One week after the launch of the first U.S. bitcoin mutual fund, hopes are rising that a U.S.-listed bitcoin ETF could soon follow suit. The Bitcoin Strategy ProFund (BTCFX) launched on July 28 to little fanfare despite being the first mutual fund of its kind.
Investors are understandably more interested in a bitcoin ETF than a bitcoin mutual fund given all the benefits the ETF wrapper would provide, including intraday liquidity and tax efficiency.
Still, BTCFX is an interesting product in its own right and one that successfully navigated the regulatory hurdles that have thus far prevented any U.S.-listed bitcoin ETF from coming to market.
The mutual fund holds front-month CME bitcoin futures contracts to gain its exposure to the cryptocurrency.
Since their introduction in 2017, bitcoin futures have closely tracked prices for bitcoin itself, but because futures contracts have an expiration date, they must be rolled forward over time for continuous exposure.
Much like with other commodity funds, a strategy of rolling futures contracts exposes investors to potential roll costs, depending on the shape of the futures curve. Currently, bitcoin futures are in modest contango, meaning BTCFX would have to a pay a slight premium to exchange its front-month contracts for later-dated contracts.
It’s not clear exactly why the Securities and Exchange Commission (SEC) has suddenly come around to greenlighting a fund like BTCFX, but it bodes well for the prospects of a similar ETF coming to market in the not-too-distant future.
“The SEC permitted the offering of ProFunds Bitcoin Strategy Fund, allowing this regulated, open-end mutual fund structure to now be available to investors,” Simeon Hyman told ETF.com, while adding that “it is possible that approval for Bitcoin ETFs may follow.”
Hyman is the global investment strategist at ProFunds, a mutual fund company, and the affiliated ProShares, the issuer behind more than 130 U.S.-listed ETFs with combined assets under management of $60 billion.
Been Here Before
ProShares previously filed for a handful of futures-based bitcoin ETFs in 2017, but they were rejected by the SEC a year later.
Currently, nearly a dozen bitcoin ETFs are vying to become the first to market—most of them funds that would hold bitcoin directly—yet the evidence suggests that a futures-based bitcoin ETF might launch ahead of those.
In remarks to the Aspen Security Forum on Tuesday, SEC Chair Gary Gensler hinted at that:
“I anticipate that there will be filings with regard to exchange-traded funds under the Investment Company Act (’40 Act). When combined with the other federal securities laws, the ’40 Act provides significant investor protections. Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures,” Gensler said. (Read: SEC Chair Hints Bitcoin ETF Possible)
Multiple Layers Of Protection
ProFunds’ Hyman confirmed that there were clear reasons why BTCFX was able to launch, and the mutual fund’s use of bitcoin futures was one of them.
He noted that BTCFX is structured as an open-end mutual fund that is regulated by the SEC. Additionally, it uses bitcoin futures, which are traded on the Chicago Mercantile Exchange, regulated by the Commodity Futures Trading Commission and settled with the backing of a centralized clearinghouse.
These multiple layers of investor protection are why BTCFX has pursued the strategy it has, and why a futures-based bitcoin ETF may come before a physically owned bitcoin ETF.
While that may be disheartening to hear for some investors who were hoping for more direct ETF ownership of bitcoin, a futures-based bitcoin ETF still satisfies the convenience factor that many investors are looking for.
You can buy a hypothetical futures-based bitcoin ETF in your brokerage account without having to worry about storing a private key, purchasing an over-the-counter product or interacting with newer types of financial institutions.
For some investors, that’s enough.