The First Bitcoin Futures ETF is Coming. What Investors Need to Know

A Bitcoin futures ETF should hit the market on Tuesday, marking a milestone for the burgeoning cryptocurrency.

Fund sponsor ProShares appeared to have won regulatory approval late Friday for its Bitcoin Strategy ETF (ticker: BITO). The company filed a “post-effective” registration statement with the Securities and Exchange

Commission and the New York Stock Exchange approved the listing, according to securities filings. The fund is expected to begin trading on Tuesday.

The pending launch of the ETF helped spark a rally in the currency. It was up 7% on Friday, trading above $ 61,600 for the first time since April. It’s now up almost 50% since Sept. 30, when it was trading around $ 41,500.

Fund sponsors have been trying for years to get SEC approval for Bitcoin ETFs. The SEC has not approved any ETFs that hold Bitcoin directly, unlike some of the closed trusts that are now on the market. Still, if the ETF launches as expected, it could pave the way for more futures-based ETFs, including products from Invesco, VanEck, Valkyrie, and others.

“This will likely be the first of many ETFs based on Bitcoin futures,” says Todd Rosenbluth, CFRA director of ETF and mutual fund research. He notes that ETFs should have liquidity and cost advantages over other investment products that offer direct exposure to Bitcoin, including Grayscale Bitcoin Trust (GBTC) and Bitwise 10 Crypto Index Fund (BITW).

While ETFs can attract many investors seeking cryptocurrency exposure in a fund envelope, they are just one of many avenues of exposure. Investors can buy Bitcoin and other cryptocurrencies directly on exchanges such as Coinbase Global (ticker: COIN), Robinhood Markets (HOOD), or Webull. Apps like Square (SQ) and PayPal (PYPL) also make it easy to buy cryptocurrencies.

Closed funds like Grayscale and Bitwise offer direct exposure to cryptocurrencies without going through the futures markets. However, their fees are relatively high and can be negotiated with premiums or discounts on their underlying NAV. Both are now trading at a discount.

The ProShares ETF will have an expense ratio of 0.95%. That would make it less expensive than the 2% Grayscale Bitcoin Trust or the Bitwise Index fund with a 2.5% expense ratio.

However, investing in Bitcoin through futures contracts has some drawbacks. While the contracts are intended to track Bitcoin spot prices, they impose costs on investors because fund managers must continually renew expiring contracts on new ones, resulting in “roll returns” that can be negative. or positive, depending on the futures prices in the near future. – and in the long term.

One complication with strategy is called “contango,” a situation that arises when a futures contract with a longer-term maturity is traded at higher prices than contracts with a short-term maturity. Contango can occur for technical reasons and occurs in commodity markets when investors expect prices to be substantially higher in the future.

Funds that primarily have short-term contracts can suffer losses when futures are in contango, due to what is called a “negative return.” ProShares plans to manage roll returns and hold longer-term contracts opportunistically.

One other complication for ETF investors is taxes. Futures contracts are generally taxed on a mark-to-market basis of unrealized gains and losses. Even if a fund doesn’t sell a contract, it may rack up a tax liability at the end of the year on unrealized gains. Moreover, a fund’s taxable income, which is distributed to shareholders, would consist of 40% short-term capital gains or losses, and 60% long-term, according to IRS rules.

ProShares says in its filing that investors should expect a “significant portion” of any capital gains or losses to be short-term.

That isn’t ideal for long-term investors. If Bitcoin keeps rising in price, an investor who bought and held for more than a year would owe tax on long-term capital gains on a sale. Long-term capital-gains rates are generally lower than short-term, which is equivalent to ordinary-income rates.

Still, the first Bitcoin ETF could be popular with advisors aiming to add crypto for clients. Including ETFs in client portfolios would allow them to charge management fees on the holdings, and ETFs tend to be quite liquid, allowing advisors to trade.

The ETF may also put pressure on funds managed by Grayscale, Bitwise, and other crypto fund managers to lower their fees to compete.