Home > What is Crypto Futures Trading? Beginners Guide for 2024 > What is Crypto Futures Trading? Beginners Guide for 2024

Advertiser Disclosure

Crypto Futures ETF: Navigating the Crypto ETF Investments in 2024

Written by Charles

Written by:

Charles

Twi

Hey there Experience: None

Expert reviewed

Expert Reviewed

This article has been reviewed by crypto market experts at SCM to ensure all the content, sources, and claims adhere to the highest standards of accuracy and reliability.

Last Updated on June 6, 2024

As you explore the innovative world of cryptocurrencies, an increasingly popular investment avenue you may come across is the Crypto Futures ETF.

A Crypto Futures ETF is an exchange-traded fund that provides exposure to cryptocurrency futures contracts rather than holding the underlying digital assets directly.

These ETFs are designed to mimic the performance of the cryptocurrencies they track by investing in futures contracts and agreements to buy or sell the assets at predetermined prices on a specified date.

The importance of Crypto Futures ETFs in the financial landscape cannot be understated.

With the introduction of Bitcoin futures ETFs in 2021 and the subsequent approval of the first U.S. spot Bitcoin ETFs in January 2024, these financial vehicles have provided a regulated and more secure entry point for both retail and institutional investors looking to gain exposure to cryptocurrencies.

They offer a way for investors to speculate on the price movements of digital assets without the complexities and risks associated with direct ownership, like securing private keys or dealing with cryptocurrency exchanges.

Historical Context

Evolution of Traditional ETFs: Exchange-traded funds (ETFs) have revolutionized how you invest in various asset classes. Traditionally, ETFs offered a way to invest in a basket of securities, like stocks or bonds, that track an index. This methodology provided you with diversification, lower costs, and the flexibility of stock trading.

Crypto’s Entry into ETFs: Due to its digital nature and growing market demand, Cryptocurrency inevitably found its way into the world of ETFs. Initially, regulatory hurdles kept pure crypto ETFs at bay, but the market’s evolution led to innovative investment products like crypto futures ETFs.

  • The Significance of the First Crypto Futures ETF:
    • Date: October 2021
    • Event: Launch of the first Bitcoin futures ETF
    • Industry Impact: Validation and increased investor accessibility

Your Experience with the Introduction of Crypto Futures ETFs:
Your investing landscape transformed with the approval and launch of the first Bitcoin futures ETF in 2021.

This event was a significant milestone in the crypto industry, bridging the gap between traditional financial markets and digital assets.

With the entrance of Ethereum (ETH) futures ETFs and the approval of a spot Bitcoin ETF in 2024, you witnessed further mainstream acceptance and growth in your investment options.

Each development marked an evolution in the financial products you access, reflecting both the innovation within the cryptocurrency sector and the financial industry’s adaptability.

How Crypto Futures ETFs Work

A cryptocurrency futures exchange-traded fund (ETF) indirectly exposes digital currencies through futures contracts.

Fundamentally, crypto futures are agreements to buy or sell the underlying Cryptocurrency at a predetermined price on a specific date.

Crypto Futures ETF Structure:

  • Holdings: Instead of holding cryptocurrencies, these ETFs own futures contracts.
  • Market Trading: You can trade shares of the ETF on the stock market like any other ETF.
  • Asset Management: The ETF is managed by professionals who navigate the buying and selling of futures contracts.

Differences from Spot ETFs:

  • Direct vs Indirect Exposure: Spot ETFs aim to hold actual cryptocurrencies, offering direct exposure to the price movements. In contrast, futures ETFs offer indirect exposure through contracts speculating on future prices.
  • Influence on Prices: The buying and selling actions within a spot ETF could directly influence the actual market price of the Cryptocurrency. In contrast, futures ETFs speculate on price, with less direct impact on the immediate market pricing.

Critical Benefits for Investors:

  • Regulation: Futures ETFs often operate under more regulated environments as they trade on traditional exchanges.
  • Accessibility: You can invest without dealing with the complexities of owning and securing cryptocurrencies.

When you consider investing in a crypto futures ETF, remember that the risks often reflect the volatile nature of the underlying assets and the complexities of the futures market. As with any investment, perform due diligence and consider the fund’s structure and management strategies.

The Current State of Crypto Futures ETFs

As of the first quarter of 2024, the landscape for crypto futures ETFs is characterized by a blend of growing investor interest and cautious regulatory oversight.

Your understanding of these funds is essential as they represent a bridge between traditional investment mechanisms and the evolving world of Cryptocurrency.

Market Reception
You’ll find that crypto futures ETFs have witnessed variable trading volumes, reflecting the volatility and speculative nature of the underlying assets. However, the positive reception from traders suggests a consistent demand for these innovative investment products.

Performance Analysis

  • Volatility: The performance of existing ETFs, typically tied to Bitcoin or Ethereum futures, often mirrors the fluctuations in cryptocurrency prices.
  • Liquidity: The trading volume can be substantial on days of high market activity, though it can also taper during periods of consolidation.

Regulatory Impact

  • Approvals: Interventions by entities like the SEC have shaped the market with a cautious approach to approvals.
  • Guidelines: Regulations are crafted to protect investors while allowing market innovation.

Key Components

  • Issuers: Companies like ProShares have successfully brought products to market.
  • Regulators: Agencies continue to scrutinize proposals rigorously.
  • Investors: Institutional and retail participants both engage with these ETFs.

Example ETF
For example, the ProShares Bitcoin Strategy ETF has paved the way for your understanding of the structure and operation of crypto futures ETFs.

The overall environment for future crypto ETFs is one of cautious advancement. It reflects a growing alignment between investor appetite for crypto exposure and regulatory frameworks safeguarding market integrity.

What Is a Bitcoin Futures ETF?

Bitcoin Futures ETF

A Bitcoin Futures ETF is an exchange-traded fund that tracks the price of Bitcoin futures contracts rather than the spot price.

These futures contracts are agreements to buy or sell digital currency at a predetermined price on a specific date. They are traded on regulated exchanges like the Chicago Mercantile Exchange.

The U.S. Securities and Exchange Commission (SEC) approved the first Bitcoin futures ETFs in October 2021. This decision marked a significant milestone, allowing investors to gain exposure to Bitcoin’s price movements without directly purchasing or storing the Cryptocurrency.

Distinct Characteristics of Bitcoin Futures ETFs

  • Futures-Based: Bitcoin Futures ETFs do not hold Bitcoin directly. Instead, they invest in futures contracts, providing an investment exposure to the price of Bitcoin.
  • Regulatory Oversight: These ETFs operate under regulatory oversight, offering security and legitimacy.
  • Accessibility: They make investing in Bitcoin’s potential easier for individuals who prefer traditional investment products.

Bitcoin Spot vs. Futures ETFs

  • Spot ETFs: These aim to track the current market price of Bitcoin and involve holding the actual cryptocurrency.
  • Futures ETFs: In contrast, these track futures contracts, not the direct price of Bitcoin, removing the need to hold the Cryptocurrency.

Top 5 Popular Bitcoin Futures ETFs (as of April 2024)

  1. ProShares Bitcoin Strategy ETF
  2. Valkyrie Bitcoin Strategy ETF
  3. VanEck Bitcoin Strategy ETF
  4. Galaxy Bitcoin Futures ETF
  5. WisdomTree Bitcoin Strategy ETF

Your choice between a Spot ETF and a Futures ETF may depend on your investment strategy, risk tolerance, and preference regarding direct exposure to Bitcoin versus exposure via the futures market.

Advantages of Crypto Futures ETFs

  • Diversification and Risk Management:

When you invest in a crypto futures ETF, you’re getting exposure to cryptocurrency markets without direct ownership of digital assets.

This can be a prudent way to diversify your portfolio, arguably mitigating risk compared to holding cryptocurrencies directly.

Futures allow for hedging against market volatility, which can be significant in crypto.

  • Accessibility for Traditional Investors:

If you’re accustomed to traditional investment vehicles, a crypto futures ETF provides a familiar entry point into cryptocurrencies.

Often available through conventional brokerage accounts, they allow you to invest in digital assets without managing wallets or navigating exchanges.

  • Predictability and Transparency of Futures Contracts:

Crypto futures ETFs are based on contracts with set expiry dates and prices, offering a degree of predictability.

The values of these ETFs reflect the price movements of futures contracts rather than the immediate fluctuations of the cryptocurrency market, potentially providing a clearer picture of longer-term price trends.

This structure, regulated by financial authorities, adds a layer of transparency not always present in the underlying crypto markets.

Challenges and Criticisms

  • Debate Over Spot vs. Futures ETFs

When you consider investing in a Crypto Futures ETF, you’re embarking on a different path than a spot crypto investment.

Unlike Spot ETFs that hold the underlying Cryptocurrency, Futures ETFs contain contracts to buy or sell the asset at a future date, which can introduce a divergence in performance from the spot price due to a phenomenon known as contango or backwardation.

  • Roll Costs and Tracking Errors

One of the challenges you may encounter with a Crypto Futures ETF is the roll cost.

You indirectly pay this price when the ETF transitions, or ‘rolls,’ from expiring contracts to newer ones. Roll costs can drag on performance, adding a layer of indirect expense to your investment.

Tracking errors are another concern.

Tracking error signifies the difference between the performance of the ETF and the underlying asset it aims to emulate.

In the case of Crypto Futures ETFs, this error may become more pronounced over time, potentially leading to significant underperformance relative to the actual movements of the underlying cryptocurrency prices.

  • Regulatory Hurdles

Regulation is a persistent concern in cryptocurrency, and Crypto Futures ETFs are no exception.

Regulators scrutinize these investment vehicles to ensure a high standard of investor protection. For you, as an investor, this could mean changes in the regulatory environment might impact the accessibility, performance, and overall viability of these funds.

While Crypto Futures ETFs offer a regulated path to gain exposure to cryptocurrency markets, you must weigh these challenges and criticisms carefully to make informed investment decisions.

Which CRYPTO ETF Will Get Approved Next?

The crypto community is buzzing with anticipation for the subsequent significant ETF approval. The spotlight is currently on Ethereum, with expectations set for a potential approval of an Ethereum ETF by May 23, 2024.

This date marks the final deadline for the first wave of applications, and given the SEC’s previous move to approve Bitcoin ETFs on their final deadline, hopes are high for Ethereum to follow suit.

While there’s no guarantee, the SEC’s stance on Ethereum in other filings and a regulated ETH futures contract by the Chicago Mercantile Exchange (CME) add to the optimism. Moreover, the upcoming Ethereum upgrades, focusing on scalability and security, could further bolster the case for an Ethereum ETF.

Investors and enthusiasts are closely monitoring the developments, ready to see if Ethereum will become the next digital asset to be embraced by traditional finance through an ETF.

Frequently Asked Questions

This section addresses common inquiries regarding Bitcoin Futures ETFs, providing you with essential insights into how to invest, the potential risks and benefits, significant market players, differences from traditional ETFs, and specific performance metrics.

How can one invest in a Bitcoin Futures ETF?

You can invest in a Bitcoin Futures ETF by purchasing shares through a brokerage account, similar to buying stocks or other ETFs. Ensure the ETF is available on your trading platform, and consider the associated fees and liquidity.

What are the risks and benefits associated with Bitcoin Futures ETFs?

The risks involve the highly volatile nature of Bitcoin, regulatory changes, and the complexity of the futures market. Benefits include exposure to Bitcoin’s potential price movements without directly holding the Cryptocurrency and the convenience of trading through traditional investment platforms.

Which ETF is currently the largest in terms of future investments in Bitcoin?

As of the knowledge cutoff in early 2023, the ProShares Bitcoin Strategy ETF (BITO) was one of the largest ETFs investing in Bitcoin futures. Checking the latest market data is crucial as the landscape can shift rapidly.

How does a BTC Futures ETF differ from a regular ETF?

A BTC Futures ETF differs from a regular ETF in that it does not hold the underlying asset, i.e., Bitcoin. Instead, it invests in future contracts for Bitcoin, providing exposure to Bitcoin’s price movements without owning the cryptocurrency.

Does Vanguard offer any Bitcoin Futures ETFs?

Vanguard does not currently offer a Bitcoin Futures ETF. However, they provide access to various ETFs and mutual funds, some of which may have indirect exposure to cryptocurrencies through blockchain-related companies.

What are the performance indicators for the ProShares Bitcoin Strategy ETF?

Key performance indicators for the ProShares Bitcoin Strategy ETF (BITO) include its NAV (Net Asset Value), trading volume, and the performance of the Bitcoin futures contracts it holds. The ETF’s prospectus and market analyses provide detailed information on its performance and associated risks.

Conclusion & Example of a Functioning Crypto Futures ETF

Exchange-traded funds (ETFs) based on future contracts for cryptocurrency have emerged as a significant financial tool.

These ETFs allow you to access the cryptocurrency market indirectly through investment in futures contracts.

As opposed to spot ETFs that provide direct ownership of the underlying Cryptocurrency, crypto futures ETFs offer exposure to price movements without the need to hold the actual digital assets.

Key Benefits:

  • Liquidity: You can buy and sell shares quickly during trading hours, providing liquidity like stock trading.
  • Regulated Framework: Crypto futures ETFs operate within a structured and regulated investment environment, which can offer security and oversight.

Considerations:

  • Market Volatility: Cryptocurrency markets can be exceptionally volatile; your investments in crypto futures ETFs are subject to this volatility.
  • Contango and Backwardation: When the futures market is in contango, futures prices are higher than the spot price. Conversely, backwardation occurs when futures prices are lower. These situations can affect the performance of a futures ETF.

An illustrative example: The first Bitcoin futures ETF, launched in October 2021, allowed investors to engage with Bitcoin’s price movements.

By April 2024, it became evident that the presence of a regulated investment vehicle such as a Bitcoin futures ETF could integrate the cryptocurrency market with traditional financial markets, thereby expanding investors’ options.

When considering a crypto futures ETF, assess your risk tolerance and investment objectives.

Regular monitoring of market trends and understanding the unique characteristics of these financial products will inform your investment decisions and assist in managing risk.

About the Authors

Hey there Experience: None