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Bitcoin Futures ETFs: Explained

Read 5 min
A bust of a person covered in currency
 — Exchange-traded funds, or ETFs, are a type of fund that owns the underlying assets of the stock market, such as companies and dividends, and trades.

— A Bitcoin Futures ETF allows investors to indirectly invest in the growth of bitcoin through traditional stock exchanges like the NYSE.

— Crypto ETFs make it much easier for people to invest in cryptocurrencies without onboarding to new tools or complying with unknown regulations.

If you keep hearing about Bitcoin ETFs, but aren’t sure what it means, keep reading.

The release of the Bitcoin Futures ETF on the New York Stock Exchange was billed as a watershed moment for Bitcoin and saw a record-breaking first day of trading as it launched in 2021. But what’s the significance of these ETFs? And how do they compare to the Spot Bitcoin ETFs planned for approval in Jan 2024?

Let’s dive in:

What is a Bitcoin Futures ETF?

An ETF – or Exchange Traded Fund – is a financial instrument designed to be traded on the stock exchange. It’s a fund that owns an underlying asset. This is useful because it allows investors to get involved with a particular market (in this case Bitcoin) without having to buy the asset directly. 

As you might guess then, part of the appeal of the Bitcoin ETF is that it allows institutional investors who don’t fancy the hassle of buying and storing their own Bitcoin to get in on the action.

However, let’s start by clarifying one key point: the Bitcoin Futures ETF does not allow you to invest directly in Bitcoin. Instead, you invest in Bitcoin futures contracts.

Futures ETFs: A Bet on a Bet

To explain, there are two types of ETFs. Futures, or spot ETFs. Spot ETFs allow you to bet on the current price of Bitcoin. However, the type of ETF we’re talking about is a Futures ETF, and that’s a completely different beast. Futures ETFs do not track the underlying commodity directly. Instead, they are backed by futures contracts relating to that commodity.

To fully understand, let’s use an example. Imagine John agrees to sell Rachel a barrel of oil in six months for 1000 USD. Rachel thinks the barrel will be trading for more at that point, so she thinks it’s a good deal. Meanwhile, John thinks the oil market is just about to crash, so he believes he has the best deal instead.

The point is that both parties are basing their price on the future of the market, and how they feel about it. So a futures ETF doesn’t really track its underlying asset. More accurately, it tracks the market sentiment about that asset, which might tell a completely different story.

In short, a Futures ETF lets you bet on the future price of Bitcoin on the traditional stock market.

Why are Bitcoin Futures ETFs significant?

If you’re already down the crypto rabbit hole, you might be wondering why the Bitcoin Futures ETF matter. As the OG of crypto, Bitcoin’s number one premise was to provide an alternative to centralized finance. But the stock market is centralized, so what’s going on?

Simply, a futures ETF allows a completely new demographic to have their first interaction with crypto.

You know it, I know it – crypto is a tricky asset to store and secure. For many investors, that was enough to deter them from buying in. By allowing people to get involved from within a familiar ecosystem, without worrying about hacks, blockchains, or private keys (what are those again?), a whole new audience could be reached.

After a long list of ETFs have been rejected by the Securities and Exchange Commission, this was a real step forward in accepting cryptocurrencies for the United States government. Legitimacy has been a key theme in the story of Bitcoin. Many, many people have written it off as a scam, a bubble, or simply too volatile to be considered viable. Yet the admission of a Bitcoin-related product on the world’s premier exchange suggests crypto has reached a sort of critical mass that cannot be ignored. Even by the central structures it was designed to challenge.

Should I invest in a Bitcoin Futures ETF?

If crypto’s caught your eye but concerns over self-custody have come between you and your first foray into the world of blockchain; this fund might seem a safe entry point. Giving some exposure to the buzzing crypto ecosystem without the worry of learning its intricacies. However, it also takes some knowledge. Futures contracts are all about betting on the future price, and you’ll find that’s much easier with some prior knowledge.

If you want to dive into the web3 ecosystem, perhaps just buying some Bitcoin might suit you better. So if you’re thinking of taking your first steps into crypto, and you’re trying to figure out your approach, often learning about the ecosystem is the best move. After all, knowledge is power.

Bitcoin Futures Vs Spot ETFs: What’s the Difference?

With the success of the Bitcoin Futures ETF, you may now be wondering what the deal is with Spot ETFs. Well, while there is already a Bitcoin Spot ETF running in Canada, the US is yet to have its own. That said, there is a list of Bitcoin Spot ETFs awaiting approval on Jan 10th, 2024, by the SEC. These ETFs are highly anticipated, offering non-crypto natives the option to get in on the current Bitcoin market. Instead of having to rely on making bets on the future of the market, the Bitcoin Spot ETF will allow all sorts of investors to profit from price action immediately, and without any knowledge about the technology behind it. With the success of the Bitcoin Futures ETF previously, likely, Spot ETFs will also bring new investors and extra liquidity.

In short, Bitcoin ETFs help Bitcoin, and crypto as a whole, reach wider audiences. And although they may offer a more centralized way of investing than most crypto-natives prefer, they undoubtedly get us one step closer to mass adoption.

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