Bitcoin Fans Flock to the Futures Market

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The premium on bitcoin futures has doubled this month as investors bet the SEC will approve the first futures-based bitcoin ETF

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SEC Chairman Gary Gensler said in August that he would be receptive to futures-based ETFs. He said so again two weeks ago while speaking at an asset management conference in Washington, D.C.

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In recent times, the annual premium over CME bitcoin futures prices to the spot price of bitcoin was 15%, compared to an average of about 7.7% in the first nine months of the year. Noel Acheson, Head of Market Insights at crypto lender Genesis Global Trading Inc., said traders can make those returns by buying spot bitcoin and shorting a futures contract as the two prices will converge in the future. She chalks up the difference in premium to institutions in a hurry to buy bitcoin futures in hopes of ETF approval.

The Chicago Mercantile Exchange is planning to increase the cap on the number of bitcoin futures contracts a firm can hold this month. Analysts said the move could help make room for new big players like ETFs. People familiar with the matter said some of the asset managers involved in the efforts so far have answered several rounds of questions from the regulator on how the fund will function.

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“We are on the edge of our seats to see if the filing gets through to the SEC,” said Jiang Bui, head of US exchange-traded products at Nasdaq, which is working with Valkyrie to create a bitcoin futures ETF. . “We are all very hopeful.”

Analysts expect the SEC to approve a bitcoin ETF, which has contributed to bitcoin’s nearly 25% climb this month.

Over the past eight years, the agency has rejected or delayed decisions on several proposals for funds directly holding bitcoin. Mr Gensler cited the agency’s lack of oversight over crypto trading venues that are not registered as exchanges in the US, which gives regulators no information about where bitcoins are coming from and whether price manipulation is taking place. being done. This leaves investors vulnerable to potential fraud and business manipulation, the agency said.

Oversight is not an issue with bitcoin futures, which enable traders to bet on whether the price of the cryptocurrency will rise or fall. Futures trades differ from the underlying asset they receive from exchanges, such as the CME, which are overseen by the SEC.

But futures-based ETFs are sensitive to variations in futures prices and the underlying assets they track—in this case bitcoin, which is notorious.

If the ETF continues to rise, the ETF could also lag behind Bitcoin’s performance. Long-term bitcoin futures tend to trade above short-term contracts, a market dynamic known as contango. This can lead to lower returns for the fund as they pay to roll over the contracts monthly.

“A lot of people don’t really understand how futures work,” said Kathleen Moriarty, ETF attorney for Individual Investors.

Investment returns on the fund will also be affected by annual fund fees and potentially some of the funds’ plans to hold other assets, such as crypto-related equities and funds.

Still, analysts say there is likely to be a ready market for futures-based ETFs for institutional investors looking to buy crypto assets. A recent survey of nearly 400 US institutional investors by Fidelity Digital Assets found that 18% had invested in digital assets through an investment product this year. About a third said they prefer investment products over direct investments in crypto for any future investments.

Asset managers are laying lines to meet the demand. Following the initial batch of funds for review, the SEC is expected to weigh in on three additional bitcoin futures ETFs in November. And analysts expect to see more. Just on Wednesday, Cathy Wood’s ARK Investment Management filed plans to launch its own bitcoin futures ETF in partnership with European crypto asset manager 21Shares.

“Not everyone is seeing this in the case of bitcoin ETFs,” said Armando Aguilar, vice president of digital asset strategy at Fundstrat Global Advisors. He said he believes some investors would prefer an ETF with direct exposure to bitcoin. “But it is a step in the right direction.”

Michael Wursthorn at [email protected] and Caitlin Ostroff at [email protected]

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