The first bitcoin ETF finally gets listed in the United States after 8 years of long journey since 2013. The U.S. SEC approved the first bitcoin-linked ETF after its 5 commission members’ discussion.
It’s understood if the SEC does not reject, delay or ask more questions, the bitcoin-linked ETF proposal will take effect automatically. During October 15-18, no rejection, delay or more questions were heard. At 9:30 am, October 19, ProShares’s CEO Michael Sapir rang the bell at the NYSE. It is a milestone in the history of bitcoin, which sees the public listing of bitcoin-linked ETF by ProShares trading under Ticker Symbol BITO. After 4 trading days since October 20, 1.2 billion dollars flow into the bitcoin-linked ETF and the bitcoin price hits a new record.
It is learned that the fee on the ETF is 0.95%, which is only half of the fee on GBTC, which is 2%. At the same time, Grayscale Investments plans on filing an application to convert the world’s biggest bitcoin fund into a spot ETF, according to a person with knowledge of the matter. Bitcoin trust is not the desired one for Grayscale from the very beginning. In January 2017, Grayscale filed an application of bitcoin spot ETF listing to SEC, but withdrew it in October since SEC thinks the bitcoin market is extremely risky. Now it seems that Grayscale never gives up the bitcoin ETF.
What is an ETF?
ETF (exchange-traded fund) means an exchange-traded open index fund. It is a traditional financial market concept, listed on exchanges, open with variable fund shares, such as BUZZ ETF, ARK ETF, Vanguard ETF, and SPY ETF.
ETF vs mutual fund
Compared to traditional mutual funds, listing on exchanges is featured by standardized products among investors, all-day trading capability, and liquidity enhancement.
- Instant transparency of share holding
It allows all investors to learn about the fund share holding in the day, helps play the role of arbitrage, and guarantees that ETF and its underlying assets are traded independently and relevantly.
The capital gains from ETFs are far less than related mutual funds because the interior features of creation and redemption mechanisms enable ETF to transfer in and out assets without any taxes among all investors.
- Investors will not be affected by the behaviors of other ETF investors.
It is incredibly important because no matter where you are the only ETF holder or one of millions of share holders, you will not be affected due to other investors’ engagement or withdrawal. It varies considerably from mutual funds where the fees on assets are charged by investor base.
What is the first bitcoin-linked ETF in the U.S.?
The bitcoin-linked ETF is a crypto-based traditional ETF and a financial investment product. Compared to direct investment in bitcoin and its trust funds, there is no guarantee that the bitcoin-linked ETF can bring desired profits for investors but provides a lower investment entry.
The first bitcoin-linked ETF is ProShares Bitcoin Strategy ETF (BITO), which is applied to be created by the asset management company ProShares. ProShares on Linkedin shows that it has been at the forefront of the ETF revolution since 2006. With one of the nation’s largest lineups of ETFs, the company provides innovative strategic and tactical ETFs designed to manage risk and enhance returns. Apart from various positive tracking index ETFs, its also includes low-leverage reverse ETFs.
ProShares Bitcoin Strategy ETF seeks to provide capital appreciation primarily through actively managed exposure to bitcoin futures contracts. The Fund does not invest directly in bitcoin. Therefore, the “bitcoin-linked ETF” refers to standardized, cash-settled bitcoin futures contracts traded on commodity exchanges registered with the Commodity Futures Trading Commission (“CFTC”). The value of bitcoin futures is determined by reference to the CME CF Bitcoin Reference Rate (“BBR”), which provides an indication of the price of bitcoin across certain cash bitcoin exchanges. The Fund seeks to invest in cash settled, front-month bitcoin futures. Front-month bitcoin futures contracts are those contracts with the shortest time to maturity.
Highlights of the first bitcoin-linked ETF in the U.S.
- The Fund does not take temporary defensive positions. The Fund will generally hold its bitcoin futures contracts during periods in which the value of bitcoin is flat or declining as well as during periods in which the value of bitcoin is rising. In order to maintain exposure to bitcoin futures contracts, the Fund must sell its futures contracts as they near expiration and replace them with new futures contracts with a later expiration date. This is often referred to as “rolling” a futures contract. Futures contracts with a longer term to expiration may be priced higher than futures contracts with a shorter term to expiration, a relationship called “contango.” When rolling futures contracts that are in contango, the Fund will sell the expiring contract at a relatively lower price and buy a longer-dated contract at a relatively higher price.. That is to say, the Fund will “renew” contracts permanently rather than close out them. Conversely, futures contracts with a longer term to expiration may be priced lower than futures contracts with a shorter term to expiration, a relationship called “backwardation.”
- The Fund seeks to fully invest in these portfolios at any time to provide exposure to bitcoin futures
- The Fund does not invest in, or seek direct exposure to, the current “spot” or cash price of bitcoin. The Fund is classified as non-diversified, which means it has the ability to invest a relatively high percentage of its assets in financial instruments with a single counterparty or a few counterparties.
- The bitcoin-linked futures contracts on CME may significantly differ from bitcoin spots in investment strategy risk, market and volatility, liquidity risk, bitcoin futures risk, bitcoin futures capacity risk, cost of futures investment risk, bitcoin risk, cash and money market instruments risk, subsidiary investment risk, borrowing risk, counterparty risk, non-diversification risk, market price variance risk, authorized participant risk, cash purchase and redemption risk, early closing/delayed closing/trading suspension risk, active management risk, new fund risk, tax risk and valuation risk.
Differences between GBTC and bitcoin-linked ETF
- ETF allows market makers to randomly create and redeem shares, while GBTC does not allow and the fund shares can only be monetized on secondary markets.
- GBTC sets a 6-month locking period, with high premium, while ETF has better liquidity and is free of premium or reduction.
- GBTC trading fees are very high, including broker fees, annual management fees and premium. The bitcoin-linked ETF has lower fees. For example, for the BITO only 0.95% of management fees are charged, while the the first North America bitcoin ETF——BTCC, listed in Canada, has a lower management fee to 0.75%.
- GBTC is only available for qualified investors with 50,000 dollars at least. The bitcoin-linked ETF has few restrictions on investors’ qualification and amount.
In summary, with over ten years of insane development, the cryptocurrency market gradually goes back to be rational. Recently, the cryptocurrency market is experiencing huge revolution and transformation. The crypto marketplace including Bitcoin has attracted the eyes from traditional financial markets, and is moving towards standards and compliance.
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