This Bitcoin ETF is bad for your financial health
Unless you live underneath a rock, outside crypto land, or have better things to do with your life (bless you!), you will have noted the exuberance at getting the first Bitcoin-based ETF approved. Here is the TL;DR for this post: don’t touch it, at least for long-term investment.
We are intentionally saying “Bitcoin-based ETF” rather than “Bitcoin ETF”, because the trading vehicle approved is based on Chicago Mercantile Exchange (CME) futures.
Generally, there can be good reasons to trade futures. Your trading mandate might include CME futures, but not digital assets. You are trading a commodities portfolio, including CME futures, and you can take advantage of cross-product margining if you hold all your positions at the same trading venue.
Even for futures-based ETFs, there are good reasons to trade them short-term. Common favorites include the 3x leveraged index ETFs. They are a fantastic vehicle to take advantage of short-term market swings (think hours, or at a maximum a few days). They are also a great way to lose all your money in the long-term. Why is that?
For simplicity and clarity, please allow us to quote from the TSE website:
Futures prices vary depending on contract months (settlement cycle for futures). The reason is time value. The time value shows expectation for price movements during the period from the present to a contract month.
In general, because the further away you are from the contract month, the more uncertain the future prices will be, the time value becomes larger and futures prices become higher. Situations where the futures price is higher in a deferred contract are called contango; whereas, situations where the futures price is lower in a deferred contract (meaning that prices in the near-term contract are higher than those in the deferred contract) are called backwardation.
Such factors may lead to gains and losses associated with the transfer of a contract month to the next contract month or later (rollover) in futures-type ETFs.
Particularly, commodities futures or volatility index futures, including Nikkei 225 VI Futures, tend to veer toward contango. Futures-type ETFs that use such futures prices may reduce in price with repeated rollover. Thus, mid- and long-term investment warrants attention.
Another popular futures-based ETF is United States Oil (USO), which tracks West Texas Intermediate (WTI) through NYMEX futures. Historically, oil has experienced long periods of contango, resulting of significant negative roll yields as expiring contracts are replaced by longer-dated ones. A ~900 dollar investment in USO at the market peak in July 2008 would have yielded a current value of USD 57.26 as of the close yesterday (adjusted for innumerable reverse stock splits). Talk about wealth destruction.
Regardless, the Bitcoin-based ETF approval was important, albeit not in its own right, but because it will inevitably be a step towards a fully physical (digital) Bitcoin ETF. In the interim, as a retail investor, just open an account with a regulated cryptocurrency exchange in your jurisdiction to gain exposure to this asset class — avoid the superficial convenience of trading this futures-based Bitcoin ETF out of your brokerage account.
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