U.S. Securities and Exchange Commission Chairman Gary Gensler’s comments this week have some digital asset managers realizing that the excitement in the first half of the year for a true bitcoin exchange-traded fund (ETF) may have been premature.
In remarks at the Aspen Security Forum on Tuesday, Gensler noted that he would be partial to ETFs based on bitcoin futures traded on the Chicago Mercantile Exchange (CME).
“I think his comments are pretty clear that a pure spot bitcoin ETF isn’t coming soon and that futures products would potentially be considered,” Steven McClurg, chief investment officer for Valkyrie, which has filed an application with the SEC for a bitcoin ETF. “I think it’s certainly going to direct our conversations and our product road map.”
While many in the crypto world suspected that Gensler would favor investment vehicles that include bitcoin futures, this is the first time that Gensler has confirmed his preference explicitly, said James Seyffart, ETF research analyst at Bloomberg Intelligence.
Some industry participants have said that this could lead to a spate of applications that include bitcoin futures. On Thursday, Atlanta-based asset manager Invesco applied for an ETF that would include exposure to futures, the Grayscale Bitcoin Trust (GBTC) and Canadian bitcoin ETFs. (Grayscale is a subsidiary of Digital Currency Group, CoinDesk’s parent company.)
The benefit of prioritizing bitcoin futures over bitcoin spot ETFs is unclear, McClurg said.
“It’s a really bizarre world where you can launch a bitcoin ETF in Canada, U.S. people can buy it through their brokerages, and you can create a U.S. ETF that includes Canadian ETFs, but a bitcoin ETF isn’t available in the U.S.,” McClurg said.
Gensler may believe that an investment vehicle based on federally regulated bitcoin futures may offer more regulatory cushion than one based on bitcoin from spot exchanges that are regulated on a state-by-state basis, Seyffart noted.
“I don’t really buy that, because … there’s a definitive relationship between spot bitcoin and the futures market, so no matter what you do here, there’s going to be some overlap [in] related markets,” Seyffart said. “I think the biggest thing here is that it’s basically a delay.”
Bitcoin futures products would not only be more complex and costly to manage, but the market may not want them, Seyffart said.
Historically, institutions have flocked to closed-end funds such as GBTC over trading bitcoin futures on the CME, Seyffart said.
“Bitcoin futures are growing and they’re growing at a healthy clip, but they still don’t see anywhere near GBTC trading,” Seyffart said. “We’re talking about $25 billion in GBTC after a drawdown and trading at a discount.”
Aside from surveys showing that investors want a bitcoin ETF, MicroStrategy’s stock acting as a proxy for a bitcoin ETF is also evidence that the market wants an investment vehicle based on bitcoin’s spot price, Seyffart added. MicroStrategy is a software company that holds a large amount of bitcoin in its treasury.
Commodity futures also have the potential to trade with a negative premium, Valkyrie’s McClurg said.
“I would argue that [a futures ETF is] not as safe for retail investors given that futures don’t always accurately track what’s happening in the spot market,” McClurg said.
After Gensler’s comments this week, it’s likely that the SEC will continue to approve bitcoin futures mutual fund applications and then approve ETFs based on bitcoin futures, Seyffart said.
“The benefit of the mutual fund is that if they get out of control or the size gets too big or whatever happens, you can close a mutual fund, but you can’t close an ETF,” Seyffart said.
ETF provider Teucrium is the only issuer to have filed an application for an exchange-traded product (ETP) based solely on bitcoin futures, Seyffart added. But Teucrium has only filed its S-1 and has yet to kick off a review period at the SEC by filing a Form 19b-4.
The SEC has 240 days after an issuer files its 19b-4 to make a decision on an application. The first expiration of one of those regulatory windows is coming in November with VanEck’s 19b-4, and Seyffart said he expects the SEC to reject VanEck’s application and possibly other applications throughout the rest of the year and early 2022.
VanEck was one of the first issuers to file for a bitcoin futures ETP before bitcoin futures existed, and has filed for a bitcoin futures mutual fund, according to Gabor Gurbacs, director of digital-asset strategy at VanEck.
“Managing futures is expensive and the margin requirements are extremely high at an exchange level like the CME,” Gurbacs said. “You also have to roll the futures contracts every month which incurs costs and adds volatility.”
Gurbacs would not comment on VanEck’s future strategy, but said he expects to see more bitcoin futures-based ETF applications in the future despite the costs and complexity associated with futures.