How will US regulators ensure fair adoption of Bitcoin ETFs?

Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website guidelines before making any financial decisions.

Bitcoin ETFs represent a new investment milestone for the crypto space. While some experts predict that we could see a Bitcoin ETF within two months, the first to get approved will likely provide a market advantage for the “first mover” exhibit. However, the difference between physical and futures-based ETFs can be enough to dampen it.

Gary Gensler prefers forward-thinking ETFs

Since there are no Exchange Traded Funds (ETFs) for cryptocurrencies, US investors will have to look elsewhere to increase their crypto exposure without holding Bitcoin directly. However, after several delays and denials of approval of a single Bitcoin ETF by the SEC, there appears to be a growing consensus that one will be approved by the end of the year.

The man in charge of quickly tracking crypto ETF approvals is Gary Gensler, the head of the US Securities and Exchange Commission. His views on the crypto space can be characterized by some of his earlier comments:

“This asset class is rife with scams, fraud and abuse in certain applications … I look forward to staff reviewing such filings, especially if they are limited to these CME-traded Bitcoin futures.”

That may seem harsh, but Gensler has no problem with mutual funds and closed trusts like Grayscale Bitcoin Trust. These financial vehicles are on a highly regulated futures market, governed by the Investment Company Act of 1940. On the other hand, a Bitcoin ETF would involve direct handling of physical Bitcoin, the safekeeping of which would require more regulation.

Based on Gensler’s earlier statements, the most likely reason for the delay in approving a single Bitcoin ETF application is that they were not forward-looking ETFs. The Bitcoin Strategy ProFund Investor Class (BTCFX) is one of the investment funds already on the market. As expected, it is closely following Bitcoin’s performance and is up 15% since July.

BTCFX vs BTC, source: Yahoo Finance

Accordingly, the investor-protected futures market is said to be the most likely place to welcome the first future-based Bitcoin ETF. Bloomberg ETF analyst Eric Balchunas believes this will be the case by the end of October, with the most likely candidate coming from ProShares ETF specialist based in Bethesda, Maryland. The parent company, the ProFunds Group, is the owner of the investment fund BTCFX.

New hint from @JSeyff today how withdrawing Ether ETFs increases the likelihood of a Bitcoin futures ETF with ProShares as a favorite hit launching by the end of October, even though it could (and arguably should) be a group around avoid the first mover advantage.

– Eric Balchunas (@EricBalchunas) August 24, 2021
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What happens when a US Bitcoin ETF is approved?

Only bitcoin veterans would remember that the first rejection of the bitcoin ETF came in 2013. The Winklevoss twins, the creators of the Gemini Exchange, were the people who filed it, only to be rejected at a time when Bitcoin was trading below $ 100. Since then, dozens more have lined up to earn the coveted SEC approval.

I’ll add a few extra colors to our article: we’ve seen a number of Act Bitcoin Futures ETF products from 1940 and if they follow the relatively standard 75-day start window we could see an introduction in October. but we think the SEC should hold back and bring a handful to market at once.

– James Seyffart (@JSeyff) August 24, 2021

Why do companies rush to overtake one another? The reason for this is simple – first mover advantage. With the U.S. economy still dominating the world, the first to get approval for a Bitcoin ETF would almost certainly generate billions in revenue. One only has to look at Canadian ETFs to see this in action.

Canadian Purpose Bitcoin ETF (BTCC) was the first to hit the market in Canada, followed just a day later by Evolve Bitcoin ETF (EBIT). However, BTCC was the first to gain $ 80 million in trading volume within an hour and has continued that trend ever since. As one of the five best Canadian ETFs, only the 3iQ CoinShares Bitcoin ETF (BTCQ) managed to come close to the BTCC thanks to a partnership with Europe’s largest digital asset fund manager – CoinShares.

Photo credit: The Tokenist

Although the first mover advantage is to be expected, will Gary Gensler take it into account in the approval process? To mitigate this, he would have to approve several Bitcoin ETFs at once. Given the way the SEC works, it doesn’t seem likely. On the other hand, unlike Canadian ETFs that deal with physical bitcoins, these would be future-oriented.

Accordingly, this can even provide a damper for the first mover. If you know the basics of futures contracts, you will understand their drawbacks:

  • The future price of an asset may be lower than its spot price, resulting in a contangowhich is bad for futures investors. The opposite of contango is Backwardation – if the price of the futures contract is lower than the spot price.
  • Its price can fluctuate rapidly thanks to strong leverage. If you are not careful, you can lose entire savings in leveraged futures.
  • In the further course there may be legal and tax burdens that were not taken into account in the spot price.

These are the main differences between physical Bitcoin ETFs and future-based Bitcoin ETFs preferred by the current SEC chairman. As a result, we’ll likely see a slower adoption rate, which could then level the playing field for approved Bitcoin ETFs coming to market at a later date.

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Many forecasters have used Bitcoin ETFs as a key ingredient so that Bitcoin can hit $ 100,000 sooner rather than later. Do you think future-oriented models will have the same effect? Let us know in the comments below.

About the author

Tim Fries

Tim Fries is the co-founder of The Tokenist. He holds a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior associate on the investment team in the US Private Equity Division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in sensor, protection and control solutions.

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