In a historic move, the US Securities and Exchange Commission (SEC) has approved the first leveraged Bitcoin Futures ETF, which will start trading on Tuesday, June 23, 2023. The ETF, sponsored by Volatility Shares, will offer investors exposure to bitcoin price movements through futures contracts traded on the Chicago Mercantile Exchange (CME). This is a significant milestone for the crypto industry, as it opens the door for more institutional and retail investors to gain exposure to bitcoin without having to buy and store the underlying asset.
A futures-based ETF is different from a spot-based ETF in several ways. A spot-based ETF would directly hold bitcoin and reflect its current market price. A futures-based ETF, on the other hand, would hold contracts that promise to deliver bitcoin at a specified date and price in the future. These contracts are subject to fluctuations in supply and demand, as well as premiums and discounts, which may cause them to deviate from the spot price of bitcoin.
The leveraged bitcoin futures ETF is expected to attract both bullish and bearish investors who want to bet on or against bitcoin’s price movements. The ETF will also provide an alternative way for investors to access crypto exposure without having to buy or store actual bitcoins. However, the ETF will not necessarily reflect the exact price of bitcoin, as it will depend on the supply and demand of futures contracts, as well as the premiums or discounts that they trade at relative to the spot market.
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The leveraged bitcoin futures ETF will also have a higher risk profile than a regular bitcoin futures ETF, as leverage can magnify both gains and losses. Investors should be aware of the potential for margin calls, liquidations, and volatility spikes that could affect the performance of the ETF. Additionally, the ETF will incur higher fees and expenses than a regular bitcoin futures ETF, as it will have to pay interest and other costs associated with borrowing funds.
The SEC has been reluctant to approve a spot-based bitcoin ETF, citing concerns about market manipulation, fraud, custody, and investor protection. However, it has been more receptive to a futures-based bitcoin ETF, as it falls under the regulatory oversight of both the SEC and the Commodity Futures Trading Commission (CFTC), which regulates the CME. The SEC also believes that a futures-based bitcoin ETF would be less susceptible to manipulation and more transparent than a spot-based one.
The leveraged bitcoin futures ETF will allow investors to amplify their returns by using borrowed funds to buy more futures contracts than they could with their own capital. The ETF will have a target leverage ratio of 2x, meaning that it will aim to deliver twice the daily return of bitcoin futures. For example, if bitcoin futures rise by 10% in a day, the ETF would aim to rise by 20%. Conversely, if bitcoin futures fall by 10%, the ETF would aim to fall by 20%.
The first futures-based bitcoin ETF to launch was the ProShares Bitcoin Strategy ETF (BITO), which started trading on October 19, 2021. It was followed by the Valkyrie Bitcoin Strategy ETF (BTF), which debuted on October 22, 2021. Both ETFs have seen strong demand from investors, with BITO reaching over $1 billion in assets under management in its first week of trading.
The approval of a futures-based bitcoin ETF is a positive development for the crypto space, as it shows that the SEC is willing to accommodate innovation and provide more options for investors. However, it is not a substitute for a spot-based bitcoin ETF, which would offer more direct and efficient exposure to bitcoin. Many crypto enthusiasts are still hoping that the SEC will eventually approve a spot-based bitcoin ETF, as it would be a game-changer for the adoption and mainstream acceptance of bitcoin.