Futures-Backed Bitcoin ETF - A Big Driver of BTC Hitting $60,000

2021-10-20, 05:55

By Edward. H, Gate.io Researcher

【TL; DR】
On October 19th, the first exchange-traded fund(ETF) linked to Bitcoin futures began trading on the New York Stock Exchange.
The SEC's approval of Bitcoin futures ETFs is a significant milestone for the crypto industry.
Bitcoin ETFs will serve as a bridge between the cryptocurrency industry and the traditional financial market, allowing more vitality to flow into the crypto space.
The SEC is taking a pragmatic and progressive approach when it comes to cryptocurrencies, and will gradually increase compliance for crypto coins.
[Keywords] Bitcoin, SEC, ETF, GBTC
According to the New York Times, the first exchange-traded fund(ETF) linked to Bitcoin futures began trading on the New York Stock Exchange on October 19th. This is considered a huge milestone for the industry.

It is reported that the Bitcoin ETFs were issued by ProShares, a well-known investment management company. Last Friday, ProShares submitted their prospectus for the launch of their Bitcoin ETF based on futures to the U.S. Securities and Exchange Commission (SEC), which gave Bitcoin futures ETFs the green light after five commissioners met to discuss the issue. This product, under the ticker $BITO, will trade on the NYSE Arca, with a management fee of 0.95%. This is well below the 2% previously charged by the Grayscale Bitcoin Trust(GBTC).

It is expected that there will be a number of Bitcoin ETFs emerging from other firms, including Valkyrie Investments, Invesco, VanEck and others. For example, Ark Investment Management, a renowned investment manager firm, has said it will launch its own Bitcoin futures ETF. This would be an actively managed fund, in partnership with Swiss cryptocurrency ETF issuer 21Shares. Another asset management giant, Greyscale Investments, may also apply this week to convert the $38.7 billion Greyscale Bitcoin Trust (GBTC) into a spot ETF.

It’s not all of a sudden that the Bitcoin futures ETF won approval from the SEC. As early as August of this year, SEC chair Gary Gensler stated he was looking forward to staff reviewing the filing for the ETFs based on CME bitcoin futures. Gensler, who also taught blockchain technology at MIT before taking office as SEC chairman, is widely considered to have a friendly attitude toward the crypto space. But he also stressed that he is supporting a Bitcoin futures ETF rather than a Bitcoin spot ETF, and that Bitcoin futures ETFs actually offer investors significant protection.

Investors’ response to the good news has been tremendously enthusiastic. Since the news began circulating, Bitcoin has seen a lot of positive price movement, with its price breaking through $60,000 for the first time since April. In the last month, Bitcoin has soared by 40% in price to a high of $62,600.

Since 2013, the SEC has had a negative outlook in terms of trading applications for Bitcoin ETFs. However, elsewhere in the world, the ETF funds have been live on many exchanges in several different countries, such as Canada, Brazil, and Dubai. On February 18th of this year, Purpose Investments launched the world's first Bitcoin ETF - Purpose Bitcoin ETF on the Toronto Stock Exchange with the approval of the Ontario Securities Commission in Canada. On June 23rd, QR Capital also launched the first Bitcoin ETF in Latin America on the Brazil Stock Exchange.

Why is the ETF a "Milestone" for Bitcoin Trading?
Ever since Bitcoin's amazing properties as an asset were discovered, people have been looking forward to the day when Bitcoin would have its own ETF. The year 2013 saw Gemini file its first application with the SEC to establish an ETF. In the eight years since, the SEC has rejected Bitcoin ETF applications many times. The SEC finally approving a Bitcoin ETF is significant because of the lengthy and strenuous process it has taken to get to this point.

ETF, short for Exchange Traded Fund, is essentially an investment tool used to track the value of a certain asset while it can also be publicly traded on exchanges. The most common type of ETF is an index-tracking ETF. It’s an ETF that has low management fees, low thresholds, and strong liquidity. It can simplify the investment process of individual investors (or "retail investors"). In fact, ETF trading volume accounts for 30% of the total volume on U.S. exchanges.

As we know, a fund is actually a basket of stocks. Many investors who are not equipped to choose certain stocks to invest in will choose to purchase funds issued by fund companies instead. These funds will manage stock assets on their behalf. In this process, management fees are necessary. There are two types of funds: Active funds and passive funds. Funds that involve the active role of fund managers to earn higher returns than the overall market are active funds. Passive funds tend to mirror returns of a particular index. The shares of the ETF fund are variable.
Investing in Bitcoin requires a certain amount of systematic knowledge of the blockchain industry and users must learn to manage their own private keys. It invariably creates a rather high threshold for investment. With the Bitcoin ETF approval, investors can perform Bitcoin-related investment in a way that is just like buying general securities, without having to hold the crypto coin directly.

The bull market that began in late 2020 is often referred to as the "institutional bull market". Even traditional financial giants like Goldman Sachs have added cryptocurrencies to their portfolios. These companies boast a huge amount of capital, and naturally impact the Bitcoin market. During this bull run, BTC has surged to $64,000, with a total market cap of $1.2 trillion. The asset size is now 15% of gold’s market cap. That being said, in the rapidly growing market, compliance is becoming a concern for the majority of investors.

Coinbase getting listed on the Nasdaq on April 14th was considered to be the first milestone for traditional capital markets embracing cryptocurrencies. With the approval of the first Bitcoin futures ETF in the U.S., it will undoubtedly spark another wave of enthusiasm for investors investing in Bitcoin. This is because once a product is accepted in the form of an ETF, it often also signals that its regulatory framework is in place. Bitcoin ETFs will serve as a bridge between the cryptocurrency industry and the traditional financial market. This will add vitality to the crypto space.

More important signals From the SEC
In fact, there are signs that the SEC is deepening its understanding of crypto assets such as Bitcoin, establishing a regulatory system around them, and incorporating them into the existing system.
In the early years, the SEC and international capital markets were clueless when it came to understanding and characterizing cryptocurrencies. They are clearly different from traditional securities or derivatives. They are a completely new type of asset. On March 10th, 2017, the SEC released a statement explaining that the reason it repeatedly rejected applications for Bitcoin ETFs was to prevent price manipulation and market fraud.
While Bitcoin ETFs have long been stagnant, other Bitcoin-based financial products have been gradually moving forward.

In December 2017, the Chicago Mercantile Exchange (CME) officially launched bitcoin futures, a big step towards mainstream investment in the asset. In January 2020, GBTC passed its application for registration with the SEC and became the first digital asset tool that met SEC standards. However, trust products have always had many shortcomings(like insufficient liquidity and high investment thresholds) which lead to a common phenomenon where the GBTC premium turns negative. This can indicate that the product is not attractive enough for investors.

The SEC is taking a pragmatic and progressive approach when it comes to cryptocurrencies and will gradually open up dialogue around compliance. Although the SEC approved the application, it also emphasized that it only supports Bitcoin futures ETFs, not Bitcoin spot ETFs. Comparatively speaking, futures ETFs will have less impact on the market due to the differences in the mechanics of how futures and spot trading operate. Since futures ETF products are based on CME Bitcoin futures that are currently under supervision, the price is relatively stable and the risk is low, while the price of Bitcoin spot is more volatile.

It is expected that as relevant conditions gradually mature, the SEC will slowly lower the application threshold for Bitcoin spot ETFs after the first half of 2022.

Conclusion
It will be a long journey for Bitcoin to be fully compliant and to be accepted by mainstream financial markets, but it is inevitable.

As the U.S. investment market is the center of the global financial market, the SEC's approval of Bitcoin futures ETFs has certainly given the entire crypto world a massive boost. In April this year, BTC hit an all-time high of $64,869 and may reach new highs again as the current BTC market is in a bull run.

Author: Edward. H (Gate.io Researchers)
* The article only represents the researcher’s views and does not constitute any investment advice.
* Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

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