In the wake of Bitcoin’s rollercoaster ride to above $31,000 last month, traders of futures and futures-based exchange-traded funds (ETFs) are faced with a prohibitive peculiarity. The crypto market has witnessed the surge in spread between the Chicago-Mercantile Exchange (CME)-listed July futures contract and the now-expired June futures contract, topping a staggering $500 for the first time since the bull market days of 2021.
This steepening of contango ― the increase in the futures price over the expected future spot price ― undoubtedly raises the cost of the pre-expiry futures rollover. It seems this single-handedly impedes the financial outcomes of the futures-based products offered by ProShares, VanEck, and others. Matt Hougan, chief investment officer at Bitwise Asset Management, hinted that such a level of contango could unfavorably impact investors relying predominantly on futures-based ETFs, given the historical context of sharp contango during bull market periods.
Spot-based ETFs, therefore, appear to be the buzzword in the blockchain world, with financial giants such as BlackRock, Invesco, Fidelity, and more putting in applications with the U.S. Securities and Exchange Commission (SEC) last month. A spot-based ETF bears closer resemblance to owning bitcoin outright without additional complications or overheads. It allows investors to tightly clutch their positions indefinitely whilst eliminating the rollover expense tied to futures ETFs, and navigates the intricacies of securing the cryptocurrency in a digital wallet.
The fact that the SPDR Gold Trust ETF owns gold bars could provide a suitable analogy here ― the spot-based ETF would dedicate itself to closely monitoring bitcoin’s spot price. The futures-based ProShares’ Bitcoin Strategy ETF, which has lagged behind the cryptocurrency this year, offers a case in point. Despite Bitcoin’s 88% surge this year, the value of ProShares’ ETF shares has only risen by 56%, reinforcing the need for a more profitable investment channel.
Ryan Kim from FalconX highlights that the cost of carry stemming from futures-based ETFs manifests either as reduced performance in a contango state or amplified performance in a backwardation state. The growing anticipation around spot-based ETFs could potentially be attributed to this dynamic. The situation prompts thoughtfulness, especially if bitcoin continues its ascend, bringing more buyers on board and keeping futures premiums high across varied expiries.
While a situation where bullish market sentiment escalates the CME futures basis, as Ravi Doshi of Genesis Global Trading articulated, could momentarily intensify the annualized basis in the contract. This pinpoints the future ETF holders’ steep cost to confront the rollover. The game-changing spot-based ETF therefore, if approved, could simplify the investment landscape considerably.
Source: Coindesk
