Crypto ETFs Unpacked

ETF.com’s webinar “Unpacking The Crypto ETF Dilemma” was a fast-paced, insightful rundown of the crypto ETF space, with plenty of broader crypto-related nuggets of information thrown in as well.

The panel—which consisted of Bitwise’s Matt Hougan, DACFP’s Ric Edelman and CME’s Tim McCourt—was broadly in agreement that the recent launch of bitcoin futures ETFs was a significant step toward bringing the new crypto asset class to mainstream investors.

“We should applaud the SEC for approving the first bitcoin futures ETFs,” said Matt Hougan, chief investment officer of Bitwise. He noted that the crypto industry wasn’t mature enough to support an ETF back in 2013, when the first bitcoin ETF attempted to come to market, but it is now.

“Over the past eight years, the crypto industry has matured incredibly. There are a large number of regulated insured custodians in the market; we’ve seen [the CME Group] bring regulated bitcoin futures to the market; and billions of dollars of bitcoin trade per day at pennywide spreads. We’ve emerged into a truly institutional ecosystem,” explained Hougan.

Flourishing Futures Market

Of course, the latest batch of bitcoin futures ETFs wouldn’t have been possible without the growth and success of the underlying bitcoin futures market. Tim McCourt, managing director and global head of equity products at CME Group, explained how his firm’s futures contracts work and why they’ve been so popular.

“The bitcoin futures are financially settled, which makes it easy for market participants who are already trading futures contracts to make that leap into trading crypto derivatives. It works the same way e-mini S&P 500 futures or micro Nasdaq futures work,” he said.  

McCourt noted that there is a wide range of market participants who use the contracts: “We have active individual traders, we have institutions, we have asset managers, hedge funds and crypto firms.”

“The contract has grown up a lot and emulates a lot of the characteristics and benefits that futures contracts provide in other asset classes. You have commercial end users, you have professional trading firms, you have liquidity providers, you have hedgers, you have people who are being a little bit more opportunistic about their trading,” he added.

”It’s that diversity of personalities that really enable efficient, two-way price discovery and offers all of this in a regulated futures market in the U.S. It’s enabling some of the product innovations that we’re seeing such as ETFs and other structured products around the globe,” McCourt continued.

A Better ETF

As excited as Hougan is about bitcoin futures and bitcoin futures ETFs, his firm, Bitwise, is focused on another type of product.

Bitwise had previously filed for a bitcoin futures ETF, but it recently withdrew the application. Instead, the fund manager is now focused on bringing a spot bitcoin ETF to market, a product that Hougan says is superior.

“For long-term investors, a spot-based ETF is a better solution. Futures-based ETFs are a valid and important product, particularly for short-term traders, but they face a number of significant challenges, including that the bitcoin futures market has historically traded in contango, and that contango has represented a 5-10% annualized head wind,” he explained.

“I do think we’ll get a spot-based ETF much sooner than many people anticipate. I think we’re closer than we’ve ever been, and I feel relatively certain that it won’t be three years until we get a spot-based ETF; it’s going to happen sooner than that,” Hougan added.

Advisors Need To Consider Crypto

Ric Edelman, founder of the Digital Assets Council of Financial Professionals and a financial advisor with more than 30 years of experience, agreed with Hougan’s prediction for a spot bitcoin ETF.

“We’ll eventually get there, but in the meantime, the price has been continuing to rise,” he said. “So, the question for investment advisors is, how long are you going to wait?”

Most advisors are still not investing in bitcoin and crypto, which, according to Edelman, is a problem.

“It doesn’t matter whether you like bitcoin or not. Take a look at your diversified portfolios today. You already have assets in your portfolio you don’t like. But you have them there anyway because you recognize the importance of broad-based diversification,” he said.

“Bitcoin has proved itself as an asset that is additive to your effort to provide your clients with improved returns and lower risks. That’s all there is to it,” Edelman noted.

He added that there are many financial products offering exposure to crypto that advisors and investors can use in portfolios. In addition to bitcoin futures ETFs, he pointed out that there are ETFs of crypto-related companies and OTC-traded index funds from firms like Bitwise that are easily accessible.

Merits Of Ethereum

The panel was particularly bullish on the prospects for Ethereum and some of the other smart contract platforms. While bitcoin has greater name recognition and holds the “store of value” crown within the crypto space, Ethereum is fundamentally rewiring how big parts of the world work, they said.

“If you’re an investor in the crypto space, and your thesis isn’t specific to wanting a nonsovereign store of value as a hedge against runaway inflation,” you need more than just bitcoin, explained Bitwise’s Hougan.

“If you’re making a bet on the idea that programmable money is going to be a big thing; if you’re making a bet on the idea that digital property rights are going to be a big thing; if you’re making a bet on the idea that Web 3 is going to be a big thing, then you need exposure to these other more powerful, more flexible blockchains, like Ethereum and like Solana,” he added.

Hougan suggested taking a look at the Bitwise 10 Crypto Index Fund (BITW), the first crypto index fund in the world, which is available both as private placement and an OTC-traded product.

Check Out The Full Webinar

The above summary is a brief overview of all the topics covered in the webinar. Hougan, Edelman and McCourt also answered myriad audience questions pertaining to everything from the energy efficiency of various blockchains to the merits of investing in crypto-related companies versus cryptoassets directly.

Click here to watch the replay.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2