Will an Inverse Bitcoin ETF Trade in 2018?
With Bitcoin all over the media, it’s no surprise retail interest is skyrocketing. Investors from the U.S. to South Korea are clamoring for all types of crypto-currencies including bitcoin, ethereum, fastcoin and litecoin. But investing in them isn’t easy so many are waiting for a bitcoin ETF to emerge. Unlike many finance blogs, our site is looking at the other side of the bitcoin mania.
Many view crypto-currencies as the future of money. An alternative to paper fiat currency, the theory goes that these digital currencies should retain their value or purchasing power since they cannot be manipulated by central banks. Bitcoin is purported to have a fixed amount, 21 million coins, in ‘circulation’. Further, these currencies are unlikely to be regulated by government agencies and may even be untraceable to an owner.
With the Wild West days hopefully behind them (remember when crypto-exchanges would get hacked and implode a la Mt. Gox in Japan) today’s digital currencies are garnering some real attention. And while mishaps still happens to a lesser degree, investors are able to look past such nuisances.
So, Where’s the Bitcoin ETF?
No bitcoin inverse ETFs currently trade, but it shouldn’t be long before one is introduced. ProShares has filed two bitcoin ETFs with the Securities and Exchange Commission- one intended to go long bitcoin, the ProShares Bitcoin ETF and one to go ‘short’ bitcoin, the ProShares Short Bitcoin ETF.
They aim to deliver the actual or inverse return, respectively, of the lead month bitcoin futures (traded on either the CBOE or CME) for a specified period of time.
Additionally, there are 16 bitcoin ETFs or associated investment products have been filed with the S.E.C. According to a Bloomberg report:
- 2 Coin-Based Investments (Winklevoss Bitcoin Trust)
- 7 Futures-based ETFs (Rex Bitcoin Strategy)
- 2 Inverse Bitcoin ETFs (including ProShares Short Bitcoin ETF)
- 5 Blockchain technology stocks ETF (Amplify Blockchain Leaders ETF)
The delay in launching a bitcoin ETF can be attributed to the delay in a futures market for bitcoin. But in December, Bitcoin futures finally started trading on the CBOE and, more recently, on the CME. These futures markets have legitimized the trading of digital currency, which is only likely to grow.
Even though the SEC won’t be regulating the bitcoin futures (the CFTC will) they are taking a very close look at bitcoin ETFs and have not given the green light yet. In fact, they and FINRA have issued warnings on them.
One reason is that the futures contracts can’t be settled for cash, only bitcoin. Another has to do with liquidity and clearing issues. But passing the hurdle of a futures market should go a long way towards adoption of new bitcoin ETFs. We expect them to be approved in 2018.
If you can’t wait for approval, there are currently two bitcoin ETNs (exchange traded notes) that trade in Sweden and track a bitcoin index there, ‘CoinXBT’ and ‘CoinXBE’. Marc Cuban has reportedly invested in bitcoin in this manner for the liquidity it provides in this nascent market’s early stages.
An Inverse Bitcoin ETF for Skeptics
Bitcoin presents a conundrum for us. On the one hand, it represents an alternative to fiat manipulation we’ve railed about on this site for years. On the other hand, there must be some sense of valuation. Has bitcoin gone too far, too fast? Well, it has gone from pennies on the dollar (circa 2010) to a recent trade above $20,000 on one exchange. We are definitely wary of anything that has experienced price appreciation outpacing the Dutch Tulip Mania (which bitcoin has).
Remember, the internet didn’t die in the year 2000, but most internet stocks did. Even the good ones, (Cisco, Microsoft, Amazon, etc.) lost around 80% of their value before they rebounded. So we will quote the anonymous Chinese philosopher who remarked, ‘No tree grows to the sky…”.
In the meantime, check out our list of inverse etfs for a new section dedicated to short bitcoin and other crypto products. Of course, when the first bitcoin inverse ETF is announced, we will let you know.
Regardless, you’ll need to consult your financial advisor and read the prospectus for a list of inverse etf risks. Inverse ETFs are often run via a derivative called a swap agreement with a counterparty, so an inverse bitcoin ETF is technically a derivative of a derivative (the bitcoin futures) of a digital currency which is not redeemable in dollars.
There is no telling how much margin or collateral will need to be posted in a bitcoin ETF, probably a substantial amount. And there’s no telling how the counterparty or custodian will set their own rules to minimize their own risks. Whichever side you choose, long or short, a bitcoin etf is likely to be one of the most followed investments in the market today.
http://www.chicagotribune.com/business/ct-biz-bitcoin-futures-cme-group-20171218-story.html
