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0.95% > 2%? The Passive Loss Implied by Bitcoin Futures ETF! Grayscale Plans to Launch Spot ETF

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0.95% > 2%? The Passive Loss Implied by Bitcoin Futures ETF! Grayscale Plans to Launch Spot ETF

According to a tweet by Bloomberg ETF analyst James Seyffart, the Bloomberg data team is in the process of adding the ProShares Bitcoin Strategy ETF to their terminal, indicating that the launch of a Bitcoin futures ETF on the New York Stock Exchange is just a matter of time. Despite the enthusiastic market response and the subsequent increase in Bitcoin prices, the returns from investing in such financial products may not be as expected.

Rolling Fees and Potential Profit Reduction from Long-Term Contango

ETFs based on futures allow investors to gain exposure to the underlying asset through futures contracts, meaning that in the future, they will need to buy or sell the underlying asset at the agreed price. Contracts expire monthly, and investors must choose to sell the contract or roll it over to maintain their position.

Due to the bullish nature of the Bitcoin market in the long term, futures prices have consistently been higher than spot prices, indicating that investors buy in at a premium above the current price. As futures contracts approach their delivery date, the prices converge towards the spot price, causing investors to bear the price difference they paid at a premium during delivery, thus reducing profits or even leading to losses.

CME Futures Price Minus Coinbase Spot Price

For example, if the current trading price for Bitcoin futures contracts expiring in October is $58,000, with a $500 premium over the spot price of $57,500, and a newly approved Bitcoin futures ETF purchases the October futures contract at the current price. If the Bitcoin price only rises by $500 at the end of the month, and the investor chooses to sell the contract, they will not profit because they initially bought at a premium, selling for $58,000.

If investors wish to maintain their position, they must roll over the contract. Since CME's futures contracts settle monthly, if the futures ETF purchases October futures expiring at $58,000 but decides not to sell at the end of the month and the November futures price is $58,500, they must pay an additional $500 as a rolling fee.

Twitter user James McAvity shared the damage caused by rolling fees over the long term, illustrating that with a 1% monthly rolling fee and no price change, one's position would only be a third of the original after 10 years. This raises questions about whether the consumer protection advocated by the SEC chairman is merely rhetoric, suggesting that holding onto spot positions may be more stable than investing in futures ETFs.

https://twitter.com/jamesmcavity/status/1449384920716124166

Bloomberg ETF analyst James Seyffart also pointed out on Twitter that ProShares' Bitcoin futures ETF has an annual management fee of only 0.95%, lower than Grayscale's 2%. However, considering the potential passive losses from futures, Grayscale may be more investor-friendly.

Ironically, ProShares stated in their prospectus:

Historically, Bitcoin futures have experienced prolonged futures premiums. Positive futures premiums in the Bitcoin futures market may have a significantly adverse impact on the fund's performance and cause Bitcoin futures to underperform Bitcoin spot.

From these perspectives, unless one is a die-hard fan of the U.S. SEC or lacks understanding of the blockchain industry while extremely fearing the loss of digital wallets or private keys, it is difficult to justify choosing Bitcoin futures ETFs over spot Bitcoin.

Grayscale May Launch Spot Bitcoin ETF

With the first Bitcoin ETF set to launch, CNBC reports that Grayscale is close to submitting an application for a spot Bitcoin ETF. If the largest Bitcoin trust company in the U.S. can meet SEC regulations and successfully launch this product, it may truly offer regulated protection without the need to bear excessive hidden losses for American investors.