August 2018 was a big month in the world of cryptocurrency trading as the US Securities and Exchange Commission (SEC) deliberated over two bitcoin exchange-traded funds (ETFs). Both the proposals were pitched by the same company and were based on future contracts previously approved by the Commodity Futures Trading Commission last year. In addition to all that, the SEC delayed their decision regarding a physical-backed bitcoin ETF, which was pitched by two other prominent companies.
If you don’t know what any of that means, we don’t blame you. In fact, we were so baffled by all these news articles talking about bitcoin ETFs we decided to unpack it not only for our readers but so we ourselves could understand what’s going on.
What Is A Bitcoin ETF?
Let’s answer the big question first: what even is an exchange traded fund? After sifting through many definitions, the best answer is that an ETF is a collection of numerous stocks or bonds in one fund. They are traded at most big-league exchanges including the New York Stock Exchange as well as online. For example, SAXO deal in over 3,000 exchange traded funds across more than 30 exchanges from around the world.
ETFs are so popular partly because they are far less risky than regular stocks as, when you buy a share of an ETF, you don’t actually own any shares of the asset – which, in the case of a bitcoin ETF, would be bitcoin. What you do own is a share of the fund and, so, your only interest should be how the fund is set up and where the money in said fund is going.
What Does Physical-Backed Mean & What Is A Future Contract?
If the SEC were to support a physical-backed bitcoin ETF, investors who bought shares could get involved in the cryptocurrency market without actually owning any bitcoin, thus avoiding the risks that come with their notoriously unstable value.
However, it seems that the SEC are more likely to support a futures-backed bitcoin ETFs. These take that degree of separation displayed in a physical-backed ETF even further by adding yet another layer known as a futures contract, which set a fixed price and expiration date. So, if you were to buy shares in a future-backed bitcoin ETF, you’re actually entering into the shares of a futures contract.
Why Futures-Backed Bitcoin ETFs?
With the extra layer and expiration date, it’s no surprise that the SEC is supporting futures-backed bitcoin ETFs, even though most smart investors tend to opt for physical-backed ETFs when possible. After all, cryptocurrency isn’t quite as mainstream as we’d like as of yet and, even more worryingly for investors, it carries a risk of hacking and theft.
So, crypto investors may just have to put up with rolling futures for the time being until cryptocurrencies become a little more solid. It’s complex and borderline philosophical at times but a futures-backed bitcoin ETF will hopefully help this become a reality sooner.