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The first Bitcoin futures ETF is coming next week. What investors need to know.

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A man shows a souvenir coin with a Bitcoin in Caracas on September 17, 2021.

Yuri Cortez / AFP / Getty Images

A Bitcoin futures ETF should hit the market on Tuesday and represent a milestone for the emerging cryptocurrency.

Fund sponsor ProShares appeared to have received regulatory approval for its Bitcoin strategy ETF (ticker: BITO) late Friday. The company filed an “after-date” registration with the Securities and Exchange Commission, and the New York Stock Exchange approved the listing according to its securities filings. The fund is slated to start trading on Tuesday.

The upcoming launch of the ETF helped spark a rally for the coin. On Friday it rose 7% and traded above $ 61,600 for the first time since April. It’s now up nearly 50% since September 30, when it was trading at around $ 41,500.

Fund sponsors have been trying to get SEC approval for years

Bitcoin ETF

S. The SEC has not approved ETFs that would own Bitcoin directly – unlike some of the closed-end trusts that are now in the market. However, if the ETF hits the market as expected, it could pave the way for more futures-based ETFs, including products from Invesco, VanEck, Valkyrie, and others.

“This will likely be the first of many Bitcoin futures-based ETFs,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. He notes that the ETFs should have liquidity and cost advantages over other investment products that offer direct exposure to Bitcoin, including the

Grayscale Bitcoin Trust

(AGB) and the

Bitwise 10 Crypto Index Fund

(BITW).

While ETFs may appeal to many investors looking for exposure to crypto in a fund wrapper, they are just one of many ways to get exposure. Investors can buy Bitcion and other cryptos directly on exchanges such as Coinbase Global (ticker: COIN).

Robinhood Markets

(HOOD) or Webul. Apps like Square (SQ) and PayPal (PYPL) also make buying crypto easy.

Closed-end funds like Grayscale and Bitwise offer direct exposure to cryptos without going through the futures markets. However, their fees are relatively high and they can be traded at a premium or discount to their underlying net asset value. Both are now trading in discounts.

The ProShares ETF will have an expense ratio of 0.95%. That would make it cheaper than the Grayscale Bitcoin Trust with 2% or the Bitwise Index Fund with an expense ratio of 2.5%.

However, investing in Bitcoin through futures contracts has some drawbacks. While the contracts aim to track the spot prices of Bitcoin, they add a cost to investors as the fund managers continually have to convert expiring contracts into new ones, resulting in “roll returns” that are negative or negative depending on nearby futures prices can be positive – and in the long term.

A complication of the strategy is called “contango”, a situation that arises when a futures contract with a longer term is traded at a higher price than a contract with a short term term. Contango can occur for technical reasons and occurs on the commodity markets if investors expect significantly higher prices in the future.

Funds that mainly hold short-term contracts can suffer losses due to what is known as a “negative roll return” when futures are in contango. ProShares plans to manage the roll returns and keep longer term contracts opportunistic.

Another complication for ETF investors is taxes. Futures contracts are generally taxed based on the market valuation of unrealized gains and losses. Even if a fund does not sell a contract, it may incur a year-end tax liability on unrealized gains. In addition, under IRS rules, a Fund’s taxable income that is distributed to shareholders would consist of 40% short-term capital gains or losses and 60% long-term capital gains.

ProShares says in its filing that investors should expect that a “significant portion” of all capital gains or losses will be short-term.

That’s not ideal for long-term investors. If the price of Bitcoin continued to rise, an investor who bought and held for more than a year would owe taxes on long-term capital gains from a sale. Long-term capital gains rates are generally lower than the short-term, which correspond to ordinary income rates.

Still, the first Bitcoin ETF could be popular with advisors looking to add crypto for clients. Inclusion of ETFs in client portfolios would allow them to charge management fees on the holdings, and ETFs are typically quite liquid so advisors can trade.

The ETF can also put pressure on funds managed by Grayscale, Bitwise, and other crypto fund managers to lower their fees in order to compete.

Write to Daren Fonda at [email protected]

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