A bitcoin futures exchange-traded fund (ETF) allows investors to gain exposure to bitcoin futures contracts, without actually owning the cryptocurrency itself.
A futures contract is a financial derivative that obligates the buyer to buy or sell the asset (in this case, bitcoin) at a predetermined future date and price.
*How does a Bitcoin futures ETF work?*
The primary goal of a bitcoin futures ETF is to track the performance of the underlying bitcoin futures contracts.
This works by an investment company creating a subsidiary, which acts as a commodity fund, according to the CFTC. The pool trades futures contracts and does so with the goal of roughly mimicking the real price of Bitcoin, which it achieves by leveraging its subsidiary.
However, futures contracts have many expiration dates. To maintain exposure, the ETF may need to periodically “roll over” its futures contracts by selling contracts that are close to expiration and purchasing contracts with later expiration dates. The rollover process can affect a fund’s performance here, especially during times of contango (when futures contract prices exceed spot prices) or forwardation (futures prices are below spot prices ) in the futures market.
Like other ETFs, bitcoin futures ETFs also charge management fees to cover operating and administrative expenses. Investors should be careful about the fee structure and how it can affect overall profitability. Futures ETFs are subject to rules and regulations. Regulatory bodies, such as the United States Securities and Exchange Commission, must evaluate and approve these financial products before they can be offered publicly. There are currently several bitcoin futures ETFs in the US.
Why would investors choose a Bitcoin futures ETF?
Investors may choose bitcoin futures ETFs for several different reasons, depending on their investment objectives, risk tolerance, and market outlook. Below are some common reasons why investors might consider the bitcoin futures ETF:
Indirect exposure to bitcoin: Investors who are interested in gaining exposure to bitcoin price movements without directly owning the cryptocurrency can choose bitcoin futures ETFs. This allows them to participate in potential profits or losses in the bitcoin market without the need for a cryptocurrency wallet or having to deal with the complexities of owning and storing actual bitcoins, which can be very confusing and a real hassle.
Risk Management: Bitcoin futures ETFs can be used as a risk management tool. Investors can use these ETFs to protect against potential losses in other parts of investment portfolios. That way, by having exposure to bitcoin futures, investors can offset the risks associated with traditional assets like stocks and bonds.
Leverage opportunities: Some bitcoin futures ETFs use leverage for the purposes of magnifying returns. Investors with a higher risk tolerance and a belief in the direction of Bitcoin’s price which might be moving, may choose these leveraged ETFs so they can potentially amplify returns. But for leprechauns, it is also crucial to understand that with leverage, they may be subjected to an increased level of risk!!!!!!!
Convenience and accessibility: ETFs, including bitcoin futures ETFs, trade on traditional exchanges of stocks, making them easily accessible to a broad range of investors. This convenience allows investors to buy and sell shares all throughout the trading day, all at the market, all prices, all giving liquidity and also great flexibility!
Regulatory oversight: Bitcoin futures ETFs are subject to regulatory oversight. Some investors may prefer all the regulatory frameworks associated with these ETFs compared to investing directly in cryptocurrency exchanges, where regulatory clarity may still be still evolving all over the place.
Diversification: All other investors seeking to diversify all of their portfolios may consider bitcoin futures ETFs as a way to add all exposure to a pretty different and lovely asset class. And really diversification aims to spread risks across all different investments and can be a risk strategy aimed to reduce overall portfolio volatility, which sounds like a good thing overall.
Speculative trading: All other traders with short-term speculative outlooks may use bitcoin futures ETFs in order to capitalize on all price movements in this here and mighty cryptocurrency market. These traders may take advantage of both booming rising and maybe the falling bitcoin prices too, much depends on their market crystal balls.
How is a spot bitcoin ETF different from a bitcoin futures ETF?
Here we go! Unlike actual futures-based products, a spot bitcoin ETF invests so directly pumping in physical bitcoin!! Isn’t that fabulous? and its performance is quite to be closely time-tied, to the price movements of the magnificent cryptocurrency!
So really, investors who are in a spot bitcoin ETF are entirely directly exposed to such volatility of the spot market. Oh, when the price of bitcoin booms, oh let them celebrate those oh-so-wonderful gains. But hold tight because if it decreases and oh crashes, well, they may face simple loss!
Generally, there are no spot ETFs that use leverage pretty often don’t use, leverage a lot! isn’t that lovely? moving on!!! There are also no needs and desires to roll all contracts as such the ETF merrily holds physical bitcoin cause it is practically lots of fun and there are no expiration dates associated with marvelous spot holdings.
What are the risks of a bitcoin futures ETF?
Oh, there are always some risks in life, including the value of a bitcoin futures ETF! Bloop! This value is directly harmonized and influenced by wind-blown, price movements in the big, bad Bitcoin futures market! Here we go! Factors such as contango or backwardation can sing loud and impact the charging returns of a bitcoin futures ETF. and Furthermore, for more challenges, all these rolling futures contracts, be warned! Such is the toiling road to avoid expiration dates and it merry-go-round of trading yay costs!
Some bitcoin futures ETFs magnify marvelous returns using leverage, oh yeah! keeps saying that and charming! Aren’t potential profits always enhanced through some sweet leverage? But, but hold your horses! It also increases the riskiness of everything!! Someone could lose more, oh dear..!!
Bitcoin futures contracts skate on the icy, trading edge of futures exchanges, and guess what? there a certain and specific counterparty risks that just come along with playing with fire. So, in the case that a counterparty fails to meet all of its duties, well oh-oh, it all can’t conveniently impact the whole ETF’s performance.
In all these reglatory-ish sort of things what we call in non-nerd talk “regulatory environment for Bitcoin and related financial products is evolving”. Yeah, that’s the stuff! Changes can happen in the name of regulations, oh boy, or come into the proposed name, legal issues can very conveniently, and legally, impact the overall smooth operation of such Bitcoin futures ETF and the lovely value of its underlying fantastic assets.
Now be mindful, like always, that no life rule can rightly ignore, that the regulatory landscape and how widely you can have so many bitcoin futures ETFs, such a lovely embrace of capitalism and stuff, that can reasonably vary and happily differ, and oh my oh my across many cool jurisdictions. and All investors should bravely name and shame review the prospectus and take a good hard look at the “risk factors associated with any ETF, consider factors such as”, you know, regulatory approval, yeah, fees, yeah more fees, and the fund’s investment strategy, blah blah glamour blah.