Some decidedly interesting news about Bitcoin ETF in the US have emerged in recent days.
It is worth mentioning that in order to land on the US markets, ETFs must get approval from the SEC, but the US government agency has a contradictory attitude.
On the one hand, it has already approved several ETFs based on futures contracts on BTC over the years, but it has always refused to approve even one based directly on spot Bitcoin.
This attitude appears inconsistent, although the SEC has provided reasons for it.
It is worth noting that in other parts of the world, such as neighboring Canada, spot Bitcoin ETFs have already been approved by authorities and placed on the markets without any apparent major problems.
Summary
News: the first leveraged Bitcoin ETF
The most important recent news in this regard is the SEC’s approval of yet another ETF based on Bitcoin futures contracts, but this time with leverage.
This is the first time the SEC has accepted a leveraged Bitcoin ETF, although not based on spot BTC but on the usual futures contracts.
It is the 2x Bitcoin Strategy ETF (with ticker BITX) from Volatility Shares Trust, which has been finally and officially approved, and is expected to be available in the markets as early as tomorrow on the Chicago Board Options Exchange (CBOE).
The official document approved by the SEC states that the BITX fund aims to achieve daily investment results that correspond to two times the return of the S&P CME Bitcoin Futures Daily Roll index. Hence the 2x in the name.
By contrast, returns over longer periods than a single day will most likely differ in amount, and perhaps even in direction, from the fund’s self-reported multiple for the daily return.
Indeed, Volatility Shares Trust warns:
“The Fund presents different risks than other types of funds. The Fund is not suitable for all investors and should be used only by knowledgeable investors who understand the consequences of seeking daily leveraged (2x) investment results, including the impact of compounding on Fund performance. The Fund is intended to be used as a short-term trading vehicle.
Investors in the Fund should actively manage and monitor their investments, as frequently as daily. The Fund is not intended to be used by, and is not appropriate for, investors who do not actively monitor and manage their portfolio.
An investor in the Fund could potentially lose the full value of their investment within a single day. The Fund does not invest directly in bitcoin. Instead, the Fund seeks to benefit from increases in the price of bitcoin futures contracts for a single day.”
Thus, if previous futures-based Bitcoin ETFs served primarily to take a position on Bitcoin’s price trend over the medium to long term, without having to buy and hold BTC directly, this one instead serves only for short-term speculation.
Therefore, this is not only a first in the US market, given that until now a leveraged ETF on the Bitcoin price trend had never been approved, but also a new financial instrument for all intents and purposes aimed particularly at professionals in investment and financial speculation.
In short, this is not yet another ETF based on BTC futures, but something new for the US markets.
News: the leveraged ETF’s impact on the price of Bitcoin
It is assumed that the launch of this new fund in the markets, which is expected to take place tomorrow, may not affect the BTC spot price that much.
As Volatility Shares Trust itself writes in the official document, no Bitcoin will be purchased as the underlying for the BITX fund, but dollar-settled Bitcoin futures contracts will be purchased.
To maintain its 2x daily exposure to the benchmark index, the fund intends to exit its futures contracts near expiration and replace them with new futures contracts with a later expiration date.
Therefore, it will always be collateralized only with BTC price futures contracts, themselves not based on Bitcoin but on a dollar index.
This does not imply that the managers of the fund, or of the futures contracts that the fund will buy, will be forced to buy BTC in the market. Therefore, the launch of this fund will not increase the pressure to buy BTC in the market.
The other Bitcoin futures ETFs
The first Bitcoin futures ETF approved by the SEC for the US market was BITO (ProShares Bitcoin Strategy ETF), which landed in the US markets in October 2021.
As it was launched just before the end of the last big bull run, its overall performance to date is obviously negative.
Right now its market value is 57% below its launch value, and 60% below its highs.
It is worth noting that BTC’s price is “only” 56% below the highs, so BITO is actually performing worse than Bitcoin. In other words, over the medium to long term it is proving to be a worse investment than Bitcoin itself, not least because it has management and commission costs that BTC may not have if kept trivially on a non-custodial wallet.
What is most surprising is the 2023 performance.
Indeed, since the price began to rise, following the bear-market bottom of 2022, Bitcoin has risen 82%, while BITO only 64%.
Moreover, taking into consideration the accumulated losses between November 2021 and November 2022, i.e., during the bear-market, Bitcoin has recorded -77% while BITO -78%.
Therefore this Bitcoin futures-based ETF is performing worse than Bitcoin especially in this rebound phase, because during the bear-market it had performed poorly in much the same way.
BlackRock’s claim
The second major piece of news is the attempted landing in the crypto markets by the financial giant BlackRock.
In fact, about ten days ago it filed an application with the SEC to launch an ETF on Bitcoin.
In this case, it is a spot Bitcoin-based ETF, and it could also be the first ever of its kind to be approved by the SEC for the US market.
It is worth noting that BlackRock almost always manages to get its applications sent to the SEC approved, so in theory there could also be a good chance of success this time.
The important thing is that if BlackRock really wants to launch a spot Bitcoin ETF in the markets, it will first have to buy BTC in the market to hedge the fund.
In other words, the more investors buy shares in the BlackRock Bitcoin Trust, the more BlackRock will be forced to buy spot BTC on the crypto markets.
Therefore, in this case the price impact could be significant, provided the purchase volumes are large.
However, it will take many months before the SEC makes a final ruling on this, to the extent that there are those who speculate that the actual launch could take place shortly before the halving of 2024.
There are also those who speculate that BlackRock has already started buying BTC on the spot market at the beginning of the year, taking advantage of particularly low prices due to the bear-market of 2022.
