Exchange Traded funds(ETFs) have been an elusive goal for the Bitcoin community throughout recent years. a few months ago, the U.S. Securities and Exchange Commission denied the petition for a Bitcoin ETF requested by Cameron and Tyler Winklevos. However, with Bitcoin futures launching in the CME and Cboe, most experts thought that a Bitcoin ETF was the next logical step. However, the behavior of futures contracts have revealed some interesting behaviors that indicate that a Bitcoin ETF might take a little longer than expected.
In the past, I’ve written several articles detailing some of my thoughts about Bitcoin ETFs( check out those articles). I am not planning to bore you by restating my previous ideas by I would like to reexamine the prospect of a Bitcoin ETF factoring in recent market developments mostly related to the futures contracts. Here are some of my new thoughts:
1)More Products Might be Necessary
The idea that a single derivative product such as the CME-Cboe futures contracts would pave the way for a Bitcoin ETF was a valid thoughts but it might proven unrealistic. Based on the relatively small trade volumes in the CME and Cboe futures, regulators might want to see more derivative products before giving the green lights for an ETF.
2)Different Positions by Regulators
Reading the statements made by different regulatory arms of the U.S. governments, you might be wondering if those different agencies ever talk to each others. The Commodities and Futures Trade Commission(CFTC) seem to be more open to the idea that Bitcoin and digital currencies should become a relevant asset class in the markets. The CFTC recently granted permissions to financial startup LedgerX to start trading Bitcoin options and has been working with the startup community to establish a proper regulatory framework for cryptocurrencies. In the CFTC view, crypto assets should be classified as commodities based on its limited supply.
The SEC seems to be taking a more aggressive position by labeling some digital currency products as securities and taking a tougher stand in terms of the regulatory approach. Until those two agencies reconcile their positions, a Bitcoin ETF will remain a nice idea but highly unpractical.
3)Large Institutional Investors are Short on Bitcoin
An interesting statistic that arises when analyzing the investor behavior in the CME and Cboe Bitcoin futures reveals that large institutional investors have been shorting the digital asset while smaller retail investors tend to be taking long positions. Recent data published by The Wall Street Journal highlights that traders holding fewer than 25 Cboe future contracts places 3.6 more bullish bets than bearish ones. Similarly, large hedge funds placed close to 40% more short bets than long ones and banks and large asset managers have remained absent from the trading of Bitcoin futures. Gaining large investors is important for the viability of a Bitcoin ETF.
4)Small Volume and Lack of Liquidity
The trading volume in both the CME and Cboe futures contract has been relatively modest and it hasn’t provided strong liquidity. The value of the combined outstanding futures contracts between the two exchanges has been trending around $150 million which is a very small number compared to the valuation of the asset. Also, the number of trades has decreased following the excitement of the initial days. Getting traders excited about Bitcoin derivatives and providing active liquidity is a key element to materialize a Bitcoin ETF.
5)Will We See a Bitcoin ETF in 2018?
My guess is still yes but its going to require some work. Maybe the initial version of ETFs won’t be based on derivatives like the futures contracts. The world of ETFs grown tremendously in 2017 and we have ETFs for almost anything you can think of. So why not Bitcoin?