Nobody really knew for sure how last week’s first U.S.-listed bitcoin ETF would be received and what ripples it may or may not make in CME’s bitcoin futures market.
But the debut could not have been more of a box office success in terms of demand and trading, once again proving the exchange-traded fund can open the door to just about any investable asset class.
In two trading, days BITO broke the record for the fastest ETF ever to attract more than $1 billion in assets under management, eclipsing the long standard sprint to $1 billion by the SPDR Gold Trust (GLD) set in 2004.
Though it hasn’t completed a full trading week yet, it took in the second-most assets of any U.S.-listed ETF this past week—quite an auspicious start.
Weekly Flows Ending Oct. 21, 2021
Top 10 Creations (All ETFs)
|Ticker||Name||Net Flows ($,mm)||AUM ($, mm)||AUM % Change|
|SPY||SPDR S&P 500 ETF Trust||1,130.59||407,887.61||0.28%|
|QQQ||Invesco QQQ Trust||880.86||193,639.25||0.45%|
|FAS||Direxion Daily Financial Bull 3x Shares||421.80||4,010.60||10.52%|
|KWEB||KraneShares CSI China Internet ETF||343.77||9,062.11||3.79%|
|XLF||Financial Select Sector SPDR Fund||331.79||45,774.60||0.72%|
|USFR||WisdomTree Floating Rate Treasury Fund||323.81||1,732.00||18.70%|
|VCSH||Vanguard Short-Term Corporate Bond ETF||311.52||42,142.95||0.74%|
|IWM||iShares Russell 2000 ETF||306.73||69,956.42||0.44%|
|VTI||Vanguard Total Stock Market ETF||225.70||279,038.98||0.08%|
|ITB||iShares U.S. Home Construction ETF||224.74||2,679.05||8.39%|
SEC Trial Balloon?
What’s ironic is that the hugely successful launch of U.S.-listed bitcoin futures ETFs might spark their demise. That success and confirmation of nothing breaking in the ETF structure or in the CME futures market is setting the stage for a physically backed ETF in the U.S. Futures are much more problematic than physical, and the SEC likely understands that.
Europe and Canada have no issues or scary market spooks with their physically backed bitcoin ETFs.
Perhaps this was a trial balloon by the SEC to see if things would work as issuers had asserted. The SEC has been too nervous about what might go wrong, rather than what might go right and benefit investors.
Just The Beginning
But investors should also pay attention: After BITO launched, the SEC gave approval to a second bitcoin futures ETF, and 24 hours later, the Valkyrie Bitcoin Strategy ETF (BTF) made its own debut.
While not out of the gate as fast as BITO, BTF traded nicely on Friday—about 20% of the hundreds and millions of dollars in BITO volume, but a nice start. In fact, it was one of the top 15 ETF trading volume launches, according to Bloomberg.
If anything, BITO, at $1.2 billion in assets under management, will continue to grow under this status quo if no physical bitcoin in the U.S. exists. The problem is that the ETF is close to bumping up against the futures contract position limits that the portfolio managers are bound by. That hasn’t happened yet, even with $1.2 billion in flows in two trading days. However…
Roll Costs Coming
One thing easily overlooked by investors who don’t look under the hood of bitcoin futures ETFs is total costs (not just the expense ratio).
For instance, the cost of the first futures (October) contract rolling over in BITO and BTF will be about 1% when that happens Friday, the last trading day of October. Annualized, that 12% cost on top of the 0.95% annual expense ratio for the ETF means you're looking at a potential 13% cost, which reenforces the need for a physically backed bitcoin ETF, that has no futures-contract drag.
But there's a reason for bitcoin futures. Imagine you're an institutional investor with direct exposure to bitcoin, because you can't buy an SEC-approved physical product. Buying futures is like buying car insurance. You're not really buying performance. You're buying a mitigating loss if, say, bitcoin went from its current price of $60,00 to $30,000. It's happened before.
Know Contango, Or Else
BITO over the past week has been slowly shedding its October exposure and moving into the November contract. Eventually, it will move into December contracts. That will mitigate the rollover costs. The ETF is designed at the moment to be only in the front-month and following-month contract. Often futures contracts roll into a more expensive contract as the price of a commodity rises; trading jargon known as "contango."
If the price of bitcoin or any commodity collapses for a sustained time, then bitcoin or that commodity goes into a backwardation futures curve, meaning you get paid to roll your contract. But that’s not necessarily the case with bitcoin futures right now, or most futures contracts of anything. That's not their purpose, at least to me.
When the coffee crop freezes in Brazil or drought scorches America's midwest corn crop, suddenly the price of the current coffee or corn futures is worth more now than in the future. You get paid. Hopefully the farmer locked in those contango prices as insurance with a futures contract. Or a day trader is shorting those commodities spiking unusually. Bitcoin is the same.
Not Just Another Bitcoin Filing
I have said for months that no physically backed bitcoin ETF will cut the mustard with the SEC because issuers have been more concerned with being first in line than in addressing what the SEC is asking for. The regulatory body is scared to death of price manipulation. Rightly so.
Less than two weeks ago, Bitwise Investment, which has a closed-end crypto index fund you shouldn't play with, Bitwise 10 Crypto Index Fund (BITW) and a crypto-industry equity ETF, the Bitwise Crypto Industry Innovators ETF (BITQ), which seems safe, filed for a "spot price" ETF. Interesting wording.
ETF.com’s Heather Bell reporting:
Bitwise, a provider of cryptocurrency indexes and funds, has once more filed for a physical bitcoin ETF that will hold the world’s most popular cryptocurrency rather than futures on it. The issuer also released two white papers intended to show the relationship between bitcoin spot and futures pricing and the likelihood of an exchange-traded product influencing bitcoin futures pricing.
Matt Hougan, chief investment officer of Bitwise (full disclsoure: He was former CEO of ETF.com more than five years ago, and my terrier bit him in the calf eight years ago), told me why this is a difference maker.
“We entered a new filing for a spot bitcoin ETF because we believe we have now met the standards required for approval,” Hougan said. “Our application included more than 150 pages of novel, data-driven and statistically significant research in response to questions the SEC had raised in the past in rejections of earlier spot bitcoin ETF applications.
He goes on: “We demonstrate that the CME is the leading source of price discovery for the bitcoin market worldwide,” he said and added this: (The attached table below, according to Bitwise, shows that prices on the CME led prices on Coinbase, a large spot exchange, in a statistically significant manner ever since the CME contract debuted. You can view the full research here.)
While the worrywarts at the SEC wring their hands over price manipulation and whether price discovery can truly be found, the evidence says those are really not major concerns.
The record-breaking BITO proves bitcoin futures can be wrapped in an exchange-traded product, and a spot ETF holding physical bitcoin without the added roll costs of futures will only be a bigger help to investors.
Drew Voros can be reached at [email protected]