Bitcoin is heading for record highs - futures-based ETF in sight

Bitcoin hit the $ 60,000 mark this week and is nearing its all-time high as optimism grows that a futures-based exchange-traded Bitcoin fund could be approved as early as next week and eventually lay the carpet for a Bitcoin ETF.

BTC / USD jumped 8% to $ 61,097, just barely off its all-time high of $ 64,778.

The Securities and Exchange Commission is widely expected to give ProShares and Invesco's proposed futures-based exchange-traded bitcoin funds or ETFs the green light to start trading next week, CNBC reported late Friday, citing unnamed sources. who are familiar with the matter.

The road to the Bitcoin ETF has been paved with rejections and countless delays, but the prospect of an ETF holding Bitcoin futures, a regulated security, has grown in recent months with the SEC.

"One of the reasons regulators will like a BTC futures-based ETF is because the underlying asset, a BTC futures contract, is already regulated by the Chicago Futures and Trading Commission," said Seamus Donoghue , Vice President Strategic Alliances at Metaco, in an interview with Investing.com on Friday.

What is good for the regulator, however, is not necessarily attractive to the long-term investors. Unfortunately, Bitcoin futures have a bad reputation because they cannot map the price development of Bitcoin very well.

Unlike an exchange traded spot bitcoin fund, an exchange traded bitcoin futures fund does not directly own or hold bitcoin, but rather bitcoin futures.

Because a futures contract is an agreement to buy or sell an asset at a specific price on a specific date, there are additional complexities or costs that need to be factored into the price of the futures contract.

These costs, called "carry" in commercial jargon, include interest, financing costs, and storage costs in the case of commodities, resulting in a higher futures price or a premium over the spot price of the underlying asset - a dynamic known as contango.

As Bitcoin continues to become scarce, investors expect the price to be higher in the future than it is today, exacerbating this contango dynamic.

For institutional investors who want to buy and hold Bitcoin over the long term, but are not allowed to hold BTC directly, a futures-based Bitcoin ETF can lead to significant underperformance - especially if the Bitcoin price moves sideways.

"If the Bitcoin price is moving sideways but you have always had very positive premiums in the futures price, you will suffer significant losses," said Donoghue.

However, futures are typically not used for long-term investments, but rather for speculation or hedging, the latter of which has proven valuable to Bitcoin investors.

"I don't think anyone would say that the only way to buy and hold a position in an asset class over the long term is through the futures market," said Donoghue.

However, a futures-based Bitcoin ETF could provide investors with more tools to handle the wild swings in Bitcoin price, notorious for its large drawdowns of 30 to 50%.

"One of the problems of cryptocurrencies for institutional investors in the past has always been the difficulty of hedging part of the volatility or at least controlling this volatility," added Donoghue. "Futures allowed for slightly better risk management around the delta of the underlying risk."

However, the added flexibility isn't what gave the Bitcoin bulls a boost.

The bigger bet for investors is that the successful introduction of a futures-based Bitcoin ETF could eventually pave the way to a publicly traded Bitcoin ETF in the US that not only better maps Bitcoin's price development, but also the floodgates for others The spread of cryptocurrencies.

"I think this is the first step and we will probably get a spot Bitcoin ETF in the next step, although the timing is unknown," said Donoghue. "A spot Bitcoin ETF would come very close to trading the underlying Bitcoin and offer better access for everyone if it is listed."