Finding Bright Spots in the Bitcoin Bear Market

Despite a tumultuous year for cryptocurrencies and their trading platforms, there remains one bright spot in the space: bitcoin futures ETFs.

The funds recorded record trading volume in 2022, while continuing to operate smoothly on a regulated market. the ProShares Bitcoin ETF Strategy (BITO) reached a trading record on November 8, beating its previous record by 64%. and volume for ProShares Bitcoin Short ETF (BITI) also on November 8, it shot up 366% more than any other day since its launch, according to ProShares.

BITO remains the largest of the crypto funds, while BITI offers a reverse strategy for investors betting against bitcoin. These types of ETF structures, along with futures, have performed well amid a backdrop of crypto volatility.

“That’s not surprising because you think about the time of Covid and high volatility,” said Deborah Fuhr, founder and managing partner of ETFGI. Bob Pisani on CNBC’s”edge ETFs” on Monday. “People thought fixed income ETFs weren’t going to work, and they did. So the ETF wrapper works well.”

ETFs operate as an ecosystem, Fuhr said, like highly regulated funds that trade on the CME exchange. In most cases, investors are not trading the underlying securities, but only the ETF as a product.

SEC Chairman Gary Gensler has consistently pushed back against ongoing pushes for a spot bitcoin ETF, primarily based on the unregulated aspects of the exchanges and ongoing charges of fraud and corruption.

“The whole exchange system for bitcoin and cryptocurrencies is not mature yet, even if you don’t own any FTX,” Simeon Hyman, global investment strategist at ProShares, said in the same segment, referring to the exchange. catastrophic collapse from a $32 billion company to face an avalanche of criminal investigations.

Hyman said the lack of segregation between bitcoin exchanges underscores the need for maturation. While the futures market, he said, has matured rapidly.

But because the futures market doesn’t track bitcoin spot and ETFs, the funds carry the possibility of additional fees, such as rollover costs, when the fund swaps expiring futures for new ones.

“BITO is not a leveraged strategy,” Hyman said. “You have enough cash, so the return should be about bitcoin spot. So that roll cost is offset by the cash gains. And that’s what we’ve been seeing this year.”

Despite the advantages of the strategy, BITO has decreased by approximately 65% ​​this year. Compared, bitcoins has fallen 64% in 2022, while ethereal It’s down 65%.

But the direction of cryptocurrencies and the ETFs that track them is at a crossroads, with fallout from the FTX debacle weighing heavily on decentralized finance platforms and blockchain technology.

“We have to differentiate crypto products from blockchain and smart contracts,” Fuhr said. “Because we’re seeing it used for a lot of things, including private equity tokenization and enabling retail access.”

Fuhr explained that within the framework of a project in Europe, ETF creations/redemptions are done through the ETP link using smart contracts. In Canada, where ETFs have operated for 33 years, the funds operate under a set of rules and regulations like the Bill ’40 funds in the US.

As of the end of October, there were 162 products listed globally with $7.5 billion in net receipts, according to ETFGI.

“Regarding bitcoin and cryptocurrencies, the problem is not so much that we have disclosure rules,” Hyman said. “The question is, what stress would that put on the exchanges if you were invested in the bitcoin exchange itself?”

Hyman said the asset mix is ​​a concern for investors, leading them to turn to “cold wallets” where cryptocurrency tokens are kept offline.

“The ETF corrects a lot of that,” he said. “Particularly when it comes to belts and suspenders with the futures market.”

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