Trader Talk

Traders works at the New York Stock Exchange (NYSE), August 4, 2021.
Andrew Kelly | Reuters

Cryptocurrency enthusiasts and the exchange-traded fund industry are bracing for the first bitcoin futures ETF to begin trading on Tuesday, when the ProShares Bitcoin Strategy ETF is scheduled to debut at the NYSE. 

One catch: The ETF goes active unless the Securities and Exchange Commission objects to the filing, which can happen right up until midnight on Monday.

Despite the uncertainty, many believe the odds are in favor the ETF will begin trading as scheduled.

“I would give it a 75% chance of approval,” Dave Nadig, chief investment officer and director of research of ETF Trends, told me.

A bitcoin futures ETF: a disappointment, or step in the right direction?

The ETF is based on bitcoin futures that trade on the CME. It’s a disappointment to many in the bitcoin community, who would prefer a pure-play ETF backed by physical bitcoin. They complain that the high cost of rolling into futures contracts will not adequately track the spot price of the cryptocurrency, and that the SEC should proceed to approval of a pure-play bitcoin ETF. 

“A futures is a derivative of the spot market, so if you are comfortable with futures, why wouldn’t you be comfortable with the spot market?,” Michael Sonnenshein, CEO of Grayscale Investments, a digital currency asset manager which runs the Grayscale Bitcoin Trust told me. Grayscale has indicated it intends to convert GBTC into a bitcoin ETF should they receive regulatory approval.

Regardless, most bitcoin activists – and the ETF community – are cheering it as a small but critical step to open the crypto market to a much wider audience.

“This is a crawl, walk, run market,” Matthew Hougan, chief investment officer at Bitwise Asset Management, told me. “The smallest step the SEC can take right now is to launch a bitcoin futures market because it is a regulated market.”

That fact – that futures are a regulated market – is critical to understanding why SEC Chair Gary Gensler is likely to allow a bitcoin futures ETF to begin trading, but not a pure-play bitcoin ETF.

Gensler and the SEC have a crypto problem, and a bitcoin futures ETF will help

Gary Gensler has a crypto problem. He wants to be supportive of financial innovation like crypto, but he lacks regulatory authority over critical areas like crypto exchanges.

“Gensler wants to be innovative and yet balanced,” Hougan told me. ”He doesn’t want to kill financial innovation [around crypto]. He wants to crack down on the fraud and nefarious elements and the criminal activity. He wants to put a regulatory framework around it.”

But he doesn’t have a regulatory framework, at least not yet. It’s likely Congress will need to step in and provide a broad regulatory framework for the whole crypto space, but the chances of that happening soon are slim. 

But the crypto space is growing so fast Gensler is under enormous pressure to do something. The SEC can only go so far in claiming regulatory jurisdiction without ruffling the feathers of other agencies.

The temporary solution: Allow a bitcoin futures ETF to begin trading.

A bitcoin futures ETF allows the broader public to get involved without many of the problems around owning the virtual currency. First, you don’t have to worry about custody. There’s no one complaining they forgot their exchange password. There are no issues around someone owing bitcoin on an unregulated exchange who had their crypto stolen by cyberthieves.

Can a futures market be manipulated?

One big reason a bitcoin ETF has not been approved is the worry over market manipulation. A similar concern has been expressed about a bitcoin futures ETF: that the futures market could be manipulated by the spot market. 

In a recently released paper, Hougan and his associates at Bitwise Asset Management claim this worry is unfounded. 

“We have showed that the CME bitcoin futures market is the leading source of price discovery in the bitcoin market worldwide,” Hougan told me. “Prices move first on the CME ahead of Coinbase, Kraken and other offshore exchanges. The CME is the big dog. The spot market does not wag the futures tail.”

Dave Nadig agreed, noting that in the commodity world, pricing has long been dominated by the futures: “The futures is where the liquidity is.”

Hougan has taken this reasoning one step further. Yesterday, Bitwise filed for a bitcoin ETF that would hold the actual virtual currency, not futures, arguing that the market is sufficiently mature.

“This is not your grandma’s bitcoin,” Hougan told me. “It is a mature market.” 

Baby steps first

The SEC is unlikely to be willing to take that next step and approve a pure-play bitcoin ETF, at least not yet. They will likely want more regulatory control over the spot market and will want further proof that the regulated market [futures] is doing a good job and not being manipulated by the spot market for bitcoin. 

Should the ProShares ETF begin trading Tuesday, others will likely quickly begin trading, including the Invesco Bitcoin Strategy ETF, the VanEck Bitcoin Strategy ETF, the Valkyrie Bitcoin Strategy ETF, and the Galaxy Bitcoin Strategy ETF.

Hougan says Tuesday will be a big day for crypto investors. 

“This is a positive step,” Hougan told me. “People should cheer for it. You don’t see regulatory courage like this too often.”