Differentiation Already Needed For Bitcoin ETFs

Valkyrie, Direxion filed for inverse and leveraged bitcoin futures ETFs one week after the first U.S. bitcoin ETF debuted.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

On Tuesday, Valkyrie filed for the XBTO Levered BTC Futures ETF (BTFX), which would provide 1.25x exposure to the bitcoin reference rate. The filing comes after the launch of the firm’s first ETF, the Valkyrie Bitcoin Strategy ETF (BTF).

After launching on Friday, BTF only gathered $38.2 million in assets under management (AUM) in its first two days of trading. While this would be considered a success for any other launch, it’s a far cry from the $1.1 billion gathered by the ProShares Bitcoin Strategy ETF (BITO).

Later on Tuesday, Direxion filed for the Direxion Bitcoin Strategy Bear ETF. This fund would provide managed short exposure to CME bitcoin futures contracts, or in other words, inverse exposure.

These filings are a sign that issuers feel that differentiation is already necessary to stand out in this new slice of the ETF industry. ProShares’ first-mover advantage by receiving the first approval for a bitcoin futures ETF in the U.S. has proven to be significant.

And with little room for differentiation among strategies like BITO, as the use of front-month futures is necessary to provide the closest correlation to spot price, other ETFs that are released using this investment process will be challenged to stand out.

Approvals of leveraged or inverse bitcoin futures strategies would likely be met with criticism from the industry due to the many negatives inherent in a futures-based ETF. (Read: SEC’s Bitcoin Solution A Problem)

Gensler’s Concerns

Despite the issues with futures-based ETFs, SEC Chair Gary Gensler reiterated his message that a physically backed bitcoin ETF is unlikely to be approved any time soon. In an interview with Yahoo Finance earlier this week, Gensler drew a distinction between bitcoin and bitcoin futures, noting that futures are regulated by the Commodity Futures Trading Commission.

Expressing concern over investor protection in cryptocurrency markets, Gensler said, “Investors aren’t protected the way they are, whether they go into the stock or bonds markets that we’ve overseen so long. Without that, I think it really is, as I’ve said to others, a bit of the Wild West.”

Cryptocurrency markets are not the only area of concern for Gensler. In early October, the SEC chair asked his staff to review the potential risks of leveraged and inverse ETFs. He stated that these products “can pose risks even to sophisticated investors and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions.”

Given that recent commentary, it seems that Valkyrie and Direxion face steep odds of approval from the SEC anytime soon. However, this could be just the beginning in terms of issuer filings for unique takes on the cryptocurrency space as BITO seems unlikely to lose its status as king of the mountain.

Contact Jessica Ferringer at [email protected] and follow her on Twitter

Jessica Ferringer, CFA, is a writer and analyst for etf.com. She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.