Tokyo FinTech
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Tokyo FinTech

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:

Source: TSE

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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Norbert Gehrke

Passionate about strategy & innovation across Asia. At home in Japan. Connector of people & ideas.