This week saw the introduction of the first US bitcoin futures exchange-traded fund, and another on Friday.
Instead of bitcoin, these funds invest in futures contracts, which are agreements to acquire or sell the commodity at a later date.
The new tools eliminate the bother and security concerns of bitcoin exchanges.
A lack of actual currency ETFs, though, didn’t dampen enthusiasm for the maiden launch.
With $550 million from crypto-hungry investors, the ProShares Bitcoin Strategy ETF (BITO) had one of the best debut days ever. Morningstar reports that over $1.01 billion worth of stock changed hands.
Moreover, according to Coin Metrics, the price of bitcoin increased by almost 4% on Tuesday to $64,206.51, and surpassed the previous intraday record of $64,899 set in mid-April.
“The original goal [of bitcoin] was to upend traditional finance,” said Ben Johnson, Morningstar’s global ETF research director.
By developing this new environment, Wall Street will profit millions if not billions of dollars from bitcoin.
BTC ETF approvals delayed
A decade has passed since the first US bitcoin ETF was announced. But the SEC has been wary of the asset, citing concerns about lack of oversight and potential for fraud and manipulation.
“General conservatism has been a norm among US regulators,” Johnson added, citing revised and abandoned bitcoin ETF filings.
Former UO finance associate professor and partner at Collab+Currency, Stephen McKeon said that most ETF applications previously relied on spot markets, or directly investing in the currency.
SEC Chairman Gary Gensler hinted in August that a futures-backed ETF could be allowed under the Investment Company Act of 1940, which oversees mutual funds and may offer “significant investor protection.”
This week’s approvals triggered a deluge of filings.
Regulators may offer some investor protection, Gensler said on CNBC’s “Squawk on the Street” this week. The stock market is “extremely speculative,” he cautioned.
While the SEC expected to approve a few more bitcoin futures ETFs, it is uncertain if and when it will approve a bitcoin ETF.
“I don’t think the SEC is in a rush to enable ETFs to invest directly in bitcoin,” Johnson added.
Know before you invest
While bitcoin futures ETFs are gaining popularity, several experts advise investors to educate themselves before investing.
He described big price swings as “Christmas in October for high-frequency traders.”
Although the assets have a high connection to bitcoin, the asset’s value is unpredictable because it tracks the price of futures contracts.
Michael Bisaro, president of StraightLine Group in Troy, Michigan, which rated 92nd on CNBC’s FA 100 list for 2021, agreed.
There may be a role for it, but it can be “extremely dangerous” if it dominates a person’s portfolio.
Some financial gurus think a little dabbling may not be a problem after retirement and other goals are on track.
“I have no problem with customers investing out of their budget or lifestyle,” said Jordan Benold, partner of Benold Financial Planning in Prosper, Texas.
But when more crypto-based products hit the market, investors may soon be overwhelmed.
“It is only the beginning,” McKeon remarked. “In the next years, we’ll see ETFs that hold a variety of crypto assets.”