The Bitcoin futures exchange-traded fund (ETF) officially hit the New York Stock Exchange (NYSE). The ProShares Bitcoin Strategy ETF (NYSE: BITO) started trading on the exchange with increased participation from the Wall Street investors.
BITO reached $1 billion in trading volumes on the first day of trading. The ETF started trading on October 19, at $40 a share, and posted a rise of 4.85 per cent before closing on the first day with gains of 2.59 per cent, at $41.94. At the end of Day 1 of trading, the ETF surpassed the $1 billion in volumes and became the second most traded ETF on its first day. The number one position is held by the BlackRock U.S. Carbon Transition Readiness ETF with $1.16 billion in trading volumes on its first day.
What are Bitcoin Futures?
Bitcoins and Bitcoin futures are two different assets. In the futures contract, as in the case of BITO, an investor will agree to buy or sell the asset in the future at some specified price (similar to other stock futures contracts). Futures contracts here are derivatives of Bitcoins and are not directly backed by actual Bitcoins. Investors are not directly buying and selling the underlying asset (Bitcoin in this case).
How Does this ETF Work?
BITO lets investors buy into bitcoins through the futures contract (F&O segment) without actually buying it on a crypto exchange. The underlying driver behind the value of the shares in this fund is Bitcoins. This works like other futures contracts such as commodities’ ETFs or the gold futures ETFs where the investors do not buy physical gold or gold bars
How Does a Bitcoin ETF Impact the Price of Bitcoins?
Bitcoin price surged to a record high of more than $60,000 on the news and touched a high of $66,974, crossing the previous high of $64,889 set in April. Since this ETF is a future-based ETF that tracks futures contracts as opposed to the current price of the asset, the price of the ProShares ETF won’t be the same as the price of the Bitcoin. ProShares had to peg the future price to a listed exchange price and has picked the Chicago Mercantile Exchange (CME) as the benchmark. This may lead to a situation where the ProShares’ fund is likely to trade at a premium in a bull market and a discount in a bear market, which might make the ETF a good short-term investment than for an investor who is looking at long-term investments.
BITO will be trading at regular market hours like any other stock, unlike Bitcoin which can be bought, sold, or traded at any time. Investors can place orders for BITO during off-market hours, however, the orders will be executed during the market hours only unlike Bitcoins.
Bitcoin-linked ETF comes with protection in line with other conventional investments. Brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). This insurance covers accounts up to $500,000 in cash and securities if a brokerage is closed due to bankruptcy or other financial difficulties and if customers’ assets are missing from accounts.
Should You buy a Bitcoin-linked ETF?
Investors can invest in Bitcoin ETF through their regular brokerage account. This ETF allows access to many investors who were looking to invest in Bitcoins and other cryptos but did not know how to begin with. BITO is safe for investors to gain access to the crypto world as it is regulated by the SEC, making it the first regulated cryptocurrency investment vehicle in the U.S. to go mainstream. ETFs allow investors to diversify their portfolios without having to own the assets themselves.
Top Things to Know about Bitcoin ETF:
- Since the trading of Bitcoin ETF is done based on a predefined price, it does not rely on the final price of the Bitcoin on the day of trading.
- The final price of the cryptocurrency does not affect the Bitcoin ETF contract. Therefore, one of the two parties incurs a profit while the other incurs a loss. The margin of profits for one party can have high magnitudes.
- Bitcoin ETF makes it easier to buy and sell the commodity as it removes the cost and requirement of storing an asset. Investors need no more be concerned about security procedures associated with holding the crypto coin.
- Bitcoin ETF does not allow investors to hold and trade assets like Bitcoins on bigger trading platforms.
- Since Bitcoin ETF is an investment vehicle, it allows investors to short sell shares of the ETF if they expect a plunge in Bitcoin price in the future.