The Breakdown - It's Here: Bitcoin Futures ETF to Begin Trading

Starting point is 00:00:00 When the pro shares ETF and then the other ETFs actually launch, do people actually start using these instruments? If so, who was using it and how? Is it people who were on the sidelines before, who find this instrument desirable, or is it professional traders who are making an arbitrage trade relative to the future price of Bitcoin? How does the market narrative respond to the answers to one and two? Does the market see whatever happens as a success validating this latest rally or a flop which could turn us lower. Welcome back to the breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

Starting point is 00:00:43 The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Monday, October 18th, and today we are discussing that it's finally here. A Bitcoin Futures ETF is officially slated to begin. trading. So unless you've been living under Iraq, you've been watching this whole ETF drama really probably throughout the year. And I did a whole show on the setup for this last week, which you can listen to, but just to give the shortest TLDR ever, in 2013, the Wingo Vos Brothers kick off the modern Bitcoin ETF era with the first ever rejected Bitcoin ETF proposal. During the J. Clayton era of the SEC, there was little hope at any point that something was actually going to give.

Starting point is 00:01:33 The SEC was simply too concerned about market manipulation to even countenance any sort of ETF. Now, with Gary Gensler, a man who had, as we all discussed, taught courses about blockchain and Bitcoin at MIT, coming into the chairmanship of the SEC, wouldn't there be a better chance of a Bitcoin ETF? Pretty quickly it became clear that Gensler was not going to be the easy ally that we had imagined. However, over the last month, there has also been increasing clearness from public statements from Gensler and the SEC that they would be more amenable to a Bitcoin futures-based ETF than a Bitcoin spot ETF. Where we left off last week, it seemed as though the SEC was likely to allow a Bitcoin futures ETF to begin trading this week, but it wasn't completely sure. However, after my weekend

Starting point is 00:02:23 recordings were completed on Friday, the SEC's five commissioners met and greenlit a Bitcoin Futures ETF. The first to begin trading will be ProShares, which will be coming to the market tomorrow via the New York Stock Exchange. The ProShare's fund is linked to futures traded on the CME, the Chicago Mercantile Exchange, and will trade under the ticker BITO. Michael Spare, the CEO of pro-share, said 2021 will be remembered for this milestone. BITO will open up exposure to Bitcoin to a large segment of investors who have a brokerage account and who are comfortable buying stocks and ETFs, but do not desire to go through the hassle and learning curve of establishing another account with a cryptocurrency provider and creating a Bitcoin wallet or are concerned that these

Starting point is 00:03:03 providers may be unregulated and subject to security risks. Douglas Yones, the New York Stock Exchange head of exchange traded products, told the New York Times deal book, quote, this is an exciting step, but not the last. There is, as you would well imagine, quite a bit of excitement in the markets. Bitcoin is currently trading a little above 61,000 at the time of recording, and Lynn Alden pointed out, quote, it's not there in dollars yet, and I don't know what the price will be tomorrow, but at the moment, Bitcoin denominated in euros and yen, appears to already be at all-time highs for those currencies, at least according to charts with daily resolution. The open interest in Bitcoin futures markets also shot to new all-time highs from CoinDesk.

Starting point is 00:03:44 The dollar value of open interest, OI, or the number of futures contracts traded but not liquidated with an offsetting position, stood at $3.64 billion on Friday, marking a more than two-fold rise for the month, according to data provided by ByBit. The previous lifetime high of $3.26 billion was recorded during the bull market frenzy in February. Glass node data shows the total number of outstanding contracts on the CME has increased by 60% to 56,410. Still, ultimately the real thing will be how this plays out in markets and in the narrative. Is this a buy the rumor, sell the news type of situation? There's also a lot of focus in the discussion on Twitter and other places around what purpose and what function this Bitcoin futures ETF will really serve in the market.

Starting point is 00:04:29 Noel Atchison, the head of research at Genesis Trading, says, demand for these Bitcoin futures ETFs is likely to be disappointing. These could be of interest to a limited audience of institutions that can't hold spot or derivatives directly, as well as retail investors that prefer the familiarity and convenience of ETFs. Most investors, however, are more likely to continue to access Bitcoin exposure through spot or derivatives, or through any of the many listed securities or international funds that offer spot BTC exposure. The co-founder of Roundhill Will Hershey wrote a great thread as well that really gives a lot of context for how to think about this particular ETF. In terms of his bona fides, Roundhill sponsors thematic ETFs, including streaming,

Starting point is 00:05:09 e-sports, sports betting, et cetera, so it's something that he's really familiar with. This is long, but I think, worth a full read. Will writes, I'm sure many crypto-natives will be learning about futures and or ETFs in the coming weeks as the first Bitcoin futures ETFs go live. Here are a few high-level points to understand. All of the upcoming Bitcoin ETF launches plan to get exposure to Bitcoin via CME-listed futures held and came in subsidiaries.

Starting point is 00:05:33 They will not own Bitcoin directly. CME Bitcoin futures are cash-settled and designed to track the CME-E CF Bitcoin reference rate, or BRR. The BRR is effectively an aggregated price index based on the average trade executions on several spot Bitcoin exchanges, including BitStamp, Coinbase, Gemini, Itbit, and Cracken. Every futures contract has an expiration date, and in the case of Bitcoin, contracts are listed for six consecutive months, in addition to two December contracts. As cash-settles futures, the CME-BTC contracts are fundamentally different from physically settled commodities futures. A fundamental seller of WTI oil futures, i.e. an E&P company, may expect to make delivery of crude oil

Starting point is 00:06:14 in Cushing, Oklahoma, upon the expiry of the contracts they have sold. For cash settled futures, none of the underlying asset trades hands, i.e., there is no on-chain Bitcoin transfer. Instead, a buyer will pay the seller USD based on the BRR. Fundamentally, this means that the spot price, BRR, and various futures prices will converge as they get closer and closer to their respective expiration dates. As of yesterday's close, the various contracts approximately settled at, spot BRR 60K, October 21, 62.1K, November 21, 62.6K, December 21, 63.6K, January 22nd, 63.7K, March 22nd, 63.8K, and December 22, 62, 65.9K. You'll notice that the future dated contracts are all priced higher than closer dated contracts. In futures markets, this phenomenon

Starting point is 00:07:06 is called Contango. This podcast is sponsored by NIDIG, a firm that's making Bitcoin accessible to banking customers on Main Street and Wall Street alike. It's part of their mission to bring Bitcoin to the people. Find out more at NIDIG.com slash NLW. That's NYDIIG forward slash NLW. Back to the Bitcoin ETFs. In the case of the pro-shares ETF BITO, the prospectus shares that the fund seeks to invest in cash-settled front-month Bitcoin futures. Currently, the front month is the October contract, which last settled for $62,075, and the last day of trading for the October front month contract is October 29th. Therefore, I would expect that BITO will launch next week with substantially all of its exposure

Starting point is 00:08:01 tied to the October contract. This is expected until we approach October 29th. At or around that date, the fund will roll its exposure from the October contract into the November contract. And putting aside any changes in spot price, BRR, this has the potential to drag on returns. At current prices, for example, the fund would be settling October 62.1k and buying November 62.6k. Insofar as the contango dynamic remains, this roll yield will reduce ETF returns. This can, of course, happen in reverse and benefit the fund. If the Bitcoin futures curve changes from upward sloping, closer equals lower, to downward sloping, closer equals higher.

Starting point is 00:08:39 In aggregate, the potential impact is difficult to measure and requires constant monitoring. This all being said, while in my view suboptimal versus a physical Bitcoin offering, the BTC futures products are likely to serve as adequate short-term trading vehicles, if nothing else. Now, there are a lot of other folks who have gone on Twitter to write long threads about how we could get into situations where you see the spot price increasing, but this futures product being down significantly and what that would mean. And all in all, you're seeing the beginning of a narrative that's really rejecting the idea that a Bitcoin futures versus a Bitcoin spot ETF is in the best interest of investor protection as the

Starting point is 00:09:16 SEC seems to be arguing. Raul Paul wrote, if the SEC really cared about looking after investors, they wouldn't allow these futures contract versions. ELD trades writes that the ETF isn't even bullish. It's just going to be used by financial firms to buy Bitcoin's spot and sell the futures premiums with the ETF and make an arbitrage killing. Meanwhile, those in the ETF will be robbed blind. Jeffrey John Roberts under Crypt writes the obvious winners of the new Bitcoin Futures ETF will be professional traders and their wealthy clients, who are familiar with concepts like contango and who are good at making money off. Indeed, shares of the new pro-shares ETF are expected to initially trade at a premium to the actual

Starting point is 00:09:51 price of Bitcoin as a result of sophisticated investors who plan to arbitrage future price movements. As for losers, you can include retail investors who are hoping to buy a boring vanguard-style ETF, one that would let them buy Bitcoin just like a stock. What they got instead is an exotic investment instrument they may not understand, one that will cost them more in fees. Ironically, the reason for this is that SEC Chair Gary Gensler believes that rules that cover futures and mutual funds better protects the little people. Okay then. There is, however, one more wrinkle that I wanted to cover in this that's getting pretty interesting. On Saturday, October 16th,

Starting point is 00:10:24 Barry Silbert, the CEO of Digital Currency Group, which is the parent company of both CoinDesk as well as Grayscale, wrote, Friends Don't Let Friends Buy and Hold Futures-based ETFs. Preston Pish responded, Barry, when conversion of the trust to a spot Bitcoin-settled ETF, Barry responded, Stay tuned. Masari's Ryan Selkis dug into this saying, Grayscale aggressively and publicly pursuing their Bitcoin ETF approval could be a catalyst for major grassroots backlash towards the SEC. It would expose the insanity of SEC crypto policy

Starting point is 00:10:56 and how deeply asleep at the wheel they've been. Over the weekend, CNBC began reporting that Grayscale was close to converting its Bitcoin fund into a spot ETF fund. This is something that has long been rumored but seems to be getting clearer and clearer, although not a lot of people think that they have much chance of approval. One reason some speculated over the weekend that Grayscale might have a better chance at this is that when it comes to the establishment of a spot ETF, one of the concerns that a body like the SEC has

Starting point is 00:11:23 is that the establishment of the fund itself, going from non-existent to existent, and being in that way a relatively price-and-sensitive accumulator of the underlying asset, can in fact cause spot distortions. But in the case of Grayscale, given that they already hold... their $38.7 billion worth of Bitcoin or whatever it is at this point, maybe that's actually different. Well, whatever the case this morning, the comms director at Grayscale wrote a thread on Twitter. Jennifer Rosenthal says, since I've started this job, we've consistently been asked,

Starting point is 00:11:54 when will Grayscale file for a Bitcoin ETF? Grayscale's position has always been clear. We are 100% committed to converting GBTC and our product family into ETFs, when the SEC has formally expressed their requisite comfort with the underlying Bitcoin market. Throughout the weekend, we have heard and read the reports from respected media brands and trusted analysts signaling that were merely hours away from a formal Bitcoin Futures ETF. This is a historic and important moment for Bitcoin in the entire digital currency ecosystem. Today, I'm happy to confirm that Grayscale will file for GBT to be converted into an ETF as soon as there's a clear formal indication from the SEC. What does this mean? Once there's official and verifiable

Starting point is 00:12:33 evidence of the SEC's comfort with the underlying Bitcoin market, likely in the form of a Bitcoin ETSEEEF being deemed effective, the NYSE-Arco will file a document called the 19B4 to convert GBTC into an E-TF. Selkis again sums it up and writes, In the coming showdown between Barry and Gary, Barry is in the right. I hope Grayscale succeeds in either converting GBT to an ETF or making a complete mockery of the SEC. So, as we wrap up, let's discuss what we should be looking out for in the weeks to come.

Starting point is 00:13:06 First, when the pro shares ETF and then the other ETFs actually launch, do people actually start using these instruments? Second, if so, who was using it and how? Is it people who were on the sidelines before, who find this instrument desirable, or is it professional traders who are making an arbitrage trade relative to the future price of Bitcoin? Third, how does the market narrative respond to the answers to one and two? Specifically, does the market see whatever happens as a success value? validating this latest rally, or a flop which could turn us lower? Does the actual trading meet,

Starting point is 00:13:42 exceed, or underperform expectations, in other words? Four, what sort of indications do we get from the SEC about the directionality of all of this? Do we see public statements from Chair Gensler that say something like, there's your toy now shut up? Or do we see something more optimistic, something that says the best is yet to come? And finally, five, what will that say about the potential of the conversion of the grayscale Bitcoin trust into an ETF. In short, we are moving now from the realm of the speculative to the realm of the real. And that brings with it a lot more interesting and juicy details. Whatever the case, it is exciting times and I appreciate you hanging out as we live through them together. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - It's Here: Bitcoin Futures ETF to Begin Trading

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