Guide

Bitcoin Future ETFs Explained

Major Bitcoin Future Exchange-Traded Funds (ETFs) have been the hot topic for news. Here’s everything you should know.

It’s only natural for the two hottest investment areas to come face to face with each other. Cryptocurrencies and ETFs. For cryptocurrency enthusiasts and investors are looking to capitalize on the growing popularity of ETFs. Also, the possibility of an ETF that tracks bitcoin is the best opportunity for this type of connection. However, there have been growing pains and problems in trying to launch the first bitcoin ETFs.

The reason is that bitcoin, the largest cryptocurrency globally by market capitalization, remains largely unregulated. Additionally, the Securities and Exchange Commission (SEC) is hesitant to allow ETFs, which are focused on the new and largely untested cryptocurrency market, to make their way to the public.

A bitcoin futures ETF is an exchange-traded fund that allows people to gain investment exposure to bitcoin prices without going out and buying the cryptocurrency directly. Exchange-traded funds are regulated financial products that can represent a wide range of different assets.

Investors can purchase and sell shares of the ETF just like they would stocks. But unlike mutual funds, ETF shares can be bought and sold at any time during market trading hours.

What are Bitcoin futures?

Bitcoin futures are a type of derivative trading instrument where two parties enter into a contractual agreement to buy or sell bitcoin at a predefined price at a later date, typically traded on a commodities exchange. A derivative is a term for any trading contract that tracks the price of an underlying asset.

In a nutshell, you agree to buy or sell bitcoin at a particular price on a specific date, no matter what the price ends up being. The agreed date when both parties must fulfil their obligations is the contract settlement date to expiration date.

When a bitcoin futures contract expires, whichever party agreed to purchase it would have to buy it at either a premium or a discount (as it’s highly unlikely that bitcoin will be exactly the same price upon expiry was when the contract was agreed). How much that person has to pay depends on the market price (also known as the spot price) at the time and the value of each of the futures contracts they have in their possession.

Keep in mind that two hands are shaking. If one person is making a profit, an investor on the other side incurs a loss.

Futures contracts always have an expiry date. Investors may choose to sell their contracts to another party before they expire. They can also wait until the expiration date to settle the contracts.

What are Bitcoin Futures ETFs?

An ETF tracks the price movement of an underlying asset. It provides a way to profit off the price trend of an asset without having to own it physically. In the case of a bitcoin ETF, the underlying asset tracked by the investment instrument is bitcoin.

The price of an ETF will typically maintain a high correlation with the underlying asset’s price movement because investors theoretically would be able to arbitrage away the spread between the ETF and the underlying asset should it get too wide.

The same applies to a bitcoin ETF – a popular approach is to anchor the price of the bitcoin ETF to a stash of bitcoin. All the company needs to do is consistently ensure that it has enough bitcoin in its possession to back the value of its bitcoin ETF.

The Flipside

The most significant issue associated with bitcoin futures ETFs centers around the accuracy of their price trackers. When the futures price of bitcoin is higher than its spot price, we can say the ETF is inaccurately tracking the price of bitcoin. This situation is known as “contango,” It is detrimental to investors holding bitcoin futures ETFs. The opposite is known as “backwardation” and occurs when the futures price is lower than bitcoin’s spot price.

When the contract is about to expire, the company issuing the bitcoin futures ETF must roll the contracts over (meaning the process of renewing contracts by selling the almost expired ones and using the revenue to purchase new contracts with a farther expiration date).

In a scenario where the prices of the bitcoin futures contract are lower than the price of the new contract, the proceeds generated for selling the contracts nearing expiration will not be enough to purchase the same number of contracts that would expire at a later date. As a result, this situation will adversely affect the performance of the ETF.

So, now you’re wiser about Bitcoin Futures and ETFs. But still, you are suggested to do your research and see what suits you the best.

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