- Bitcoin set a record high this week, after the first US futures-based crypto ETF made its debut.
- But the new fund may not be the smartest, or more profitable, strategy for average retail investors, according to two experts.
- “I think they’re better just purchasing bitcoin than to play the futures game at this point,” a private equity CEO said.
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As the long-awaited bitcoin futures exchange-traded fund hit the market this week, investors are keen to know what this structure ultimately means for their portfolios.
The ETF structure itself was one of the most significant financial innovations when it was introduced in the 1990s as a type of investment that provides access to passive, indexed funds. Bitcoin has brought in a new era of innovation, but it remains in the nascent stage.
While this development is a substantial achievement in acknowledging the legitimacy of the asset class, it’s noteworthy that within these types of ETFs, an actual bitcoin is neither bought nor sold during the execution of the trade and therefore has no direct impact on market supply.
And unlike stocks or bitcoin, futures contracts come with expiration dates and investor need to “roll” their positions into the next month to avoid taking physical delivery of the underlying asset. Regardless, the institutionalization of bitcoin is ultimately a good sign for investors – at least in theory.
But is a futures-based bitcoin ETF a smart strategy to implement?
Maybe not, according to Eric Schiffer, CEO of private equity firm Patriarch Organization.
“For the average retail investor, I think they’re better just purchasing bitcoin than to play the futures game at this point,” he told Insider in an interview. “They’re going to want to get far more educated and leave that work to quants and some of the big funds.”
But there is a huge appetite among audiences for regulated financial services rooted in the world of cryptocurrencies.
Schiffer, who is personally invested in crypto, said the launch of the first US bitcoin-based ETF “has raised the hormonal levels of investors in a positive way toward participating and also takes away some of this apocalyptic downside that crypto painted in the minds of those who saw it as nothing but a vicious sack of volatility.”
He expects more hedge funds and institutions to be willing to navigate to futures as a hedge “to benefit from the upside of the next version of the internet.”
Ben Johnson, Morningstar’s global director of ETF research, said in a recent interview these ETFs got the go-ahead because they don’t directly invest in bitcoin, but in an already established financial product.
If investors choose to invest in such a fund, they would have to navigate through not only the risks of a volatile asset, but also in maintaining their exposure to the cryptocurrency.
“By virtue of investing in actual bitcoin futures, what you see is that there are some issues most notably related to maintaining that exposure,” he said, explaining that such funds invest in the front-month futures contract.
“What can happen in the process is that if that next futures contract, or those next futures contracts, are trading at prices that are above the ones that the fund currently owns, they will be in effect systematically selling low and buying high.”
Johnson was referring to the structure of the futures market. When the market is in contango – where the forward price of a futures contract is higher than the spot price – investors in the ETF will essentially have to roll their positions forward at a loss, as they will sell the current contract and buy the next contract out at a premium. Backwardation, the opposite, is when the forward price of the futures contract is lower than the spot price.
This approach can be particularly costly, he said. Tax implications are another factor to consider, as the traditional ETF tax advantage that investors are accustomed to is eliminated in this case.
Cathie Wood seems to have a wait-and-see stance because of the potential of tax ramifications.