Finding bright spots in the bitcoin bear market

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

The funds have seen record trading volume in 2022, while still operating smoothly in a regulated market. The ProShares Bitcoin Strategy ETF (BITO) hit a trading record on Nov. 8, surpassing its previous record by 64%. And volume for ProShares Short Bitcoin Strategy ETF (BITI) also on Nov. 8 spiked 366% higher than any day since its launch, according to ProShares. 

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

“That’s not surprising because think back to the time of Covid and high volatility,” Deborah Fuhr, founder and managing partner of ETFGI, told Bob Pisani on CNBC’s “ETF Edge” 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, as highly regulated funds that trade on the CME exchange. In most cases, investors aren’t trading the underlying securities but just the ETF as a product.  

Ongoing pressures for a spot bitcoin ETF have been consistently dismissed by SEC Chair Gary Gensler, primarily based on the unregulated aspects of the exchanges and ongoing fraud and corruption charges. 

“The exchange system as a whole for bitcoin and cryptocurrency is still not mature, even if you don’t have an FTX thing,” Simeon Hyman, global investment strategist at ProShares, said in the same segment, referring to the exchange’s catastrophic collapse from a $32 billion enterprise to facing an onslaught of criminal investigations.  

Hyman said the lack of segregation among bitcoin exchanges underlines the need for maturation. Whereas the futures market, he said, has matured quickly.   

But because the futures market does not track spot bitcoin and the ETFs, the funds carry potential for additional fees like roll costs when the fund swaps out expiring futures for new ones. 

“BITO is not a leveraged strategy,” Hyman said. “You hold enough cash, such that the return should be approximately spot bitcoin. Therefore, that roll cost is offset by the earnings on the cash. And that’s what we’ve been seeing this year.” 

Despite the upsides to the strategy, BITO has declined roughly 65% this year. In comparison, bitcoin has fallen 64% in 2022, while ethereum is down 65%.  

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

“We have to differentiate crypto products from blockchain and smart contracts,” Fuhr said. “Because we are seeing that being used for many things, including tokenizing private equity and allowing retail access.” 

Fuhr explained that, under a project in Europe, creations/redemptions for ETFs are being done by 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 ’40 Act Funds in the U.S.  

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

“With respect to bitcoin and cryptocurrency, the issue isn’t 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 commingling of assets is a worry for investors, prompting them to turn to “cold wallets” where cryptocurrency tokens are held offline.  

“The ETF fixes a lot of that,” he said. “Particularly when it’s belt and suspenders with the futures market.”