Why Bitcoin futures ETFs may not be the ‘best proxy’ for spot market movements
“Bitcoin futures instruments are not always the best proxy for what is happening on the spot market given the unique idiosyncrasies in the futures market prices can be much more volatile.
The crypto community has long awaited an ETF backed by Bitcoin or other cryptocurrencies. Even as countries like Brazil, Canada, and Dubai have approved ETFs for not only Bitcoin but even Ethereum, the American SEC has long opposed the same.
Some respite was expected when the crypto-educated Gary Gensler was appointed as the new chief of the commission, but he too has echoed the sentiments of past leadership. However, speaking at a summit last month, the commissioner had hinted at the possible approval of a Bitcoin ETF in the near future, albeit one backed by BTC futures contracts.
This was immediately followed by several firms like Invesco filing fresh applications for BTC Futures backed ETFs. Although none have received authorization as yet, Bloomberg’s senior ETF strategist Eric Balchunas recently suggested that VanEck and ProShares withdrawing their Ether ETF applications may have paved a path for a BTC ETF approval by the end of October this year.
Not everyone has been in support of the SEC embracing the futures ETF instead. In a recent video, Analyst Coin Bureau (guy.eth) listed out reasons for “why future ETFs suck.” While spot-based ETFs require little management due to them being backed by the coins stored in the fund, futures contracts have to be invested in by the fund issuer for them to replicate the price of Bitcoin. Apart from the increase in management costs, he explained that the problem with that is,
“Bitcoin futures instruments are not always the best proxy for what is happening on the spot market given the unique idiosyncrasies in the futures market prices can be much more volatile.”
Moreover, CME futures markets are a lot less liquid than the spot market which can cause prices to diverge “based on strong supply or demand dynamics in the futures market dynamics which may not be playing out in the spot market.” Additionally, futures instruments have a delivery date, causing them to be constantly rolled forward into new futures contracts expiring at a later date, which also adds to management costs.
Lastly, while Bitcoin spot markets operate 24/7, whereas the futures instruments only trade during market hours. This could prove to be catastrophic in the event that prices move drastically during off-market hours causing market gaps to form, ultimately resulting in sufficient losses due to volatility. Guy further added,
“There could be a situation where futures trading has been halted by the CME but the bitcoin spot market remains open… this could create even more panic and lead to a situation where you have a boatload of panic sell orders the moment that the futures markets open up again.”
So why then does the SEC seem to support these investment instruments? Increased oversight has been cited as one of the reasons, as the SEC believes Bitcoin spot markets are open for manipulation. On the other hand, CME futures are federally regulated. However, the analyst noted that,
“Futures are derivatives instruments that react to price movements in the underlying asset. If there are whales that want to manipulate the spot market then they are also going to manipulate the futures market.”
He also added that money can be made structuring these contracts by institutions preferred by the SEC, saying,
“Wall Street, the banks, market makers and financial engineers constantly feed at the trough of friendly regulation… these funds cost a lot to structure and maintain they constantly have to incur trading fees in order to roll them forward and maintain exposure.”