Should I buy the futures backed Bitcoin ETF ?

Short answer: You probably don’t need it*.

Buying Bitcoin from an exchange like Coinbase is probably the best option. This doc will outline the definition of a futures backed ETF, and why it is useful to some but not all. This doc will outline the definition of a futures backed ETF, and why it is useful to some but not all.

Context

The crypto community made history today with the launch of the futures backed Pro-shares Bitcoin strategy ETF. This is a saga that goes all the way back to 2013 when the Winklevoss brothers first applied for a Bitcoin ETF. With almost $1 billion in trading on the first day. Many people are asking themselves, “Should I buy the futures backed Bitcoin ETF ?”

What does an ETF do?

The purpose of an ETF is to closely track the value of an Asset. This can be done in many ways. In the case of the Bitcoin ETF it is done by tracking the price of bitcoin using the bitcoin futures market.

What are futures contracts?

Futures contracts are legal agreements to buy or sell commodity asset. By aggregating the contract agreements in the Bitcoin futures market, a price can be derived for the ETF.

Why is the ETF important

The ETF is a big deal because it unlocks large funds, institutions, and financial advisors to gain exposure to Bitcoin. Traditionally it has been hard for these types of investors to access spot bitcoin because of the restrictions set by their institutions.

Prior to the ETF, the primary way to gain Bitcoin exposure was through $GBTC, a security (stock) that is backed by bitcoin. The problem with $GBTC is that it could trade at 20% less than the actual price of bitcoin. At times it even traded higher than the price of bitcoin. Typically the structure of an ETF allows an asset to be tracked closer to the actual price (not always perfectly).

Cons to Future backed Bitcoin ETF :

It takes two to Contango

• Contango is a term that describes when the futures price is trading higher than the spot price of the asset. This can result in the ETF performing at a discount (lower) than the underlying asset over a set period of time.
• A futures ETF might not the best way to track the price of bitcoin. This is because a futures ETF is backed by bitcoin futures contracts (agreements) rather than actual (spot) bitcoin. Many speculate that a spot ETF is the preferred investment vehicle which has not been announced yet.

Grayscale, the company that manages GBTC made it clear that they will convert GBTC to a spot ETF as soon as the SEC grants them approval.

*This it not financial advice or the opinion of third party institutions associated with the author.