The Good, Bad, and Ugly of Bitcoin ETF

As the first Bitcoin ETF launched, the reception has been incredibly positive.

The ProShares Bitcoin Futures ETF (BITO) gives people access to the space they couldn’t access before or were uncomfortable with the custody. It opens up space to pensioners all over the world.

But there are just things you should know before making any decision. So, here are the good, the bad, and the ugly of the new Bitcoin ETF:

It’s been a long journey

The Bitcoin ETF was inevitable. At least in retrospect.

But the journey to a Bitcoin ETF started back in 2013 with the world’s first ETF application from Cameron and Tyler Winklevoss. As they submitted it, the media ignored it and sometimes even mocked it. For instance, the bitcoin ETF application appeared on Mad Magazine’s 20

Dumbest Things of 2013.

It’s important to realize that at the time, Bitcoin was trading at $68. Anyone who sold their car for $10k and bought Bitcoin upon seeing this now has $3,000,000. Some people lack foresight.

Now eight years later, ProShares launched the first bitcoin ETF with a bitcoin price of 62,500. That’s almost a 1000x return in the meantime. I’m glad we got here, but it has taken too long, unnecessarily.

The bad

So let’s take a close look at the construction of the ETF as a futures contract ETF.

There’re two major types of ETFs: futures and spot. The difference is that futures are betting on the price of the underlining asset, but they don’t settle in the asset; they’re cash-settled. That is to say, the holders have only exposure to futures, not to the actual Bitcoin. On the other hand, the spot ETF buys the asset directly and holds it in their custody.

But is the Bitcoin Futures ETF the best thing?

Honestly, probably not, and I’m not a fan of it. The approval of a Bitcoin spot ETF would be more compelling to investors, both from a price tracking and fee structure standpoint.

To begin with, the futures ETF will fall victim to a situation called contango. No, it’s not a dance move. Contango happens when the futures price of a commodity is higher than the spot price.

As a result, the price of Bitcoin futures ETF will deviate from the price of Bitcoin because futures contracts are rolled, and the following year’s contract is usually more expensive than the previous one. Investors are selling a lower-priced contract and buying a higher-priced contract. In finance, it’s referred to as bleed or negative roll yield. In other words, every time they roll, they’re losing money.

There’re enormous amounts of inefficiencies in the price of futures ETF. And in effect, it opens up massive opportunities to arbitrage it. In the first place, all the middlemen and gatekeepers like lawyers, administrators, auditors, bankers will take a cut of the pie. And then the hedge funds will simply buy Bitcoin and sell futures and make a fortune out of this.

Of course, the futures ETFs make total sense with many commodities since most of them cannot be stored in your home. However, this is not the case with Bitcoin, and the primary purpose of the Bitcoin futures ETF appears to be in enriching Wall Street.

By and large, if American regulators really cared about the investor, they would protect them from the futures ETF contract and let them buy Bitcoin directly at the crypto exchanges.

The ugly

There is a large institutional appetite for Bitcoin.

The first Bitcoin ETF was also the fastest ETF to attract over $1 billion in as little as two days after its debut. The largest on the list below, the Van Eck fund, launched with assets exchanged from other funds, which didn’t represent true investor inflows.

In addition, the global ETF market is over $8 trillion, which is seven times larger than the current market cap of Bitcoin. Therefore, the ramifications of the Bitcoin ETF are enormous, and the ETF market could easily push the price of Bitcoin over 150,000.

But I wouldn’t get my hopes up just yet. As I wrote in December 2018, we must learn from the painful lesson of the CME futures. ​​The Bitcoin futures, whether issued by CME, are a highly leveraged game.

With futures ETF, the markets will be flooded by the hundred-time larger liquidity of the artificial Bitcoin, which will dilute the highly cherished scarcity of 21 million Bitcoin. In other words, the institution, instead of buying the real Bitcoin, will be just betting on a paper Bitcoin. Therefore, demand will never actually flow into Bitcoin itself, and its price might not entirely affect the institutional demand.

In effect, all this tsunami of fake Bitcoin could derail the institutional money from the real Bitcoin markets.

The good

Why is the ETF still better than cash?

First, we live in an insane time of the excessive monetary policy. For instance, 40% of all the money printed in America was printed in the last 15 months.

As a direct result, the US and European economies are experiencing record inflation, which is clearly not “transitory.” That makes the importance of a Bitcoin allocation even more evident to most institutions. Most asset managers will ultimately realize that inflation is here to stay, and they’ll have to protect themselves with the best inflation hedge asset in the world.

As Michael Saylor put it, “Bitcoin is the most practical solution for a consumer, investor, or corporation seeking inflation protection over the long term.”

Second, BITO may be the first, but it will hardly be the last. ProShares ETF has set the wheels in motion, and the SEC is poised to approve other Bitcoin Futures ETFs. There’re forty different Bitcoin ETF applications in place, and in time we’re going to see more and more ETFs and more options for the investors.

And finally, add in the fact that approximately 86% of Bitcoin’s circulating supply has not moved in the last 90 days. Under those circumstances, the equation is simple. If demand increases exponentially due to the ETFs, but the supply remains extremely limited, the price is likely to rocket upwards in an insane way.

Final thought

It is undeniable that even with the futures ETF, Bitcoin is still the most free-market asset that we have.

However, most investors are better off buying Bitcoin through crypto exchanges than a futures ETF. The best part about Bitcoin is that we can hold it in our custody.

It has been available to all 8 billion people, and nobody needs banks to buy it, store it or send it across the globe