Breakingviews: First bitcoin ETF is test for fans and watchdogs

Even the cryptocurrency market has to go one step at a time. ProShares’ new bitcoin exchange-traded fund is a first in the United States. But it invests in bitcoin futures, not the actual digital coins. ETFs designed to own actual crypto assets are still on hold at the Securities and Exchange Commission. How the fund launched on Tuesday goes may help regulators decide whether to take that next step.

While other funds exist that offer exposure to bitcoin, this is the first ETF, a structure that allows trading throughout the day like listed-company shares. True believers in cryptocurrencies might prefer a fund that owns crypto directly. Still, it’s a new way to get tradable exposure without the hassle of digital wallets and such.

There are some pros to investing in derivatives. The CME, which offers bitcoin futures, is tightly regulated, two words that don’t yet apply to the multitude of crypto marketplaces, among the biggest being Coinbase Global. Inside an ETF wrapper that is also regulated, a cautious crypto-curious investor can dabble with less risk. CME futures also have only one price, whereas bitcoin exchanges can differ.

The market has become liquid enough to support ETFs, too. The notional exposure changing hands in one day spiked to a high above $7 billion amidst a crypto frenzy early in 2021. In recent days, both daily volume and the open interest in futures have been running at about $4 billion, expressed in terms of the underlying bitcoin. That compares to about $600 million of turnover in the new ETF as of noon New York time on Tuesday, according to Refinitiv data.

Still, the newly launched ETF could come with substantial costs. That’s because as monthly futures contracts near expiration, the fund will have to sell them and replace them with newer instruments that typically cost more.

That will play out over time, and other similar funds are in the works, too. Success hinges on how well the new fund tracks bitcoin prices, and at what cost. Regulators will want to see an orderly start to trading and no red flags like volatility beyond what’s happening with bitcoin futures. If all goes well, it could ease resistance to ETFs that buy crypto directly.