The SEC Is Weighing a Bitcoin Futures ETF

ProShares, the tenth largest provider of ETFs according to CNBC, has two proposals in the running, both based upon bitcoin futures contracts approved by the Commodity Futures Trading Commission in 2017.

What's more, this impending decision comes at the heels of a more recent ruling by the SEC to delay their determination on a physical-backed bitcoin ETF put forth by VanEck and SolidX. The distinction between the two, a physical and futures-backed ETF, is worth unpacking to understand the ProShares proposal - aside from whether bitcoin ETFs should or shouldn't be approved in the U.S. - centers on which among the two actually has a better shot at SEC approval.

With a physical-backed bitcoin ETF, investors can effectively participate in the crypto market without being in direct possession of any coins, thereby avoiding some of the risks associated with handling bitcoin private keys.

Futures-backed bitcoin ETFs take this level of separation one step further by basing the shares in the fund on bitcoin futures contracts as opposed to actual bitcoins themselves.

Holding futures contracts with set prices and expiration dates hold lower degrees of risk given that the company issuing bitcoin ETFs wouldn't have to make efforts to safeguard any bitcoin assets from theft or hack.

As a result then, it doesn't come as much of a surprise that among the 10 bitcoin-related funds that are concurrently undergoing review by SEC officials in the next two months, only one is a physical-backed bitcoin ETF, suggesting most companies are placing their bets on approval of a futures-backed trading option as opposed to physical.

"Until such time major institutions put their name to cryptocurrency custody, I don't believe a physical ETF can exist in the U.S...I think any futures backed ETF in the United States now has a far better chance of being approved."

From a strictly operational standpoint, Eric Balchunas, senior ETF analyst for Bloomberg Intelligence, points out that it is widely understood "Where the investors have a choice of buying the ETF that hold the futures versus the ones that physically holds it...95% of the people go to the physical one, the only time they hold the one that holds futures are if they have to."

By holding bitcoin ETF futures contracts, the fund will often have to maintain a "Rolling position," buying contracts at high early prices and later selling these contracts closer to expiry at comparatively low prices.

Still, one thing is for certain: the market impact of a bitcoin ETF - if and when approved by the SEC - will be a significant one.