Arbitrage and gambling are at the heart of the financial business. The new bitcoin ETF represents the Platonic ideal of both. Thirdly, they wouldn’t exist if the financial industry hadn’t induced these distortions in the first place.
The idea of a bitcoin exchange-traded fund (ETF) appears bizarre on its face. As a cryptocurrency, Bitcoin is simple to purchase and hold for those who wish to speculate on its future worth. Simply download the programme, choose a strong password, register with a crypto broker, and send the bitcoin to your blockchain wallet to get started. It couldn’t be any easier than that! Instead of paying an annual fee of 0.95 percent and incurring substantial futures fees to obtain a currency that closely tracks the value of a dollar. You would simply keep dollars if you desired a traditional currency.
Many people nonetheless found it appealing, as demonstrated by the first ETF launched. The ProShares Bitcoin Strategy ETF had the most significant amount of money invested and the second-highest volume of trading on its first day. It has accumulated 1.2 billion dollars in value in the first week of operation. Many of these funds are likely to be a new form of gambling, as traders stake their money on the fact that others will want it. However, the underlying demand is expected to come from people who can’t or won’t acquire bitcoin directly. Therefore they prefer to use a stock market-listed and SEC-approved structure.
When you question why they prefer it, they say it’s because of the high costs and ease of purchasing straight from the manufacturer. It ultimately comes down to trust, which is strange considering bitcoin was created to address a trust issue.
ProShares CEO Michael Sapir compares the regulated futures market to the “Wild West” described by the SEC “of trading in cryptographic coins. Many exchanges “have a degree of manipulation incorporated in them,” he adds, “Purchasing bitcoin directly may come with additional expenses and hazards.
There are unquestionably dangers involved. Losing your wallet password means you’ve lost your bitcoin, even if it was stored on the blockchain. You’ll lose all of your bitcoin if your password is compromised. Giving someone your bitcoin gives them control of your bitcoin. It’s manageable even if it’s worrisome for an individual; choose a unique secure password that you can remember and keep off the internet so that it cannot be hacked, and don’t tell anyone.
Nevertheless, in the financial system, the vast majority of our assets are given over to other parties and are managed by organisations such as insurance companies and pensions funds and mutual funds and endowments. Investors and advisors at these institutions are struggling with a significant lack of trust. When it comes to the bitcoin password, who can people put their faith in? Someone must have custody of it at some point, and whoever it ends up in the hands of can become highly wealthy quickly if they take it with them. This is not something you can accomplish with stocks, bonds, or real estate. Since crypto company owners often disappear and all the bitcoin their investors believed they were looking after, managing the trust issue can be difficult.
They avoid the trust issue by investing in Bitcoin futures instead of actual Bitcoin, adding a new layer of risk and opportunity. It is like betting on the Kentucky Derby for bitcoin; Bitcoin futures are just sided wagers on the price of Bitcoin that are settled in dollars. The final settlement and arbitragers who profit from the sale of overpriced bitcoin futures and the purchase of actual bitcoin connect them to the price of bitcoin. (The reverse is also possible, but the futures price is typically more significant.)
By investing in bitcoin futures instead of actual bitcoin, the new ETFs circumvent the trust issue while also creating a new element of gambling and arbitrage. It is like betting on the Kentucky Derby for bitcoin; Bitcoin futures are just sided wagers on the price of bitcoin settled in dollars. Arbitragers that make money by selling expensive bitcoin futures and buying actual bitcoin have a connection to the cost of bitcoin thanks to the final settlement and the arbitragers. (The reverse is also possible, but the futures price is typically greater.)
Like in the case of other ETFs, Arbitragers keep the ETF’s price in line with the value of the bitcoin futures it owns.
All of these arbitrage tiers are expensive, and they are not free. The ETF charges an annual fee of 0.95 percent. But futures are more costly than bitcoin, so that’s where most of the cost comes from. A month before maturity, the ETF buys the securities and incurs a loss known as the roll cost because their price drops. According to Solactive’s Horizons Bitcoin Front Month Rolling Futures index, this strategy has made around 13 percentage points less than bitcoin’s 118 percent so far this year. Mr Sapir estimates that this approach has made roughly five percentage points a year since 2017.
Technical solutions to the bitcoin custody issue are widely available, and some people are lobbying the SEC to allow an ETF that only buys bitcoin. Arbitrage and gambling caused by futures would be removed, leaving just the arbitrage inherent in ETFs and the gambling inherent in bitcoin. But this would only work if investors trusted the solution.
It’s important to remember that the fundamental idea of any bitcoin ETF is an arbitrage between the blockchain and traditional financial systems. It is precisely the opposite of what Tether and other stable coins are trying to do. In the blockchain, stable coins allow you to think in dollars; in the mainstream system, bitcoin ETFs will enable you to believe in bitcoins. Buying bitcoin has costs, but they are fees that the average person can easily avoid if they want bitcoin.