THE FIRST BITCOIN ETF: SUCCESS? 

With an extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest includes Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

Bitcoin is perhaps the most recognized cryptocurrency while it is also the number one currency based on market cap. For example, the live Bitcoin price today is $65,420.00 USD and had a 24-hour trading volume of $37.2 Billion USD. It has a circulating supply of 18,893,731 BTC coins. Unlike certain other cryptocurrencies, however, the supply of Bitcoin is limited as it has a maximum supply of only 21,000,000 BTC coins. It is expected that Bitcoin will cease issuing new coins in 2140. 

Historically, to buy Bitcoin or any other cryptocurrency, an investor had to use a cryptocurrency exchange because alternative investment vehicles, such as ETF’s were not available. A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets. Such other assets may include conventional fiat money (i.e., US dollars) or other digital currencies. Typically, exchanges accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. Presently, there are hundreds of exchanges in existence. Popular crypto exchanges include Coinbase, Gemini and Binance. 

ProShares Bitcoin Futures Based ETF 

Up until October 19, there were no Bitcoin based EFTs. However, on October 15, the Securities and Exchange Commission (SEC) approved Bitcoin futures ETFs. This was a momentous move by the SEC. Upon learning of the SEC’s approval, ProShares (a Maryland based company) immediately filed a post-effective amended prospectus. In this amended prospectus, ProShares stated that its Bitcoin futures-based ETF was expected to launch immediately on the next trading day: on Monday, October 18. Bitcoin futures are financial contracts that obligate the buyer and seller to the contract to transact Bitcoin at a predetermined future date and at a predetermined price. The buyer must purchase, or the seller must sell the underlying Bitcoin at the set price, regardless of the current Bitcoin market price at the expiration date. 

Touted as the first of its kind in the U.S., the ProShares ETF offers investors the opportunity to gain exposure to returns of Bitcoin with the ease of buying an ETF in a brokerage account. 

What exactly is this Bitcoin based ETF? 

Generally, an ETF is an investment vehicle that tracks the performance of a particular asset or alternatively, a group of assets. The argument goes, that ETFs provide potential investors an opportunity to diversify their investment portfolios. One important aspect of such an investment is that potential investors are not required to own the assets themselves. For individuals looking to focus only on gains and losses, ETFs provide what is perceived as a more efficient alternative to buying and selling individual assets. And because many traditional ETFs target a collection of potentially similar investment assets (e.g., an EFT that concentrates on US public corporations that have Bitcoin on their balance sheets), ETF’s allow investors to diversify their investment portfolios. And, perhaps most importantly to the SEC and some potential investors, ETF’s are regulated by the SEC. That is, under the Investment Company Act of 1940, all new ETFs must register with the Securities and Exchange Commission. 

And on October 19, the ProShares Bitcoin Strategy ETF (“BITO”) became the first U.S. Bitcoin-linked ETF offering investors an opportunity to gain exposure to Bitcoin. According to the BITO Fund’s Prospectus, BITO seeks to provide capital appreciation primarily through “managed exposure to Bitcoin futures contracts.” For the first time ever in the US, BITCO allows any investor with a brokerage account to buy and sell a Bitcoin-backed financial product on the New York Stock Exchange (“NYSE”). 

There are two important points to be made about this fund. First, BITO does not invest directly in Bitcoin, but rather Bitcoin futures contracts. And second, the price and performance of Bitcoin futures should be expected to differ from the current “spot” price of Bitcoin. The “spot” price of Bitcoin is the current price of this coin in the market place where it can be bought or sold for immediate delivery. 

ProShares Bitcoin Strategy ETF introduction was nothing short of spectacular. For example, ProShares Bitcoin Strategy ETF's impressive NYSE debut on Tuesday set a number of records. First, the futures-based exchange-traded fund brought in $570 million of assets. In addition, BITO registered a trading volume of $1 billion on the first day. With these numbers, BITO became the second-most heavily traded new ETF on record, according to Bloomberg. The fund’s price rose to $41.94 at the close of stock-market trading, up 4.9% from the initial $40 net asset value. 

Why Not Purchase Bitcoin Directly from an Exchange? 

If this Bitcoin ETF attempts to merely mirror the price of the cryptocurrency itself, why not just purchase Bitcoin directly from an exchange? ETF advocates provide a number of benefits for purchasing Bitcoin by way of an ETF. 

First, ETF investors do not have to bother with the security procedures associated with holding Bitcoin and other cryptocurrencies. Second, there is no need to deal with cryptocurrency exchanges in the process. Rather, ETF investors can merely purchase and sell the ETF through traditional exchanges and markets. Third, there is a perceived crucial benefit to focusing on a Bitcoin ETF rather than on the Bitcoin currency itself. Because the ETF is an investment vehicle, investors would be able to short shares of the ETF if they believe the price of Bitcoin will go down in the future. Short selling is something that cannot be accomplished in the traditional cryptocurrency market. 

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated. Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. 

Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor. Thomas Wettermann is not an independent financial advisor.