Bitcoin futures ETFs retain allure despite crypto winter

Investors piled money into bitcoin futures ETFs in 2022, even though the price of the cryptocurrency plunged 65 per cent.

Investors ploughed $241mn into the six US bitcoin futures ETFs during the first 11 months of 2022, according to data from Morningstar Direct. And most of that money — $198mn — was added after June, which bitcoin payment service provider Bitpay marks as the start of a crypto “deep freeze”.

ProShares in October 2021 launched the ProShares Bitcoin Strategy ETF, the first bitcoin futures ETF. It amassed $1.2bn in assets within two days.

But its assets tumbled to $549mn by year-end, largely because of market depreciation. Sales of the ETF have held steady throughout the crypto winter, as the ETF collected monthly net inflows for all but three of the first 11 months of 2022, according to Morningstar data.

This article was previously published by Ignites, a title owned by the FT Group.

Investors piled $259mn into the ProShares Bitcoin Strategy ETF during the year ended November 30, the database shows.

“A futures-based ETF is a very robust, ‘belt and suspenders’ solution for people who are looking for exposure,” said Simeon Hyman, global investment strategist at ProShares. “We’ve gotten big reminders of the challenges with the spot market and exchanges, which are not mature yet.”

The US Securities and Exchange Commission has not approved any ETFs that invest in spot bitcoin, citing concerns around fraud and manipulation. But the regulator has granted approval for ETFs that invest in bitcoin futures traded on the Chicago Mercantile Exchange, arguing that futures are safer for investors.

Combining the regulated futures market with an ETF wrapper resolves many of the issues with the spot bitcoin market, said Hyman.

“There’s only one thing that it doesn’t change,” he added. “Bitcoin is going to be a volatile thing.”

ETFs that invest in companies that benefit from the growth of bitcoin have also recorded net inflows so far this year, but have faltered in the second half.

Those products include the $415mn Amplify Transformational Data Sharing ETF, $119mn First Trust Indxx Innovative Transaction & Process ETF and $99mn Siren Nasdaq NexGen Economy ETF, which each invest in companies involved in the blockchain and cryptocurrency ecosystem, prospectuses show.

Investors piled a combined $100mn into the 16 bitcoin-related ETFs during the year ended November 30, Morningstar data shows. But nearly all of that money — $92mn — went into the Global X Blockchain ETF. Six of the ETFs recorded net outflows over the period.

Investors holding on to these ETFs might be doing so in hopes that the crypto market would soon recover, analysts said.

After soaring to record highs in 2021, digital assets have taken a considerable hit this year, driven down by plummeting cryptocurrency prices and the dramatic collapse of FTX, one of the largest crypto exchanges.

The price of bitcoin, the world’s largest cryptocurrency, tumbled from a high of $68,990 on November 8 2021 to $16,548 on December 31, according to Yahoo Finance.

Ethereum has not fared much better despite a successful and highly anticipated update that occurred in September, known as the “merge”, through which its network upgraded from a proof-of-work consensus mechanism to a proof-of-stake system. Still, the price of ether — Ethereum’s native coin — fell from $4,294 on November 21 2021 to $1,197 on December 31, Yahoo Finance data shows.

Crypto’s woes were exacerbated in November when FTX abruptly filed for Chapter 11 bankruptcy.

“A lot of crypto investors are the ‘buy the dip’ sort of crowd that we’ve seen really take shape in the last couple of years,” said Bryan Armour, director of passive strategies research for North America at Morningstar. “It almost seems like, to some market segments, it’s more of like a religion than an investment at this point.”

Flows into Bitcoin futures ETFs could also be attributed to “investor loss aversion”, said Matt Apkarian, associate director of product development at Cerulli Associates.

“A biased investor might say, ‘I want to hold on to this until it gets back to the price I bought it at [and] I don’t want to sell it at a loss because it’s not a loss until I sell’,” said Apkarian.

Bitcoin futures ETFs were “isolated” from the crypto winter and FTX collapse because they are separate from the underlying securities, said Vinod Jain, strategic adviser at Aite Novarica. “You’re not buying the actual assets,” he added.

The crypto winter and FTX collapse were unlikely to impact the views of people who back cryptocurrency, said Apkarian.

“This is just a bump in the road, which in some ways is probably speeding up the inevitable regulation that needs to occur around it,” he added.

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