With The Arrival Of Spot Bitcoin ETFs Who Needs Funds Based On Futures

Forbes

With the advent of the spot bitcoin ETFs, which have amassed $34 billion of assets (including more that $28 billion converted from closed end fund GBTC) the outlook for futures-based crypto funds is suddenly uncertain.  Javier Paz, the director of data and analytics for Forbes, joins “Forbes Talks” to discuss the future of bitcoin futures.  00:00 Introduction 00:20 Why The SEC Allowed Futures To Trade Before Spot Products? 03:23 Comparing Futures And Spot ETFs 07:17 How Are Investors Responding? 09:21 How Has iShares Performed? 11:21 Can ETFs And Spot Products Coexist?  Read the full story on Forbes: https://www.forbes.com/sites/javierpaz/2024/02/19/what-is-the-future-of-bitcoin-futures/?sh=5d90aa1f2962  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00 Hi everyone, I'm Rosemary Miller here with Javier Paz, the Director of Data and Analytics

00:07 here at Forbes, here to talk about the future of Bitcoin futures.

00:12 Thank you so much for joining me today, Javier.

00:15 My pleasure, Rosemary.

00:16 Glad to be with you.

00:18 Absolutely.

00:19 So Javier, why did the SEC allow Bitcoin futures ETFs to begin trading years before spot products

00:26 were given the green light?

00:28 For the benefit of those out there who are not totally familiar with the nuances of ETFs,

00:33 ETFs are exchange traded funds that hold, they're a basket of holds, different types

00:41 of securities such as stocks, bonds, commodities.

00:46 So they wrap them into a bundle and they issue shares for those, for that bundle.

00:52 And those are the ETF shares.

00:54 Now they trade like stocks, these ETFs, and in the case of Bitcoin ETFs, there's two types

01:00 of competing bundles, if you will.

01:04 One of them is made up with financial contracts called Bitcoin futures.

01:10 These are contracts that don't quite, are not Bitcoin per se, but they track the price

01:16 of Bitcoin.

01:17 So institutions use them regularly for trading things like agricultural goods or oil or interest

01:26 rates.

01:27 They're financially constructed.

01:29 And then there is the actual Bitcoin.

01:31 So the ETF buys a bunch of Bitcoin and then they wrap it into a bundle and then they issue

01:39 shares for that.

01:40 So there's two competing bundles, if you will.

01:43 And the SEC basically was not comfortable with the actual Bitcoin bundle.

01:49 So they rejected something like 20 plus applications of ETF issuers when they approached the SEC

01:59 trying to get those approved.

02:02 And this happened for years.

02:05 And then four companies had the clever ideas.

02:10 So these are ProShares, VanEck, and I believe it was Valkyrie, who thought, well, maybe

02:19 if we present to the SEC a Bitcoin futures ETF, they might go along with that.

02:27 So they made their case and it was successful.

02:31 They showed to the SEC that these are regulated contracts.

02:36 They're not unregulated, like is your concern.

02:40 So because they're regulated and they've been trading for years at the CME Group, which

02:48 is the main futures exchange out there, they're reliable and they're safe.

02:54 And you should approve it.

02:57 And they decided to approve it.

02:58 So that happened in October 2021.

03:02 And so for two years, a little more than two years, this Bitcoin futures ETF ruled the

03:09 day.

03:10 They were very popular and now came on January 10th, a new breed of Bitcoin ETFs based on

03:20 the actual Bitcoin itself.

03:24 So you briefly touched on it, but what's the main difference, I guess, in simplest terms

03:29 between the futures and the spot ETFs?

03:33 So there is actually one similarity and multiple differences.

03:38 So the similarity is that both the Bitcoin futures ETF and the spot Bitcoin ETF, they

03:47 trade like shares and they trade at the three main places.

03:52 So NASDAQ at the CBOE and the New York Stock Exchange alongside other ETFs.

04:00 So that thing they have in common.

04:02 What is different, though, is their composition.

04:05 As I mentioned, one is based on the Bitcoin futures ETF is using a financial contract

04:14 and the spot Bitcoin ETF is actually using Bitcoin.

04:17 So that's a major difference.

04:20 The futures side pays dividends as of February of last year, whereas the spot Bitcoin does

04:28 not.

04:29 Not yet, anyhow.

04:31 There is also differences in tracking error.

04:34 This is a statistic that is important for ETFs out there to measure which is better

04:39 than others.

04:40 So the ideal is that they track exactly the price movements of whatever they have in the

04:46 bundle.

04:47 In this case, the Bitcoin price.

04:49 So for two years, the Bitcoin futures tracked Bitcoin price fairly well.

04:59 But the moment they started paying out dividends less well, whereas the spot Bitcoin ETFs tend

05:07 to track it much better.

05:10 Besides that, there's differences in popularity.

05:14 We've seen a huge demand for spot Bitcoin ETFs, much greater than the that of Bitcoin

05:22 futures ETFs.

05:25 In terms of costs, there's there's something called the expense ratio that in the case

05:31 of futures is about an average of 95, 98 basis points across 12 Bitcoin futures out there.

05:41 Whereas for spot Bitcoin ETFs, the average price is closer to 30 basis points.

05:47 So three times cheaper as the futures ones.

05:52 There's one major difference also, and that is the ability to short Bitcoin.

05:59 So as you know, Bitcoin doesn't always go up, up and up very often.

06:03 It goes down, down, down, down.

06:07 So if you're a spot Bitcoin ETF, you basically have one choice where you can go up and ride

06:13 that train up, you know, very briskly.

06:17 But then you may be facing months of decline.

06:21 But one thing that Bitcoin futures offer, Bitcoin futures ETFs offer is that there's

06:29 several out there.

06:31 Well, there's a couple out there that basically track the price of Bitcoin as it goes down

06:37 so they can sell Bitcoin and make money in the process.

06:40 So that's one major difference that will come in handy when Bitcoin prices reach record

06:46 levels and then it starts to go down.

06:49 So you may want to own Bitcoin, spot Bitcoin ETFs when the price is going higher and when

06:57 it starts to go down, maybe what you want to do is also buy some insurance in the form

07:03 of an inverse Bitcoin ETF that basically makes money as the price goes down.

07:09 That way you're kind of hedged and you're not losing the money on the upside.

07:14 So those are some of the major differences.

07:17 Well, Javier, how are futures ETF issuers responding to the news of spot Bitcoin ETFs

07:23 becoming authorized January 10th of this year?

07:26 I mean, do they feel it's a threat?

07:28 Are they confident?

07:30 Right.

07:31 So what we're seeing is that out of the seven issuers out there, six are holding steady

07:39 and they still see the potential for Bitcoin futures ETFs.

07:44 But there is one that broke rank just a few weeks ago, and that's BANEC.

07:49 BANEC is a special issuer in that they have also a spot Bitcoin ETF.

07:55 So they have two side by side, one spot, one future ETF.

08:00 And they chose to concentrate on the spot.

08:03 So after the new spots launched on January 10th, they closed down, they announced the

08:10 closure of their Bitcoin future ETF, which had only like $43 million after two years.

08:18 Not very much.

08:20 So they are now concentrated on their BANEC HODL, that's the ETF ticker.

08:27 And it has now $193 million in IOM, so the assets under management.

08:34 So they view that the spot market is the future.

08:39 And that's why they closed down their futures.

08:43 Now the question then becomes, will others follow suit?

08:48 But there's little doubt that the giant in the Bitcoin futures market, which is a company

08:55 called ProShares, it's doubtful that they will follow suit with BANEC because they basically

09:03 own more than 90%, 95% you could say, of the spot Bitcoin ETF.

09:11 I'm sorry, the Bitcoin futures ETF and they are the dominant player.

09:18 So BANEC may have responded to the dominance of BITO rather than to the lack of prospects

09:26 for Bitcoin futures.

09:28 So how did ProShares BITO ETF perform before the spot products listed and what is its current

09:35 status?

09:37 So they had a phenomenal run between October of 2023 and the launch of the Bitcoin ETFs

09:47 in January.

09:48 They raised something like $1.3 billion.

09:52 They had initially something at that point in mid-October, they had something like a

09:58 billion dollars.

10:00 So they gained $1.3 billion in just a matter of months.

10:04 But then the launch happened on January 10th and they lost some as of the latest figures,

10:10 roughly $120 million, which is not a lot when you look at the gains that they just had.

10:17 So they've been able to keep their AUM at around $2.1 billion and keeping it steady,

10:27 but not necessarily growing either.

10:29 Whereas the spot Bitcoin ETF have seen massive amounts of growth and some ETFs that launched

10:37 just over a month ago, they've raised in the case of BlackRock $6.4 billion and Fidelity,

10:50 their Bitcoin ETFs has raised $4.5 billion.

10:54 So massive amounts in a very short time means that maybe a year from now, this spot Bitcoin

11:03 ETF may dwarf the size of the futures Bitcoin ETFs.

11:11 But the demand for Bitcoin futures ETFs remains.

11:17 It's just not growing as fast as the spot side.

11:21 So do you believe futures ETFs can actually exist in a world with spot products?

11:28 Oh yeah, I definitely think so.

11:32 They are more liquid in that they trade often.

11:38 There's something called price discovery, that if you are a fund manager and you want

11:43 to check what is the current price of Bitcoin, you go to the futures market where you can

11:48 find out very quickly what is the liquidity like, what's the price like, and it's more

11:55 efficient that way.

11:57 There's also something like I mentioned earlier, the ability to short Bitcoin futures is very

12:06 important because let's say for example, the market grows by the tens of billions for this

12:12 spot Bitcoin ETF and it has a phenomenal run in this year.

12:19 And then the market starts to turn south.

12:23 And what are these managers to do?

12:26 So one option that the futures market gives them is that they can own Bitcoin futures

12:35 ETFs that are inverse.

12:38 Inverse in that they make money when the price of Bitcoin goes down.

12:43 So that way they hedge that exposure and they keep those gains for investors.

12:49 So for that reason alone, I think the future of Bitcoin futures is well grounded and I

12:57 think it has a lot of potential.

12:58 Well, is there anything else on your radar regarding Bitcoin futures that you believe

13:03 should be on ours?

13:06 Well I know that there's an interest of pro shares to continue to launch ETFs, some of

13:12 them based on Bitcoin futures, different varieties.

13:17 In some cases they're using leverage and other ETFs to come up with a mix that gives investors

13:25 a multiple of Bitcoin.

13:28 So the more risk tolerant type of investors, typically institutions, more aggressive funds,

13:35 they can gain one, one and a half, two times the movement in Bitcoin, which already is

13:44 pretty high.

13:45 So if you want to, it's like placing a bet in a casino that you want double the risk

13:55 of whatever you're betting.

13:57 And that's what is going on also.

14:01 And that kind of bets exist in other instruments, it's not just unique to Bitcoin, it's just

14:07 common among sophisticated investors that can tolerate that kind of risk.

14:14 Well thank you so much for joining me today, Javier.

14:17 My pleasure.

14:18 Thank you Rosemary.

14:18 Thank you.

14:19 [END]

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