Advisers beware: Bitcoin futures ETFs are a game-changer

Investing in Bitcoin went from exotic to routine last week when the first Bitcoin futures ETF started trading in the United States. The fact that clients now can put some money into Bitcoin via the familiar process of buying an exchange-traded fund, instead of going through the maneuvering required to hold it directly, makes investing in the cryptocurrency much more accessible to U.S. investors. 

That means advisers who have been steering clear of digital currencies need to study up and be prepared to talk their clients through the pros and cons of this asset class.

The cryptocurrency market is now worth $2.7 trillion, Bloomberg estimated last week, but many market participants aren’t yet believers. Stumbling blocks for the skeptics include crypto’s volatility, fears of fraud and outright disbelief that crypto assets have any intrinsic value. In that vein, JPMorgan Chase CEO Jamie Dimon recently described Bitcoin as “worthless.”

Up until now, there have been practical considerations that tended to deter many retail investors. Many brokerages wouldn’t make crypto purchases for their customers, which meant investors had to go to a crypto exchange or an online brokerage to acquire Bitcoin or other cryptos. People could set up their own digital wallet in which to store their cryptocurrency, but there were scary stories of people who lost crypto worth considerable sums because they couldn’t remember their password.  

Bitcoin-linked ETFs were a long time coming because the Securities and Exchange Commission has been among the skeptics, citing concerns that cryptocurrencies could be susceptible to fraud and manipulation. In fact, it’s been eight years since the first Bitcoin ETF proposal was filed with the SEC in 2013.

What the SEC is currently allowing is ETFs that invest in Bitcoin futures — which trade on the Chicago Mercantile Exchange and are regulated — rather than funds that invest directly in Bitcoin, which is not regulated. The ProShares Bitcoin Strategy ETF that began trading last Tuesday fits that profile.

But the use of Bitcoin futures raises other issues. While investing in Bitcoin has always entailed dealing with the cryptocurrency’s volatility, some observers say Bitcoin futures ETFs are likely to be even more volatile. Bitcoin futures ETFs could also underperform Bitcoin because the process of rolling forward into new contracts can be costly. 

Moreover, ProShares’ groundbreaking Bitcoin Strategy ETF looks pricey by ETF standards, at 95 basis points. Before the week had ended, though, the ProShares ETF was facing price competition, as VanEck said its Bitcoin futures ETF that’s about to start trading would cost 65 basis points.

The ProShares ETF attracted more than $1 billion in just its first two days of trading, which demonstrates the extent of the interest that’s out there in cryptocurrencies. Advisers should take note and be prepared to talk to their clients about investing in Bitcoin.