It used to be said that week was a long time in politics and two weeks is most certainly a long time in the markets.

A fortnight ago we asked if there would be a Bitcoin ETF and reluctantly decided that this wouldn’t happen in the near term, as the SEC had decided to defer any decision on four separate applications,  for exchange-traded funds linked to the price of Bitcoin.

The US regulator was not due to review these applications again until November 21st at the earliest.

What’s changed in the last few weeks?

However, something or someone must have changed the regulator’s mind because a Bitcoin-related ETF started trading this week.

Pro Shares has launched a fund that tracks the price of the CME’s Bitcoin futures that are settled for cash and not in the underlying coins and can be traded through a futures broker.

Allowing this ETF to list on the NYSE is a major policy change by the US regulator and one that could open up the cryptocurrency markets to a host of new investors.

There are four more Bitcoin ETFs awaiting SEC approval.

It seems that the SEC changed its thinking after reviewing the performance of the CME Bitcoin futures market.

The regulator wanted the industry to convince it that there was a large regulated market trading alongside the spot Bitcoin market.

Something that research submitted to SEC by Bitwise Asset Management last week managed to demonstrate.

Speaking about the submission Bitwise CEO Matt Houghan said that

“The Bitcoin market has matured to the point where the CME Bitcoin futures market is actually the leading source of price discovery in the entire Bitcoin world,”

Adding that

“Prices move on the CME market before they move on Coinbase, Kraken, FTX (etc) and as a result, it satisfies the SEC hurdle for the potential approval of a spot-based ETF.”

What is a Bitcoin ETF?

A Bitcoin ETF or Exchange Traded Fund is an open-ended investment vehicle that tracks the performance of the underlying price of Bitcoin. Bitcoin ETF tracks the price of Bitcoin futures traded on the CME or Chicago Mercantile Exchange, these contracts are cash-settled rather than deliverable.

What is in the Pro Shares Bitcoin Strategy ETF?

The Pro Shares Bitcoin Strategy ETF will not own any physical Bitcoins, it does, however, have an economic interest in the CME Bitcoin futures price-performance instead.

The Pro Shares Bitcoin Strategy ETF Fund Holdings Information as of 10/20/21 are:

Description
Coupon
Maturity Date
Exposure Value
(Notional + G/L)
Market Value ($)
Percentage (%)
Shares/Contracts
CME BITCOIN FUTURES (BTCV1) 623,984,400.00 1,872.00
CME BITCOIN FUTURES 11/26/21(BTCX1) 483,823,125.00 1,425.00
TREASURY BILL 0.000 5/19/22 $424,869,843.75 27.37% 425,000,000.00
TREASURY BILL 0.000 1/27/22 $18,997,866.49 1.22% 19,000,000.00
NET OTHER ASSETS / CASH $1,108,377,771.61 71.40% 1,108,377,771.61

Where can you buy the new Bitcoin ETF?

The Pro Shares Bitcoin Strategy ETF listed on the New York Stock Exchange under the ticker BITO available to trade through US brokers like Interactive Brokers.

In theory, you should be able to trade the ETF through UK stock brokers that trade in US stock and shares.

However, the ETF may fall foul of the FCA directives that prohibit UK brokers from marketing cryptocurrency derivatives to retail clients.

Compliance officers in UK brokers are likely to be considering this question right now.

However, we have spoken to an independent compliance consultant who believes that UK retail clients may be able to trade and invest in the Pro Shares Bitcoin strategy ETF.

That’s because the ETF references assets that are themselves traded on a regulated exchange, the CME, rather than an unregulated cryptocurrency exchange.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said of the Bitcoin ETFs

Hargreaves Lansdown would not be able to offer them ( to clients), regardless of whether they are crypto-related or not, if they did not produce Key Information Document’s (KID) that are required for ETFs to be sold in Europe” 

She added that

“This became a requirement in 2018 with the introduction of PRIIPs (Packaged Retail Investment and Insurance Products) regulation, where prior to this the KID was not needed.’’

So it seems that UK retail clients may face a number of regulatory obstacles to trading or, investing in Bitcoin ETFs

We would be interested to hear your feedback and experiences if you try to trade or invest in the Pro Shares Bitcoin Strategy ETF through your broker so please get in touch.

What are the benefits of investing in Bitcoin through an ETF?

Investing in an asset through an ETF can often make sense for retail investors, who for instance, don’t want to trade in derivatives or overseas markets, and by using ETFs instead they can get exposure to the performance of an equity index or, other markets that they might otherwise find difficult to access.

Investing in Bitcoin, and other Cryptocurrencies is far from straightforward, and there are issues around the security and storage of the coins, and their conversion back into fiat currencies.

A Bitcoin ETF will allow traders to gain exposure to price changes in Bitcoin or Bitcoin derivatives, without any of those issues, and to do so via a vehicle that can be traded just like any other stock.

What are the risks of investing in Bitcoin through an ETF?

Assuming that the ETF is well capitalised and that any underlying Bitcoin it owns are securely stored and out of harm’s way, then the risk of an investment in a Bitcoin ETF is purely market risk. That’s even more true of a Bitcoin futures-based ETF

The market risk is the price action in Bitcoin and the Bitcoin ETF and the investors underlying position or trade direction i.e. long or short.

That said, the underlying market in Bitcoin is fragmented and largely untested in adverse conditions, aside from the inherent volatility in the price of Bitcoin.

As with any ETF there is a possibility of tracking error under which the performance of the ETF deviates from that of the reference assets.

So any investment in Bitcoin, even one made through an ETF, should still be considered high risk.

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