The launch of ETFs based on Bitcoin Futures has thrilled the markets, as evidenced by the record volumes and the historical high of the Bitcoin price. But as the days go by, critical views seem to increase.
Summary
The risk of futures contracts
Bloomberg was among the first to notice how ProShares, i.e. the first company to issue an ETF based on Bitcoin Futures, is moving towards a limit: that of the maximum number of Futures to hold.
In fact, BITO (the ticker of the ProShares ETF) since the very first days of its debut, has come close to the maximum allowed by the CME of futures contracts held by a single entity: about 1,900 out of a maximum of 2,000. At the moment ProShares has “solved” this by buying November futures as well, while the CME has doubled the cap from 2,000 to 4,000 contracts, starting in November.
Probably this concentration of futures was due to the fact that for a few days ProShares was the only one to issue an ETF on Bitcoin Futures. Now the Valkyrie and VanEck ETFs have also debuted on the markets, which should ease the pressure.
In fact, Bloomberg also questions the ETF’s ability to actually track Bitcoin’s performance, as the fund is tied precisely to futures contracts and not just Bitcoin.
The contradiction of the Bitcoin Futures ETF boom
Many influential newspapers, including the Wall Street Journal and the Financial Times, note that this boom in Bitcoin ETFs is contradictory.
The institutional investors who rushed to buy the ProShares ETF did so because they wanted to invest in Bitcoin but preferred a traditional instrument.
Getting to the heart of the matter: ETFs are purchased in the traditional, regulated stock market and are based on Futures purchased at the CME, which is also a regulated market. In addition, they spare investors the need to set up their own wallet and keep a password or seed phrase with the risk of losing it and thus losing their investment.
Do these considerations make sense? On the regulatory side, they probably do: Bitcoin today lives in an unregulated market, where it is easy to run into scams or accidents that can cost a fortune. In addition, transactions are irreversible: people who have taken their capital after converting it to BTC, for whatever reason, are unlikely to get it back also because of the decentralized nature of Bitcoin. Being in a regulated market makes the investor feel protected.
However, when it comes to owning BTC, other arguments arise. Why buy a Bitcoin ETF and not Bitcoin for fear of losing seed phrases, passwords and whatnot, when the derivative product is also based on custody that is entrusted to someone else?
What if that “someone else” runs away one day with the loot? This is a field of hypothetical reasoning which opens up other reflections.
ETFs versus the nature of Bitcoin
The fact is that those who buy Bitcoin ETFs rather than Bitcoin do so out of a concern for credibility: they trust ETFs more than BTC itself. However, Bitcoin was created precisely to counter the authority of the banks, which were no longer credible after the crises they had triggered, including that of 2008, the year the Bitcoin whitepaper was born.
And then there is the question of integration into the financial system. With ETFs Bitcoin enters the world of traditional finance, the world it was supposed to disrupt.
It’s a bit like finance has tamed Bitcoin. This is not necessarily a bad thing, if it can lead to the growth of Bitcoin adoption. But it would be curious to know what Satoshi Nakamoto would think of this turn of events.
