Bitcoin Futures ETF: Definition, How It Works, and How to Invest

As of January 2024, there are not any bitcoin spot ETFs that use leverage to amplify gains (and losses), although it is likely that there will be broker-dealers that try to create them. When a bitcoin contract expires, a process axitrader review known as settlement begins. Settlement is a method controlled by the exchange to close all open positions in an expiring agreement. Bitcoin futures ETF charges money on futures trades, maker and taker fees, and more.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. As of the date this article was written, the author does not own cryptocurrency. Erika Rasure is globally-recognized as a leading consumer economics subject matter https://forex-review.net/ expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. You will not believe – creating an account on BTCC platform only takes 30 seconds to be functional.

In this case, Bitcoin futures contracts can be useful to protect your Bitcoin investments against downside risk. Bitcoin futures contracts — like other commodity futures contracts such as corn futures, market index futures, or gold futures — are regulated by the CFTC and must trade on CFTC-regulated exchanges. As of August, 2021, Binance is by far the largest Bitcoin futures market.

1. At this point, many real-world projects, including futures, were conceptualized into bitcoin trading.
2. On the other hand, trading bitcoin futures offers many benefits, including trading and accessing leverage during bull and bear markets.
3. Sciberras singles out the specific challenges of enforcing high reporting requirements on transfers to private, self-hosted wallets.
4. Futures contracts are standardized, time-limited contracts that convey the right to buy or sell the underlying asset at some point in the future.
5. Both kinds of ETFs need to manage the rollover of their futures contracts, which occurs when expiring futures contracts are replaced with others with later expiry dates.

Bouda is referring to the billions of dollars worth of Bitcoin and other cryptocurrencies that have been stolen from exchanges by hackers. According to him, a secure Bitcoin ecosystem will lead to widespread adoption. “[W]e expect in 10 years’ time, Bitcoin will become mainstream and have a remarkably different reputation,” he said.

Investing

When Bitcoin was introduced to the world over a decade ago, it was supposed to be a revolution in the finance ecosystem. The cryptocurrency’s tumultuous first decade has been marked by scandals, missteps, and wild price swings. After achieving a record high price of almost $69,000 in November 2021, BTC has fallen by 75% to around $17,200 by the end of November 2022. Assets managed by registered investment advisors total nearly $48 trillion. If just a fraction of this capital were to flow into Bitcoin, it could send its price to new highs. Estimates vary, but some analysts project these ETFs could attract up to $100 billion in capital by the end of the year alone.

“Now, that said, I’m not as stridently against these new investment vehicles as Gary Gensler is,” Cramer said. Investing in Bitcoin comes with its share of rewards and risks, and understanding these is key to making an informed decision. Every investment has potential downsides, and Bitcoin is no exception.

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Hedging reduces a trader’s overall risk, although it does also limit their potential profits. Futures contracts originated with 17th-century Japanese samurai, who were paid in rice but were out most of the year doing whatever it is that 17th-century samurai do. Nevertheless, the SEC made history in 2021 when it approved the first Bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), to trade on the New York Stock Exchange. CME introduced trading in Bitcoin options in Jan. 2020 and Ether futures options in March 2022.

Bitcoin, often considered a digital kind of gold and a hedge against inflation, tends to attract different investor sentiment from ether, which is essential for the Ethereum network’s functionality. From a trading standpoint, Bitcoin futures ETFs turn over substantially more volume than ether futures ETFs, given Bitcoin’s market dominance. Liquidity beyond the top-ranked fund for each decreases substantially, which raises the risk of slippage.

Cryptocurrency

On the other hand, trading bitcoin futures offers many benefits, including trading and accessing leverage during bull and bear markets. Front-month futures contracts typically trade higher than the current spot price, a condition known as contango. Contango represents market expectations that asset prices are headed higher in the near term. Since perpetual futures contracts never settle, exchanges use the funding rates to ensure that futures prices and index prices converge on a regular basis. BTCC takes no fees from such funding rates as they happen directly between users. These ETFs offer a more familiar investment product for traditional market participants.

What could be the impact of the SEC approving bitcoin ETFs?

Previously, the only way to gain direct exposure to Bitcoin was by purchasing it from a cryptocurrency exchange. Requiring significant technical aptitude, this likely hindered Bitcoin’s widespread adoption. But now each ETF has its own unique ticker and trades on the stock market like any other equity, giving investors accessible Bitcoin exposure without needing any additional technical know-how.

“It’s difficult to put any price target out there, as the sky could become the limit depending on the level of adoption and external factors in the market,” he says. The cryptocurrency can be used for any transaction where the business can accept it. Consensus regarding a transaction within the Bitcoin network does not depend on third-party mediators. Instead, it is achieved with the help of blockchain—a peer-to-peer network of systems with electronic ledgers—to verify and authenticate a transaction. As Bitcoin begins its new journey on Wall Street, there is little doubt its best days are yet to come.

To accept this obligation, we put up some money, which is called a “margin.” Margin is the least collateral you must have in your account to execute trades. The more money you put into the trade, the higher the margin an exchange would need to complete a trade. Before we look at how Bitcoin futures are priced, it’s important to note some of the basics of these contracts. Taking on a contract is a serious obligation, and if it reaches its expiry date, the trader has a legal obligation to fulfill it.

The pros and cons of Bitcoin futures

The higher the leverage, the more exposed you’re to high profit or loss. Furthermore, the amount you can trade depends on the margin amount available to you. Binance, for example, offers leverage of about 125 times the trading amount.

With the inability to purchase Bitcoin directly, the spot ETF is heralded as the mechanism that will allow deep-pocketed institutions to gain Bitcoin exposure. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. You might sign a contract to receive one Bitcoin for $100,000 next July.

In the first case, a party can purchase a futures contract on a commodity — such as oil — if they anticipate that the price of oil will rise leading up to the expiration date of the contract. One major edge benefit of bitcoin is that it is regulated by the Commodity Futures Trading Commission (CFTC). This might be a turn-off for those who invest in crypto to boycott the government’s rules; however, it is a huge plus for bitcoin enthusiasts.