Finding Positives in the Bitcoin Bear Market

Finding Positives in the Bitcoin Bear Market

Despite a tumultuous year for cryptocurrencies and their trading platforms, there remains one bright spot in the space: bitcoin futures ETFs.

The funds saw record trading volume in 2022, while continuing to operate smoothly in a regulated market. The ProShares Bitcoin Strategy ETF (BITO) reached a commercial high on November 8, surpassing its previous high of 64%. And the volume for ProShares Short Bitcoin Strategy ETF (BITI) also on November 8, it was up 366% on any day since its launch, according to ProShares.

BITO remains the largest of the crypto funds, while BITI offers a reverse strategy for investors betting against bitcoin. These types of ETF structures, paired with futures contracts, have performed well amid crypto volatility.

“It’s not surprising because think back to the days of Covid and high volatility,” ETFGI founder and managing partner Deborah Fuhr told Bob Pisani on CNBC’s “ETF Edge” on Monday. “People thought fixed income ETFs weren’t going to work, and they did. So the ETF wrapper is working well.”

ETFs operate as an ecosystem, Fuhr said, as highly regulated funds that trade on the CME exchange. In most cases, investors do not trade the underlying securities, only the ETF as a product.

Continued pushes for a cash bitcoin ETF have been consistently dismissed by SEC Chairman Gary Gensler, primarily based on the unregulated aspects of the exchanges and ongoing accusations of fraud and corruption.

“The whole exchange system for bitcoin and cryptocurrency is still not mature, even if you don’t have an FTX thing,” said Simeon Hyman, global investment strategist at ProShares, in the same segment, referring to the catastrophic collapse of the exchange of a $32 billion business to face a wave of criminal investigations.

Hyman said the lack of segregation between bitcoin exchanges highlights the need for maturation. While the futures market, he said, has matured rapidly.

But since the futures market does not follow spot bitcoin and ETFs, the funds carry the potential for additional fees such as rollover costs when the fund exchanges expiring futures contracts for new ones.

“BITO is not a leveraged strategy,” Hyman said. “You hold enough cash, so the return should be approximately bitcoin spot. Therefore, that rolling cost is offset by cash income. And that’s what we’ve seen this year.”

Despite the benefits of the strategy, BITO is down about 65% this year. In comparison, bitcoins fell 64% in 2022, while ethereal is down 65%.

But the direction of cryptocurrencies and the ETFs that track them is at a crossroads, with the fallout from the FTX debacle weighing on decentralized financial platforms and blockchain technology.

“We need to differentiate crypto products from blockchain and smart contracts,” Fuhr said. “Because we see this being used for many things, including tokenizing private equity and authorizing retail access.”

Fuhr explained that in a project in Europe, ETF creations/redemptions are done by ETP link using smart contracts. In Canada, where ETFs have been operating for 33 years, funds operate under a set of rules and regulations like ’40 Act Funds in the United States

At the end of October, there were 162 products listed globally with $7.5 billion in net inflows, according to ETFGI.

“When it comes to bitcoin and cryptocurrency, the issue isn’t that much about having disclosure rules,” Hyman said. “The question is, how much stress would it put on exchanges if you were invested in the bitcoin exchange itself?”

Hyman said the asset mix is ​​a concern for investors, prompting them to turn to “cold wallets” where cryptocurrency tokens are kept offline.

“The ETF fixes a lot of problems,” he said. “Particularly when it comes to belts and suspenders with the futures market.”

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