A Bitcoin ETF is almost here. What does this mean for investors?

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The first Bitcoin exchange-traded fund is expected to start trading on Tuesday, making the most widely traded cryptocurrency available to most investors with a brokerage account. Here’s a look at what that means.

What is happening?

ProShares filed plans on Friday, laying the groundwork for launching its ETF Bitcoin Strategy. Other funds are expected to follow over the next two weeks as the Securities and Exchange Commission examines additional proposals made in August by asset managers Valkyrie Investments, Invesco and VanEck to sell bitcoin ETFs to investors.

Companies don’t expect their proposals to be rejected, according to people familiar with them, although the SEC may approve, disapprove or postpone some or all of the requests.

New ETF proposals are subject to a 75-day review period by the SEC. If the regulators do not object, the funds are considered cleared for trading.

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Monday will mark the end of the review period for the ProShares fund. After the first four entities this month, five more companies have asked the SEC to list similar funds, and decisions about them will likely be made in the coming months.

The asset management industry has been pushing for years to sell a bitcoin ETF, seeking to profit from an increase in the value of digital currencies. Some in the industry say investors should allocate to crypto, which means devoting a small portion of their portfolios to the asset class to increase returns and diversify holdings. A bitcoin ETF would make it easier, according to people in the industry.

What are Bitcoin ETFs?

An exchange-traded fund is an investment that tracks the price of a basket of underlying assets and is traded on US stock exchanges. In this case, the funds would track the price of bitcoin futures contracts traded on the Chicago Mercantile Exchange, rather than bitcoin itself.

Why are these ETFs based on futures?

These funds will not hold real bitcoins. Instead, they will be dealing in bitcoin futures, which trade separately on regulated US exchanges such as CME.

A bitcoin mining facility in upstate New York uses electricity from a local hydroelectric plant powered by the Niagara River. The company is one of a group of miners who are trying to make the industry more sustainable, both environmentally and financially. Illustration: Alex Kuzoian / WSJ

Regulators prefer ETFs based on futures contracts because the SEC does not have jurisdiction over crypto trading platforms that are not registered as exchanges in the United States. determined.

The SEC has not approved any exchange-traded funds that directly hold bitcoin or other cryptocurrencies, and the agency has suggested it will not support such a move at this time.

What else is there in these funds?

ProShares said in its prospectus that the fund will invest primarily in bitcoin futures contracts. Previously, the company also planned to buy shares of Canadian ETFs and mutual fund trusts that hold bitcoin in order to gain more direct exposure to real coins.

Bitcoin has surged as supporters argue that launching a bitcoin ETF will increase the legitimacy of cryptocurrencies. Photo: Marco Bello / Agence France-Presse / Getty Images

Other asset managers, including Invesco and VanEck, have offered to hold similar assets beyond Bitcoin futures.

The SEC has indicated that it prefers ETFs based on crypto futures contracts, thanks to the oversight considerations mentioned above, so the industry expects all funds to end up becoming ETFs. simple bitcoin futures.

ETFs appeal to investors who want to easily buy a set of assets. Otherwise, investors would have to buy them directly.

Is there a trade-off with futures?

Some crypto enthusiasts complain that ETFs based on futures contracts will not follow bitcoin perfectly due to the costs of buying and selling futures contracts and other concerns. They argue that investors in bitcoin futures ETFs could face substandard performance if crypto continues to rise.

Is this why bitcoin is going crazy again?

Yes. Bitcoin has surged in recent days, with fans claiming that launching a bitcoin ETF would increase the legitimacy of cryptocurrencies and ease exposure for institutional investors.

SHARE YOUR THOUGHTS

Would you invest in bitcoin futures ETFs? Why or why not? Join the conversation below.

Write to Michael Wursthorn at [email protected]

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