SEC Will Be Considering Approving a Bitcoin Futures ETF vs Physical-Backed ETF


The SEC is Decision on Bitcoin Futures ETF Nears

The United States Securities and Exchange Commission (SEC) is preparing to make a decision on two bitcoin ETFs this week. Some sources suggest that the SEC is considering approving a bitcoin futures ETF.

The two ETFs seeking approval from the SEC come from ProShares, the world’s tenth largest provider of ETFs. ProShares has submitted two bitcoin ETFs to the SEC. Both ETFs are based upon bitcoin futures contracts.

Bitcoin futures contracts were approved by the Commodity Futures Trading Commission (CFTC) in 2017.

The SEC recently delayed a decision on a more prominent ETF: the bitcoin ETF proposed by VanEck and SolidX to be listed on the Cboe. The SEC has until September 30 to approve, deny, or once again delay that ETF.

The main difference, of course, is that the ProShares ETFs hold bitcoin futures contracts while the VanEck SolidX bitcoin ETF would hold real bitcoin. It’s a futures-backed ETF versus a physically-backed ETF. Could that be the difference that wins approval from the SEC?

Despite the lack of hype, some argue that the ProShares ETFs have a significantly better chance of being approved than the VanEck and SolidX ETF. After all, the CFTC has already approved bitcoin futures contracts, so the ProShares ETFs are holding a more regulated asset – sort of.

How Does a Bitcoin ETF Work?

To understand the difference between a futures-backed ETF and a physically-backed ETF, it’s helpful to recap how ETFs work.

ETFs are traded like stocks on stock exchanges. You can buy a share of an ETF. When you buy an ETF, you’re getting a stake in the underlying asset of the ETF. Some ETFs track a single, basic asset – like gold or oil, for example. These funds hold gold or oil, then sell shares of the ETF to investors seeking exposure. Instead of holding a barrel of oil in your basement and waiting for the price to appreciate, you can buy a share of the ETF just like buying a stock. You can sell your stake at any time.

Other ETFs track an index. They buy a basket of funds representing, say, the top 50 companies on the Toronto Stock Exchange. You buy a share of this ETF, and that share rises or falls in value based on the movements of the top 50 companies on the TSX. You can diversify your portfolio without buying 50 different stocks.

This is the same way a physically-backed bitcoin ETF would work. The fund would buy bitcoin, and then investors can purchase a share of the fund. The price of each share of the VanEck SolidX bitcoin ETF, for example, is designed to be equal to the price of 25 bitcoins. When you buy a share, the fund buys 25 BTC. The fund stores the bitcoins in its secure storage system, and you can sell your share at any time. You can get a stake in bitcoin without actually touching bitcoin.

A futures-backed ETF, meanwhile, takes this separation one step further. A futures-backed ETF bases the shares in the fund on bitcoin futures contracts as opposed to actual bitcoins themselves. Each futures contract sets a specific price and date at which to trade an asset. You can buy futures contracts based on your predicted price movements.

A futures-backed bitcoin ETF would have an advantage over a physically-backed ETF: a futures-backed ETF could be profitable for investors even if the price of bitcoin drops.

A futures-backed bitcoin ETF would have another advantage: the fund wouldn’t actually hold any bitcoin; instead, the fund would just hold futures contracts, which means that they wouldn’t need to safeguard any bitcoin assets from theft or hacks.

Most Bitcoin ETFs Seeking Approval from the SEC Are Bitcoin Futures ETFs

The crypto community has heard a lot about the VanEck SolidX bitcoin ETF, which would hold physical bitcoin.

However, many members of the community aren’t aware that the VanEck SolidX bitcoin ETF is an outlier: it’s the only physical bitcoin ETF of the 10 bitcoin-related funds seeking approval from the SEC over the next two months. The other 9 ETFs are all futures-backed ETFs.

A Bitcoin Futures ETF Might Have a Better Chance of Approval

Some believe that a bitcoin futures ETF stands a much better chance of approval than a physical bitcoin ETF.

Daniel Masters, for example, executive chairman for CoinShares, explained as much in an interview with CoinDesk earlier this month:

“Until such time major institutions put their name to cryptocurrency custody, I don't believe a physical ETF can exist in the U.S…I think any futures backed ETF in the United States now has a far better chance of being approved.”

Obviously, we can also look at the number of applications seeking approval from the SEC. Of the 10 bitcoin-related funds currently seeking approval from the SEC, 9 of them are futures-backed ETFs, which suggests institutions believe they have a better chance of being approved.

Nevertheless, experts also believe that a physically-backed bitcoin ETF would be more successful. Typically, investors choose physically-backed ETFs over futures-backed ETFs. Futures ETFs are also seen as being more risky. Bloomberg’s “traffic lights system”, for example, gives a red light denoting high risk to any fund that holds rolling futures.

A Bitcoin ETF Could Be Worth $15 Billion Within 2 Years

Daniel Masters, the CoinShares executive interviewed by CoinDesk earlier this month, insists that a bitcoin ETF would be huge for the crypto industry. A bitcoin futures ETF would be big news, but a physically-backed bitcoin ETF would be much more significant.

Masters claims his clients include individuals, family offices, and hedge funds that acquire crypto through regulated marketplaces. These clients have expressed an interest in cryptocurrency and have money waiting on the sidelines to enter the industry.

If or when a bitcoin ETF is approved, it could quickly swell with value:

“If a coin-based bitcoin ETF comes out, I would see it getting to probably $5 billion within a year and then ultimately would be a pretty big product probably maybe $10 to $15 billion over the next couple years and that would put it in the top 10 percent biggest ETFs.”

It’s unclear when a physically-backed bitcoin ETF would be approved – if ever. However, it seems increasingly likely that the first bitcoin ETF approved will be a bitcoin futures ETF – like the ProShares bitcoin futures ETFs scheduled to be approved or denied by the SEC in September.

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