Bloomberg analysts Eric Balchunas and James Seyffart criticised the SEC’s preferred Bitcoin ETF option.
The SEC & @GaryGensler have lost the forest for the trees a bit when it comes to a U.S. Bitcoin ETF in our opinion. A futures based ETF has backwardation/contango and provides inefficient exposure to Bitcoin. Simply put, it’ll be an inferior product compared to a spot Bitcoin ETF https://t.co/t7aVcFoq2k
— James Seyffart (@JSeyff) August 17, 2021
“When it comes to the American Bitcoin ETF, SEC and Gary Gensler do not see the forest for the trees. A futures-based ETF has backwardation/contango and does not effectively correlate with Bitcoin. Put simply, compared with a spot Bitcoin ETF this is a low-quality product,” wrote Seyffart.
In early August, Gensler stated that the Investment Company Act of 1940 provides for more robust safeguards. He stressed that an ETF meeting regulator’s requirements could be approved.
After the SEC chairman’s comment, filings to launch exchange-traded funds under the provisions of this law were submitted by at least five firms: Valkyrie Investments, VanEck, Invesco, ProShares and Galaxy Digital. In Bloomberg analysts’ view, the SEC is likely to approve these filings.
Balchunas noted that owning shares in futures-based ETFs will cost investors an additional 5-10% per year. The costs are tied to rolling positions from one contract to another. In addition, the roll cost will be 1%, not much better than that of the Bitcoin Investment Trust (GBTC) from Grayscale Investments.
The cost of rolling positions can reach 45%. Over the past four years, the Horizons Bitcoin Front Month Rolling Futures Index, which tracks the returns of long Bitcoin futures, has lagged digital gold by 76 points.
while that is average roll cost, they could be much higher depending on period eg the last 12mo they were 45%! All told the Horizons Bitcoin Front Month Rolling Futures Index ER has lagged bitcoin by 76 points over past 4yrs. h/t @tomlombardi pic.twitter.com/rPziYPtv61
— Eric Balchunas (@EricBalchunas) August 17, 2021
“Monitoring [the cost of rolling positions] is almost as bad as monitoring the GBTC discount — both irritate, create confusion and costs for investors, and therefore, in our view, the risks of approving a physically backed Bitcoin ETF under the 1933 Act are worth it,” Balchunas concluded.
One commenter disagreed with the analysts’ view. He said that he has owned shares of the mutual fund Bitcoin Strategy ProFund for about three weeks, whose strategy involves acquiring Bitcoin futures on the CME. In his words, the structure more effectively tracks digital gold than GBTC.
Nothing has happened in this time period with futures. all it takes is a lot of volatility and that wont be the case. Not to mention the that fact that the impact of adding a couple products that track the futures could potentially make the roll costs even worse.
— James Seyffart (@JSeyff) August 17, 2021
In response, Balchunas said that nothing had happened with futures during this time. He said that, with greater market volatility, the Bitcoin Strategy ProFund’s performance would have been worse.
“Would you buy a Bitcoin ETF with a 10% fee? That’s why everything related to futures doesn’t fit into our coordinate system,” he added.
As Coinbase analysts have noted, swift approval of a Bitcoin ETF is inevitable.
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