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The long-awaited Bitcoin exchange-traded fund might finally become a reality—but not in the way many investors expected.
Securities and Exchange Commission Chair Gary Gensler signaled recently that he’s open to the idea of a crypto ETF. Though Bitcoin and other cryptocurrencies can be easily bought on financial platforms like
Robinhood
(ticker: HOOD) and
PayPal
(PYPL), an ETF would eliminate the hassle of managing digital wallets and allow investors to integrate the digital currency into their portfolios.
Bitcoin ETFs can come in two structures: directly owning the coins (similar to gold ETFs that are custodians of the actual metal) or holding futures contracts that bet whether the price will rise or fall (like many oil and other commodity ETFs). At least two dozen fund managers have filed for ETFs that would physically hold crypto assets. The most popular alternative to a Bitcoin ETF, the $30 billion closed-end
Grayscale Bitcoin Trust
(GBTC), also holds actual Bitcoin and plans to convert to an ETF once regulators allow it to.
The SEC has been cautious with regard to regulating the crypto market, and has declined to approve a Bitcoin ETF for years. Investors turned optimistic when President Biden appointed Gensler, who, in addition to running the Commodities Future Trading Commission, taught cryptocurrency and blockchain technology at MIT. Gensler’s recent comments seem to signal more openness toward ETFs that track Bitcoin futures than Bitcoin itself. This has led to a flood of new filings for Bitcoin futures ETFs from money managers including ProShares,
Invesco
,
VanEck, Valkyrie Digital Assets, and
Galaxy Digital
.
Regulators might be leaning that way because futures are traded on, and governed by, the Chicago Mercantile Exchange, while the crypto market remains, in Gensler’s words, the “Wild West” that’s rife with “fraud, scams and abuse.”
Grayscale CEO Michael Sonnenshein says the SEC should approve both types of Bitcoin ETFs at the same time and let investors choose. Allowing one but not the other would create an unlevel playing field, he told Barron’s: “The SEC should be a disclosure regulator, not a merit-based regulator.”
The Grayscale fund currently trades at a 14% discount to its Bitcoin holdings thanks to declining demand for its fund shares. If the only Bitcoin ETFs approved are futures-based, more investors would likely shift assets to ETFs. That could further drive down Grayscale’s price and hurt existing investors, says Sonnenshein.
Like most mutual funds, a Bitcoin futures ETF would need to register under the 1940 Investment Company Act, which requires asset managers to disclose more information and comply with stricter rules. A physical Bitcoin ETF would be exempt because it would be viewed as a commodity rather than a security.
Futures prices generally track the underlying assets, but there’s always some slippage, says Todd Rosenbluth, director of ETF and mutual fund research at CFRA. The gap could be particularly notable for a volatile asset like Bitcoin.
Futures ETFs need to roll over their contracts when they expire, usually on a monthly basis. If the futures are trading higher than Bitcoin’s real-time price, funds would have to pay a premium to roll them over, a possible drag on performance.
Still, Bitcoin futures could offer additional protection because they require investors—in this case, the funds—to put down cash on margin as collateral.
Unlike mutual funds, ETFs can’t close to new money if they become too big. If Bitcoin futures turn volatile and many investors want out at the same time, there could be liquidity issues. The exchange might even halt trading to help slow panicky selling. That means investors in a futures ETF might not be able to get out in time.
Write to Evie Liu at evie.liu@barrons.com
