On October 19, the first Bitcoin futures exchange-traded fund (ETF) was launched at the New York Stock Exchange spelling out a moment of validation for the budding crypto space. The launch will allow people to gain investment exposure to Bitcoin without actually having to purchase the cryptocurrency. At the time of writing, Bitcoin is trading at its all-time high value of $67,139 (roughly Rs. 50,25,433) on some Indian exchanges. Similar to stock trading, investors can buy and sell shares of the Bitcoin ETF at any time during the market trading hours of the day.
The coming of the Bitcoin futures ETF to the New York Stock Exchange has been met with major enthusiasm from crypto-enthusiasts. The excitement has furthermore been fuelled by the fact that the value of Bitcoin reached created a historic price high just one day after this Bitcoin ETF was launched in the US.
Exchange-traded funds (ETFs) are financial products that are regulated and can represent a wide array of different assets. An ETF also keeps track of the price fluctuations of an underlying asset, giving people an alternative to extract profits from the price trend of the asset without really owning even one unit of it.
Bitcoin futures are a type of price-tracking trading contract entered into by two parties. Both the parties agree to purchase or sell Bitcoins at a predefined price at a later date, a report by CoinDesk explained. This kind of trading happens on a commodities exchange.
The final day price of the Bitcoin – more or less – cannot influence this Bitcoin futures contract. In this case, while one person garners profit, the other is subjected to losses.
A Bitcoin futures ETF getting approval from US' Securities and Exchange Commission (SEC) has added to the warm climate around cryptocurrencies, brewing in the States while the government there is exploring ways to use the crypto space to their benefit and also regulate it.
“What we're trying to do is ensure the best we can within our authorities to bring projects into the investor protection perimeter. Bitcoin futures have been overseen by our sibling agency, the Commodity Futures Trading Commission (CFTC),” Gary Gensler, Chairman, SEC said during an interview.
“What you have here is a product that's been overseen for four years by a US federal regulator, the CFTC, and that's being wrapped inside of something that's within our jurisdiction called the Investment Company Act of 1940. So, we have some ability to bring it inside of investor protection. Bitcoin is still a highly speculative asset class and listeners should understand that underneath this, it still has that same aspect of volatility and speculation,” Gensler further added.
A video clipping of the interview has been tweeted by CNBC.
The value of the ETF is derived from the price movements of Bitcoin futures.
Other than removing the cost and requirement of storing an asset, Future ETFs makes the commodity easier to buy and trade. In addition, the margin of profits that one of the parties getting into a contract can extract can be of high magnitudes.
One major con of this protocol, however, is the fact that assets like Bitcoins cannot be held and traded on bigger exchange platforms. In addition, the accuracy of different crypto-price trackers keeps fluctuating, hence the agreed-upon asset value for a specific date under a future ETF contract may bring along significant losses.
When the Bitcoin futures contracts expire, the company issuing the ETF is required to roll the contracts over which means renewing contracts by selling the almost expired ones and using the revenue to purchase new contracts with an extended expiration date.
In a situation where the future contract price of an asset like Bitcoin is lower than the price of the new contract, the proceeds generated for selling the contracts coming close to an expiry will be insufficient to purchase the same number of contracts that would expire at a later date.