As the practice of trading cryptocurrencies solidifies itself in the mainstream, many are starting to question how the new digital assets can integrate with traditional investing. Following a lot of debate, the SEC finally approved a Bitcoin Futures ETF on the New York Capital Exchange, but what did this mean for traditional investors and how did it impact them?
Looking to answer this and discuss the future of cryptocurrencies in the traditional financial markets is Ian Kane, Co-Founder of the Blockchain-based fintech platform Unbanked. Having worked in technology and digital media for over ten years with a heavy focus on business development, sales, and strategy, Kane looks to explain the pros and cons of a Bitcoin Futures ETF and how this will impact future integration between cryptocurrencies and traditional investments:
Bitcoin witnessed a new all-time high on 20 October after the successful launch of ProShares Bitcoin Strategy ETF, the first trade-exchange fund (ETF) ever approved by the US Securities and Exchange Commission (SEC). The prices of Bitcoin broke the previous record of $64,889 in April and have reached as high as $66,685 since then. After a long slump with Bitcoin prices going up and down, Bitcoin has been able to extend its yearly gains up to 130 per cent. The new fund, launched on 19 October, allows investors to trade in Bitcoin futures without actually owning the coin. This ETF launch has become one of the most successful launches of all time as $570million worth of assets were traded on the very first day. Launched on the New York Capital Exchange under the ticker BITO, the fund also witnessed a trading volume of $1billion. ProShares will give investors an exposure to the risk and returns offered by Bitcoin without them having to go through the process of purchasing coins themselves. The prices of Ethereum also rose by 7.4 per cent crossing the $4000 mark. On the very first day, the fund’s value rose to $41.94 which is a 4.8 per cent increase from its initial $40 net asset value.
Before jumping on this bandwagon, investors must understand the difference between Bitcoin and Bitcoin Futures. Buying Bitcoin Future contracts from the ETF means that you are agreeing to buy or sell Bitcoin in that future at a specified price. You, therefore, will not be directly buying or selling Bitcoins. You will instead buy or sell Bitcoin at the agreed-upon date and price, no matter what the market price is that day. If the market price is higher than the agreed-upon price, as an investor, you make money by trading at a premium. And if the market price is lower than the agreed-upon price, you lost money by trading at a discount. By investing in Bitcoin Futures contracts you are betting on the future prices of Bitcoin. Essentially, this is the same as longing or shorting a publicly traded stock. Although investing in Bitcoin Futures will not protect you from the volatility of Bitcoin, it will give investors first-hand experience in crypto investment. The new ETF will give those who have a brokerage account, and are comfortable with trading stocks, a chance to invest in crypto without having to open a crypto account with a particular provider.
Change in SEC’s attitude
Until recently, several financial institutions had previously tried to get approval from the SEC for Bitcoin ETFs but all in vain. The SEC was reluctant to do so given the volatile nature of Bitcoin and the lack of a comprehensive cryptocurrency regulation. But the Chairman of the SEC, Gary Gensler, said that Future Bitcoin contracts are safer and the commission would be comfortable accepting them due to how they operate in a regulated market. This seems like a significant change in the attitude of the SEC which was earlier skeptical about the crypto market altogether. The previous SEC Chairman, Jay Clayton, had expressed concerns about the volatility of cryptocurrencies and its use by criminals for illegal activities. The SEC has always been concerned about the lack of investor protection in the crypto market, which offers criminals greater opportunities for fraud and manipulation.
The new Bitcoin-linked ETF comes with greater investor protection – somewhat along the lines of conventional methods of investments. For example, the Federal Deposit Insurance Corporation (FDIC) covers the cash balance in traditional brokerage accounts. The brokerage accounts are insured by the Securities Investor Protection Corporation (SIPC), which covers as much as $500,000 if the brokerage goes bankrupt or if other financial difficulties (like a theft or hack) arise. This kind of protection is not provided by cryptocurrency exchanges as they are potentially more susceptible to fraud, scams and scandals. The number of scandals in cryptocurrencies have increased by 1000 per cent in just one year. Therefore, any mechanism of protection will give people the trust and confidence they need to confidently invest in cryptocurrencies. Although investors could already buy bitcoin futures on the regulated Chicago Mercantile Exchange, the introduction of an ETF gives investors a wide range of options which will only add to the growing legitimisation of cryptocurrencies.
Crypto enthusiasts and advocates are quite happy with the SEC’s decision and believe that it is a major step in mainstreaming cryptocurrency. However, there are some sceptics who believe that the SEC has complicated the entire process. They believe that if the SEC cared about investors, it should have allowed for an ETF that could hold spot Bitcoin rather than a future-based product which would confuse the investors even more.
Bullish Signal
Billionaire investor Paul Tudor remarked that cryptocurrency is a better hedge against inflation than gold. He noted that inflation was a major threat to the US economy in a post-COVID scenario. He himself acknowledged having crypto single digits in his investment portfolio. Some experts have claimed that the launch of the new ETF fund was a “blockbuster move” that will add a lot more legitimacy to the crypto space. It will give impetus to many investors who previously felt uncomfortable investing in digital currencies based on the infancy of the market, and its systems, as a whole.
BITO’s success will also encourage other investment funds which are interested in cryptocurrencies to list their own EFTs. Other ETF providers like Invesco, VanEck, Valkyrie and Galaxy Digital are likely to launch their own Bitcoin ETFs soon depending on the approval of the SEC. The SEC, however, also acknowledges that investments in Bitcoin Futures may not directly increase the demand of cryptocurrencies. Instead, investors may buy Bitcoin Futures to protect themselves from unforeseen price changes or to take advantage of the pricing disparities. Both of which will help to improve the consistency of Bitcoin’s value. With this step, it seems like the greater legitimisation and institutionalisation of cryptocurrencies may just come from mainstream financial markets as people have a greater degree of trust for them. This might be an important stepping stone for mainstream adoption of cryptocurrencies by the masses.
