By itself, the futures market is no cause for alarm, but when the SEC prevents companies and individuals from buying BTC through regulated means, and only allows futures ETFs, we have a problem.
Let me explain.
Companies in the Bitcoin industry have been applying for a “spot Bitcoin ETF” for years, but to no avail. If this spot ETF were to be accepted, you could invest $100 in the ETF, which would then buy $100 in bitcoin held by the fund, giving you direct exposure to bitcoin. This will give pension funds, companies, asset managers, etc., easier access to bitcoin. But this is not yet available in the US; only a futures ETF is.
If it wasn’t already clear from the gold futures explanation above, this could pose a threat to bitcoin.
When someone buys a bitcoin futures ETF, they don’t own bitcoin. Instead, they own exposure to an ETF that holds bitcoin futures contracts. In short, this futures ETF buys contracts for the delivery of bitcoin at a future date. As that date approaches, it rolls the futures contract, sells the old contract and buys a new contract further out.
Don’t worry if you don’t fully understand how these ETFs work. The point here is not to understand the functionality, but rather the disadvantages.
It is important to understand two characteristics of futures ETFs over spot ETFs. In normal, functioning markets, if you want the right to buy something at a specified price in the future, you pay a premium over today’s price, and the longer you want to lock in a price, the more premium you pay. Each time the contract is rolled, more premium is paid. This is called rolling yield.
Even if bitcoin’s price remains the same throughout the life of the futures contract, the ETF will still decline in value because the ETF pays a premium to buy the right to buy bitcoin in the future. When that date approaches, it is time to sell the contract and buy a new one. This is known as rolling.
A by-product of this rolling is that any premium paid decreases as the contract expires (roll yield). This creates a decline in the value of the ETF and is incredibly unfavorable for long-term owners.
As a result, this decay encourages short-term trading, increased volatility and short selling of the ETF as a portfolio hedge, depressing its price.
Is it possible to see the effect of these futures ETFs in action? Below is a diagram from Willy Woo. The date of approval of the first futures ETF was in October 2021.
(Source )
Immediately prior to the launch of the first regulated futures ETF, we saw a significant increase in futures dominance. The futures market currently dictates 90% of bitcoin’s price (green line in the chart above).
In summary, just like gold from the 1930s to the 1970s, both individuals and companies have no regulated way to effectively purchase bitcoin for long-term storage. The only difference is in the age of censorship, instead of overtly suppressing what the government deems unfavorable or offensive to certain aspects of the economy, it can covertly suppress them. However, all hope should not be lost.
Many people and companies are tirelessly asking for the approval of a spot ETF, a way to get direct exposure to bitcoin. But this begs the question: Is bitcoin one of the last remaining bastions of the free market and self-sovereign individuals, or is it already under the thumb of the central planners?
This is a guest post by Seb Bunney. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
