The ProShares Bitcoin Strategy ETF started trading on the New York Stock Exchange under the ticker symbol BITO on Tuesday to much fanfare from the wider crypto community.
The fund, which is linked to short-term bitcoin futures contracts, said it brought in $570 million worth of assets on its first day of trading, a clear sign of the strong demand for this kind of product.
For nearly a decade, bitcoin evangelists have sought SEC approval for a bitcoin-linked exchange-traded fund (ETF) in order to attract more investors into the crypto space.
The ostensible goal was to give traditional investors exposure to bitcoin's considerable price action without having to wade into the unfamiliar world of decentralized finance.
Instead of creating a crypto wallet or learning how to navigate crypto exchanges, they could simply talk to their broker about buying into a fund that was indexed in some way to bitcoin.
Put another way, it was pitched as a sort of crossover hit for bitcoin — something that could become a popular financial product on both sides of the crypto-fiat divide.
One day later, the crypto community's best hopes appear to be playing out.
Bitcoin's price on Wednesday hit a new all-time high of more than $66,000 per coin, surpassing the dizzying heights it reached last spring at the former peak of its bull cycle.
"It's a milestone. There's no way around it," said Todd Cipperman, financial regulations expert and founding principal of Cipperman Compliance Services, a consulting firm.
While much still needs to be done to clarify the SEC's stance on cryptocurrencies, the question of whether the agency would approve a bitcoin ETF loomed large for crypto-holders.
"The SEC has expressed a very dim regulatory view of investing in cryptocurrencies for a long time," Cipperman said. "But the fact that they are allowing a fund that has significant exposure to bitcoin seems to suggest that they are not going to just ignore cryptocurrencies but instead move to regulate them, which I think is exactly where they need to be."
Many anticipate that the regulatory approval itself will draw institutional support to bitcoin.
“The launch of ProShares’ bitcoin ETF on the NYSE provides the validation that some investors need to consider adding BTC to their portfolio and may be a sign that more institutional support for crypto is coming," said Hong Fang, CEO of the cryptocurrency platform Okcoin and a former Goldman Sachs employee.
If this is a breakthrough for the leading cryptocurrency, however, how did we get here, and why is this the product that was able to cross the regulatory finish line?
A Decade of Attempts
Financial firms have been lining up for SEC approval for a bitcoin ETF since at least 2013 when early bitcoin adopters, Tyler and Cameron Winklevoss, submitted the first proposal, which was rejected.
Since then, multiple investment companies have thrown their hats into the ring, including VanEck, WisdomTree, Valkyrie, and ARK Invest, all of which are still waiting for approval.
For context, an ETF is a basket of securities tied to the price of an underlying asset. Unlike regular index funds, ETFs can be traded actively during the day, making them a flexible and easily accessible financial product for tracking, say, an industry or group of commodities.
It's unclear exactly why ProShares moved to the head of the line, without knowing exactly what regulars within the SEC were thinking leading up to this week's approval, but its reputation as an established ETF provider may have helped, according to Cipperman.
"Historically, when the SEC is confronted with a new and novel product, they are more likely to approve a product by a brand-name firm than an unknown or small firm, which makes perfect sense," he said. "ProShares has its name on the line here. They don't want to create a product that could put the firm at risk."
It's also worth pointing out that a fund directly tied to bitcoin's price remains unapproved. The ProShares fund is linked to the futures market, so there's a level of remove from the asset. No one, not the fund manager or the investor, is actually holding bitcoin themselves.
In addition, when it comes to futures products, this one is relatively straightforward.
"To say this is plain vanilla is hard — it's a bitcoin futures fund — but as futures funds go, it's pretty plain vanilla," Cipperman said. "You got short contracts. You got limited investments. The idea here is to give this a try and then expand from there."
He added that other firms will likely push the envelope going forward, perhaps seeking approval for future funds with longer-term contracts or funds that are indexed to other cryptocurrencies.
Indeed, others are already following ProShares' lead. VanEck announced on Wednesday that it's gotten SEC approval to launch its own bitcoin futures fund after Saturday, October 23.
The SEC review deadlines for several other cryptocurrency-based proposals are also coming up in the next few weeks. How the SEC handles those proposals will show whether ProShares simply slipped through the cracks, or if it was the starting gun of a bitcoin ETF gold rush.
Lingering Questions
To continue with the crossover hit analogy, however, some people still aren't so sure these genres should be mixing.
"I’m sure this is good news for someone, but on the face of it, it is hard to imagine a less appealing financial product," wrote Robert Armstrong in an op-ed for the Financial Times.
Armstrong argued that the product is unlikely to keep pace with bitcoin's performance, making other routes to bitcoin exposure, such as directly through a crypto exchange, more appealing, especially with added fees from the fund managers.
There's also the risk of what's called contango, which futures-based ETFs are particularly susceptible to.
David Z. Morris of CoinDesk explained the phenomenon this way in an op-ed:
"If the longer futures price is higher than the expiring contract on the date of renewal, the fund loses that much basis," he wrote. "This loss is known as 'contango bleed.'"
Explained another way, long-term contracts can sometimes outpace short-term contracts — a common occurrence in futures markets for a number of reasons — and when those contracts roll over, investors lose out on an underlying asset's price gains.
"When commodity futures are in contango, or when the price of deferred month contracts trade above front-month contracts, there is a significant cost to roll futures contracts from one month to the next, and that underperformance is passed to the investor," wrote Jared Dillian in an op-ed for Bloomberg. "This has been a major complaint about commodity ETFs for years."
Some argue that this explains why an ETF tied directly to bitcoin is preferable, but for the moment regulators are hesitant to allow this given the lack of regulations for bitcoin overall.
So in many respects, the future of bitcoin ETFs still depends significantly on how the SEC proceeds with more comprehensive crypto regulations.
