match perfectly and eventually on the final day of expiry.

The working process of the Bitcoin futures ETFs involves purchasing those particular futures contracts that have their date of expiration comparatively close.

It could be a month or two later and at that time it may just roughly and not perfectly match the spot price of Bitcoin.

However, as the date of expiry of the Bitcoin futures contract approaches nearby, these are sold by the ETF and new sets of futures contracts are bought that are about to expire in a month or two.

This process is often referred to as rolling the about-to-expire futures contracts to one that has some time remaining to their expiration.

Typically, the price of these new sets of futures contracts will not match the spot price of Bitcoin at that time because these will expire a month or two later.

That is why these particular futures contracts are expected to make some profit or lose a little in the process as its yield. If it ends up making a profit it is called the ‘roll yield.’

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In such a situation, the return you will get from your investment in such futures contracts will always be a bit different, if not more, from the returns you would have got from investing in Bitcoin directly.

Strange as it may sound to you, this is not at all a completely unusual process. You will find a lot of commodity ETFs work in this particular way.

If you consider these price differences between the futures contracts and Bitcoin over a short period of time, say for a day or two, it may look trivial and not amount to much.

However, if you consider the same for a longer period, say for a period of six months or even a year, this amount can be quite significant when taken together. 

The Difference in Price 

Now, you may ask how much exactly would be the difference in the prices of the futures contracts and the spot price of Bitcoin.

Well, with respect to Bitcoin future ETFs, there is no need to think that the Bitcoin investors are missing out on the opportunity to make lots of money through this process. It is not necessarily the case.

If you consider the historic data sheets of the Bitcoin market, you will see that it is not more than a 5% headwind in a year, a few crypto experts say.

However, on the other hand, there are a few other groups of experts who say that it is even lower than that, as much as half of it, to be precise, if the calculation is based on the annualized basis points.

But, almost all crypto critics and experts unanimously agree that the price difference between the Bitcoin futures contracts and spot price of Bitcoin will be in no way more than 5%, and they will be surprised if it ever is more than that.

However, at no point of time these experts refuse to accept the volatility aspect of Bitcoin as well as the uncertainties surrounding the Bitcoin futures ETFs.

They are quite worried at the thought of the crypto space changing entirely as and when a pure-play Bitcoin futures ETF is launched into the market because it will be favored and preferred more by the investors.

Investors Perspective 

It is time now to consider whether or not investing in the Bitcoin futures ETFs is a good idea or not.

Well, to understand it in a much better way, you should look at the matter from different points of views.

First, take a look at it from the perspective of an investor, a large institution or an individual.

Typically, those investors who hold oil futures contracts may be a bit more concerned about the issues and potential of the Bitcoin futures ETFs.

This is especially after they have gone through the turmoil due to the specific problems that the oil futures market faced in April 2020.

And now, there is another significant issue that has created a lot of buzz not only in the crypto space but in the entire financial mechanism of the country.

This is the COVID-19 pandemic. During the early stage of this pandemic, the oil industry witnessed a dramatic collapse in the price of oil due to the oversupply of oil.

For example, the price of the futures contracts of USO on WTI or West Texas Intermediate oil fell by more than 100% which wiped almost all of the investors.

In the same path, the Bitcoin futures contracts are also exceptionally uncertain due to its extremely volatile and speculative nature, which is further aggravated by the pandemic situation.

And, this concern is not unusual because there are several crypto experts and organizations who think that the price of Bitcoin falling down to zero is quite a conceivable scenario.

They substantiate their claims by referring to the housing crash in 2008 which several investors predicted.

Therefore, in theory, there is a high chance of the Bitcoin futures market to implode just as the oil futures market collapsed in April 2020.

However, from a more practical point of view, the investors think that it is quite unlikely in the case of the Bitcoin futures market to experience the similar issues faced by the oil futures market.

This is because, with oil there is an issue of storing it and it involves a significant amount of money.

In the case of Bitcoin, on the other hand, there is no such cost to bear because the investors do not own the coins and therefore will not need a wallet or an address to hold it.

Coins’ Point of View 

You will also get a better understanding as to whether or not investing in the Bitcoin futures ETFs is a good or a bad move if you know how good or bad it is for Bitcoin itself in terms of its price.

Ideally, the traditional Bitcoin futures ETFs are supposed to track the actual price or the spot price of Bitcoin closely.

However, that holds true for the ‘pure’ Bitcoin futures ETFs but in reality there is no such thing available.

The Bitcoin futures fail to track the price of the coin more often than not.

Ideally, this is the principal point of consideration by the SEC for which it denied to approve such ETFs initially.

And, add to that, the fact that there is nothing called ‘physical ownership’ of coins related to these Bitcoin futures contracts is another significant point of concern.

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However, everything is not bad for the Bitcoin futures ETFs.

One significant reason to say so is that the Bitcoin futures ETFs are traded on regulated futures exchanges that are registered in the United States.

This means that the US regulators have adequate power and authority with them to intervene and even investigate should any strange thing happens or an untoward activity is made on these exchanges.

On the other hand, if you consider the traditional crypto exchanges where trading of real Bitcoin and other crypto coins happen, such possibilities hardly exist.

Typically, these are not only unregulated by any external authorities and are spread at different places all over the world.

Should anything unexpected happen on these exchanges it is quite difficult to track things down because it involves a lot of diplomatic, political and other issues.

Moreover, irrespective of the location of these crypto exchanges, a large number of these exchanges are not allowed to operate in the US and are not subject to the US regulatory oversight for their activities.

Therefore, in this particular count, the Bitcoin futures ETFs seem to be much safer and more feasible for the investors to go ahead with.

Forecast 

Finally, you should take a look at the future of the Bitcoin futures ETFs and its forecast made by several crypto professionals and enthusiasts as well as by some prominent financial experts.

It is a common belief that manipulation on the US exchanges is the bread and butter of the stockbrokers.

Though this statement is exaggerated a bit, it is quite true.

You should never rest assured and have a strong notion that the prominent hedge funds are too honest and will not try to manipulate the prices of the assets whenever they can that would allow them to make some profits.

It would be utterly naïve on your part to have such a belief.

In fact, the possibilities of manipulation are not at all completely eliminated on these exchanges.

It is instead simply left unperturbed and those who have been doing this for decades are at their own free will to continue doing it anyway.

In this particular aspect, it seems to be fair enough to know that the Securities and Exchange Commission at least realizes what the dangers are and what the investors would get into when they put in their hard-earned money in the Bitcoin future ETFs.

However, at least as of now nothing can be said for sure as to whether or not the growing interest among the investors to put in their money in the Bitcoin futures ETFs would have any impact, significant or otherwise, on the price of Bitcoin.

This is primarily because everything is so unclear and most of it is an audacious thesis.

Therefore, it cannot be said with emphasis that several of the institutional investors have not got involved with it already.

In fact, it will not be unwise to think on the contrary.

This is because today it is very easy to buy Bitcoin on a large scale and therefore it is all the more possible and feasible for the large institutional investors to get involved in Bitcoin.

And, such possibilities cannot be ruled out completely as well, especially when there are prime and burning examples like Tesla and MicroStrategy of this known to all.

Therefore, it can be said that the futures contracts surely offer much larger scope to the investors, both smaller and the larger ones, to make safer profits as these contracts are decoupled directly from the actual value or spot price of Bitcoin.

This means that it is good for the investors, albeit in the short term, as of now.

How good and profitable will these Bitcoin futures ETFs turn out to be for the investors who plan for the long term is something that only time can tell.

And, as for the crypto industry, or Bitcoin in particular, the Bitcoin futures ETFs are not expected to have any significant or a positive impact on the price of Bitcoin.

Even if it does, at least it will not be equal to the magnitude in which the oil futures had on oil in April 2020.

On the contrary, it is even more probable that the Bitcoin futures ETFs will provide further volatility to the spot price of Bitcoin.

This is because the disconnected nature of the prices of these Bitcoin futures contracts with the spot price of Bitcoin will provide additional room for maneuvering.

Conclusion 

It all depends on the term of investing in Bitcoin futures Exchange Traded Funds or ETFs that will determine whether or not it is a bad move.

After going through this article now and understanding several aspects of it you know why it is said so.