You’re just long bitcoin and the only thing you really have to worry about is the actual price. If you own bitcoin directly, or even a spot ETF, you don’t have decay. (The “contango” phenomenon refers to when prices for longer-dated contracts are more expensive than shorter-dated ones.) On top of that, there are the actual fund fees, which in the case of BITO is another 0.95%. That causes decay as this entails transaction costs on closing out and opening new positions. Reason #3: DecayĪs the future contracts settlement date approaches, they have to be rolled over to the next period. The other 15% has to be “safer” instruments like Treasury bills or bonds to provide some kind of cushion. Owing to SEC regulations (consumer protection, and all that), the bitcoin futures ETFs can only mimic exposure to bitcoin of up to 85% of the their net asset value (NAV). FrontPoint Partners, in particular (the team led by Steve Carell’s character), found themselves in the surreal position of their own parent bank becoming insolvent from its exposure to derivatives FrontPoint had shorted heavily.Ĭash-settled futures ETFs are all derivatives, and thus they all have counterparty risk.
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In the movie “The Big Short,” you may remember how the protagonists (who had long predicted that the mortgage-backed securities would blow up markets) experienced a peculiar kind of angst as their trades were finally vindicated, only to find their profits in jeopardy as cascading failures blew up their counterparties. Caseyīelow are four reasons why we’ll be avoiding these ETFs, followed by what you should buy instead. Read more: Why a Bitcoin Futures ETF Is Bad for Investors - Michael J. But in terms of counterparties, when you own gold or you own bitcoin, the price is the price, and you own what you own regardless of how that affects anybody else in the world. You may face custodial risk, which is a separate issue.
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One of the main attractions to assets like gold and bitcoin is the absence of counterparty risk. You are only a party to a contract to settle in cash at some future date. That means no matter what happens to the price or what you decide you want to do with your positions in the future, there is no option for redemption of the underlying asset, you have no claim on actual bitcoin. While some commodities futures contracts are for settlement in the commodity itself (urban legends abound of flat-footed traders waking up the morning of their contract’s settlement day to discover a truck pulling into their driveway and dumping a few tons of sugar or coffee beans onto their front lawn), the bitcoin futures ETFs are cash settled.
You can redeem your shares for the underlying bitcoin, or ethereum or whatever the vehicle is invested in.Ĭontrast to the former, the futures ETFs. This is also possible in cryptocurrency ETFs and closed-end funds. In spot ETFs you can even redeem your shares for the assets they represent. Owning the shares correlates to claims on the assets in custody. Think of a pile of gold in a vault somewhere, against which shares are issued and sold on the open market. The difference between a futures ETF and a spot ETF is that the latter holds the underlying asset in treasury. We have better ways to gain our exposure to bitcoin, and here we’ll look at why a bitcoin futures ETF has drawbacks even as compared to a spot ETF. Jeftovic is the CEO of easyDNS and author of The Crypto Capitalist Letter.
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