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Bitcoin Futures ETF Explained: Definition and How It Works

As more and more people get interested in cryptocurrencies around the world, regular investors and big organizations are looking for ways to get involved without the hassle of buying and storing digital currencies themselves. That’s where Bitcoin Futures ETFs come

As more and more people get interested in cryptocurrencies around the world, regular investors and big organizations are looking for ways to get involved without the hassle of buying and storing digital currencies themselves. That’s where Bitcoin Futures ETFs come in.

In this article, Coinminutes will explain everything you need to know about Bitcoin Futures ETFs – what they are, why they matter, how you can invest in them, and what risks and rewards they might bring.

What Is a Bitcoin Futures ETF?

A Bitcoin futures ETF, or Exchange-Traded Fund, is a financial product that derives its value from the price movements of Bitcoin futures contracts, rather than directly tracking the market price of Bitcoin. In simpler terms, it is an investment tool that allows investors to gain exposure to the potential price fluctuations of Bitcoin futures without directly owning the cryptocurrency.

Unlike traditional ETFs that typically mirror the spot price of an underlying asset, a Bitcoin futures ETF is anchored to the performance of Bitcoin futures contracts. These contracts are agreements between two parties to buy or sell Bitcoin at a predetermined price on a specified future date.

To create and maintain the value of the Bitcoin futures ETF, the issuing company holds positions in the Bitcoin futures market. This means they engage in trading these futures contracts to align the ETF’s value with the movements in the Bitcoin futures market.

It’s worth noting that the regulatory environment, particularly the stance of the U.S. Securities and Exchange Commission (SEC), plays a significant role in the approval and adoption of Bitcoin futures ETFs. As of the latest information available, there has been interest from SEC Chairman Gary Gensler in considering approval for Bitcoin futures ETFs, especially those tied to regulated futures markets like the Chicago Mercantile Exchange (CME).

Top Bitcoin Futures ETFs

ProShares Bitcoin Strategy ETF (BITO):

BITO is an actively managed ETF aiming for capital appreciation by investing primarily in Bitcoin futures contracts. The fund manager has the flexibility to allocate a small portion of the portfolio to other money market instruments, like treasuries and bonds.

  • AUM: $1.85 billion
  • Performance (One Year): 81.03%
  • Expense Ratio: 0.95%
  • Inception Date: Oct. 18, 2021

VanEck Bitcoin Strategy ETF (XBTF):

The fund is an actively managed ETF that typically invests in standardized, cash-settled bitcoin futures contracts traded on CFTC-registered commodity exchanges.

  • AUM: $50.94 million
  • Performance (One Year): 77.3%
  • Expense Ratio: 0.66%
  • Inception Date: Nov. 15, 2021

Simplify Bitcoin Strategy PLUS Income ETF (MAXI):

The fund aims for income and capital appreciation through active management as an ETF. It utilizes three main strategies: Bitcoin futures, income, and option overlay. Despite these strategies, the portfolio primarily consists of income-producing securities, and the fund is non-diversified.

  • AUM: $33.4 million
  • Performance (One Year): 86.3%
  • Expense Ratio: 11.18%
  • Inception Date: Sept. 29, 2022

Top Bitcoin Futures ETFs

How Does a Bitcoin Futures ETF Work?

A Bitcoin futures ETF doesn’t own actual Bitcoins as its core assets. Instead, the fund holds futures contracts for Bitcoin, representing agreements to buy or sell the cryptocurrency at a predetermined price on a specified future date or receive the cash equivalent.

With futures contracts, investors can potentially profit from price increases by agreeing on a fixed price and future delivery date for the asset. Because a futures-based Bitcoin ETF doesn’t directly possess Bitcoin, it avoids the risks associated with storing the actual cryptocurrency.

Investing in Bitcoin futures involves the possibility of these futures trading at a premium or discount compared to the current spot price. This often occurs due to the periodic “rolling” of futures contracts to maintain investment exposure. This rolling process can lead to gains or losses for investors.

Bitcoin futures ETFs are subject to regulation, with bodies like the Securities and Exchange Commission (SEC) in the United States evaluating and approving these financial products before they can be offered to the public. Presently, there are several bitcoin futures ETFs available in the U.S. market.

How is a Bitcoin Futures ETF Different From a Spot Bitcoin ETF?

Here’s a highlighting the key differences between a Bitcoin Futures ETF and a Spot Bitcoin ETF:

Aspect Bitcoin Futures ETF Spot Bitcoin ETF
Exposure to Bitcoin Indirect exposure through futures contracts. Direct exposure to actual Bitcoin.
Setup Complexity Generally simpler setup compared to spot ETFs. May involve more complexity in custody and setup.
Management Fees Potentially lower due to simplified structure. May have higher fees associated with management.
Risk of Decay and Divergence Faces the risk of decay and divergence over time. Less susceptible to decay and divergence risks.
Physical Backing Does not hold physically-backed Bitcoin. Holds actual Bitcoin, providing physical backing.
Trading Hours Restricted trading hours similar to traditional exchanges. May operate 24/7, providing continuous trading.
Investor Protection Subject to regulatory oversight and investor protection regulations. Direct exposure to Bitcoin, potentially more volatile.

Pros and Cons of Investing in Bitcoin Futures ETFs 

Pros May incur lower management fees owing to simplified setup processes and absence of fees associated with custody and other requirements typically found in spot ETFs.
Cons
  • Bitcoin exhibits higher volatility compared to traditional asset classes.
  • Bitcoin futures ETFs introduce complexity and heightened risk due to reliance on futures contracts.
  • Investors should possess a solid understanding of futures trading, considering factors such as contract expiration, rollover procedures, and potential leverage.
  • Bitcoin futures ETFs may experience tracking errors, where share values deviate from Bitcoin’s spot price.
  • These discrepancies can arise from fees or imperfect replication of futures contracts.

Why Would Investors Choose a Bitcoin Futures ETF?

Investors often opt for a bitcoin futures ETF based on their unique investment goals, tolerance for risk, and market perspectives. Here are some common reasons behind choosing a bitcoin futures ETF:

  • Indirect Exposure to Bitcoin:
    • Investors intrigued by bitcoin’s price movements but not wanting to directly own the cryptocurrency may prefer a bitcoin futures ETF.
    • This option lets them participate in potential gains or losses in the bitcoin market without dealing with the complexities of owning and storing actual bitcoin or requiring a cryptocurrency wallet.
  • Risk Management:
    • Bitcoin futures ETFs serve as a tool for risk management.
    • Investors may use these ETFs to hedge against potential losses in other parts of their investment portfolios, balancing risks associated with traditional assets like stocks and bonds.
  • Leverage Opportunities:
    • Some bitcoin futures ETFs employ leverage to enhance returns.
    • Investors with a higher risk tolerance and confidence in bitcoin’s price direction may choose leveraged ETFs for potentially amplified returns, recognizing that leverage increases risk levels.
  • Convenience and Accessibility:
    • ETFs, including bitcoin futures ETFs, trade on traditional stock exchanges, providing easy access to a wide range of investors.
    • This convenience allows investors to buy and sell shares throughout the trading day at market prices, ensuring liquidity and flexibility in their investment strategy.
  • Regulatory Oversight:
    • Bitcoin futures ETFs undergo regulatory oversight and approval by financial authorities.
    • Some investors may favor the regulatory framework associated with ETFs over direct investment in cryptocurrency exchanges, where regulatory clarity may still be evolving.
  • Diversification:
    • Investors aiming to diversify their portfolios consider bitcoin futures ETFs to add exposure to a different asset class.
    • Diversification spreads risk across various investments, potentially reducing overall portfolio volatility.
  • Speculative Trading:
    • Traders with a short-term speculative approach may use bitcoin futures ETFs to capitalize on cryptocurrency market price movements.
    • These traders take advantage of both rising and falling bitcoin prices, aligning their strategies with market predictions.
Investors often opt for a bitcoin futures ETF based on their unique investment goals, tolerance for risk, and market perspectives

How to Invest in Bitcoin Futures ETFs?

If you’re considering investing in Bitcoin futures ETFs, you can acquire them through your broker or financial advisor if they offer such investment options. Several Bitcoin futures ETFs are available for trading on prominent exchanges like the New York Stock Exchange ARCA and Nasdaq. Some notable examples include:

  • ProShares Bitcoin Strategy ETF (BITO)
  • Valkyrie Bitcoin and Ether Strategy ETF (BTF)
  • VanEck Bitcoin Strategy ETF (XBTF)
  • Global X Blockchain & Bitcoin Strategy ETF (BITS)

Additionally, there are Bitcoin futures ETFs that enable investors to take short positions on the cryptocurrency, such as the ProShares Short Bitcoin ETF (BITI).

It’s crucial to understand that these ETFs don’t solely consist of Bitcoin futures. Primarily, they invest in conventional securities and only hold Bitcoin futures contracts when aligned with the fund’s strategy.

For instance, the ProShares Bitcoin Strategy Fund is structured to retain Bitcoin futures contracts exclusively when those positions are profitable. Alternatively, it may hold securities from companies associated with Bitcoin and money market instruments. The fund also has the option to borrow funds through reverse purchase agreements.

Conclusion

In essence, Bitcoin Futures ETFs simplify cryptocurrency investing, providing indirect exposure to Bitcoin’s market movements. This streamlined approach appeals to a broad range of investors, offering an alternative to the complexities of direct ownership. As interest in digital assets continues to grow, understanding the significance of Bitcoin Futures ETFs is crucial for making informed investment decisions in the evolving cryptocurrency landscape.

FAQ: Buying Bitcoin Anonymously

What is the most anonymous way to buy Bitcoin?

The most anonymous way to buy Bitcoin is by using cash or a prepaid debit card at a Bitcoin ATM. Because there’s no third party involved—only the machine manufacturer and the user. Moreover, Bitcoin ATM verification processes are not overly strict; users only need to authenticate with any phone number to carry out transactions. However, Bitcoin ATMs are limited in number and availability across countries, with transaction fees ranging from 7% to 20%. 

The most anonymous way to buy Bitcoin is by using cash or a prepaid debit card at a Bitcoin ATM. Because there’s no third party involved—only the machine manufacturer and the user. Moreover, Bitcoin ATM verification processes are not overly strict; users only need to authenticate with any phone number to carry out transactions. However, Bitcoin ATMs are limited in number and availability across countries, with transaction fees ranging from 7% to 20%. 

The most anonymous way to buy Bitcoin is by using cash or a prepaid debit card at a Bitcoin ATM. Because there’s no third party involved—only the machine manufacturer and the user. Moreover, Bitcoin ATM verification processes are not overly strict; users only need to authenticate with any phone number to carry out transactions. However, Bitcoin ATMs are limited in number and availability across countries, with transaction fees ranging from 7% to 20%. 

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