Investors of cryptocurrency this week have been given a price surge thanks to the launch of Bitcoin’s first futures-based exchange-traded fund. Bitcoin has since hit an all-time high of almost $67,000 and is currently consolidating above $60,000. However, the truth about the fund is now coming to light.
Due to ‘contango’- a common phenomenon in the futures markets- the manager of the newly listed ProShares Bitcoin Strategy ETF is rumoured to implement high costs that will leave investors with a much lower return than if they had invested in Bitcoin itself. This loss could be so large that worries around the volatility and inconsistent reference prices for spot-market Bitcoin may become trivial.
SEC has chosen the easiest strategy from a regulatory standpoint by choosing the futures road to an ETF rather than a spot market-backed fund. The underlying contracts- the CME groups Bitcoin futures- are already regulated by the Commodity Futures Trading Commission.
If the SEC has chosen one of the many spot market-backed ETF proposals, it would have a lot more work on its plate. The regulators would have needed to approve the prices quoted by exchanges, whose Bitcoin listings aren’t regulated by either the SEc or the CFTC.
By choosing the futures backed-ETF solution, the SEC may be causing more harm for smaller investors than they would experience from the spot market route.
According to Jodie Gunzberg, Managing Director of Coindesk Indexes, the average “negative yield” per monthly roll on Bitcoin futures has been 2.29%. On an annual basis, if investors held shares in a Bitcoin futures fund that had rolled over every month for the past year, they’d have ended with a cumulative cost of 28% relative to the spot market.
The monthly average negative yield for Bitcoin futures is significantly above the average contango cost that is incurred by crude oil futures and only slightly below that cost of unleaded gas.
A large amount of the contango effect can be explained by storage costs, which add up over time and make longer-dated futures contracts more expensive. Bitcoin is currently in a state of contango 58% of the time, according to Gunzberg. The contango here is explained by the hyper-bullish future price expectations.
Another contango-related issue with the futures backed-ETF is that fund managers will need to hold a large amount of cash to cover the roll payments over time. This creates an opportunity cost because the funds aren’t exposed to Bitcoin’s gains. Spot market-ETFs allow managers to invest the majority of their funds.
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