Bitcoin Futures ETF allows investors to invest their money in leveraged Bitcoin instruments such as Futures and Options. Leverage provides them with a way to reap greater returns than the average investors.
However, there are ample risks involved too. Risks such as capital risk, and regulatory risk pose a great challenge. Yet, with diligence, these ETFs prove a great investment.
This article explores Bitcoin Futures ETF and tries to explain their working, benefits and disadvantages. At the end, there is a list of 16 top Bitcoin Futures ETFs with a brief explanation on how they make money for their investors.
What are Bitcoin Futures?
Bitcoin Futures refers to the derivative contracts which trade with a certain amount of leverage. These contracts do not trade actual bitcoin but place a kind of bet on the future price of Bitcoin (hence the name). The bets are usually directional (bullish or bearish) and provide multifold return to the investor who has accurately predicted the price movement.
Usually a derivative contract is between two parties, one among whom assumes that the price will go higher and the other assumes the price would go lower. These parties remain anonymous to each other and meet via a crypto derivative exchange such as Binance, Coinbase or Derebit.
Futures trading has been beneficial for both institutional as well as retain traders. Institutions can take market positions (bearish or bullish) against a certain event (say elections) and protect their holdings from volatility. Whereas for retail users, it is a quick way to make a lot of money, although with a huge risk.
How Bitcoin Futures and Future ETFs Work?
Let us understand how future trading works with an example.
Suppose Bitcoin is at $60,000 and you run a Bitcoin ETF with 100k Bitcoins. Now imagine, if there is any negative news, for example, if the US Fed raises interest rates by 1%, it would definitely result in a market crash. But you won’t be able to sell all your 100k Bitcoins before the crash takes place, simply because of the fund size.
For the sake of simplicity, let us assume that Bitcoin would rise or fall just $1,000 in any case.
If you would have sold your Bitcoins at $60k, there is no surety that it would have fetched you the same price i.e.$60k, because selling such a large holding takes time. Plus, if you try to sell such a huge number of Bitcoins, it could have resulted in a market crash. Also, you would have been banned from trading in any crypto exchange.
Now here comes a person, who says that if Bitcoin falls from $60k to $59k, I will give you $1000 cash and if the reverse happens, say a rally from $60k to $61k, you will have to pay me $1000.
Now, think, why would someone enter into such an agreement with you. The reason is with Bitcoin futures, the person would have to pay a very small price($10 with a leverage of 100) as investment(margin) and gain $1000 if they are right. This contract is called a leveraged futures contract.
NOTE: Leverage is a form of trader where a person invests a small amount (margin), say $10 and is allowed to trade at a much bigger nominal value, say $100. The trader is liquidated (stopped) if their losses go above $10. This is how leverage works in its simplest form.
For more details on how leverage works, see the relevant section below.
If the institution/Bitcoin ETF fails (i.e., the market goes higher), they just lose $1000 and but their entire fund is still protected and also as price goes up by $1000, they make more gains. If they are right (market goes down) they still get $1000 from the individual trader.
On the trader’s side, they gain $1000 if the market goes up but lose $10 if the market goes down.
Why Are Bitcoin Future ETFs Popular?
Bitcoin ETFs provide a safe yet rewarding way for retailers to earn from Bitcoin derivatives.
Futures trading is greatly rewarding for individual retail traders, however, there is a catch. Retail traders often lack the sophisticated knowledge of trading strategies. For retail individual traders, this results in a loss most of the time they trade.
However, there is a better way for them to benefit. Traders and investors who want to benefit from Futures trading, but do not want to do it on their own, can take the benefit of Bitcoin Futures ETF.
Bitcoin Futures ETF are the shares of the companies that trade Bitcoin Futures with expert knowledge and years of experience. These traders have quantitative models, risk-reward ratio calculations and several times even insider knowledge that helps them secure a profit most of the times they trade. Even their losses are capped with the diligent usage of risk management strategies.
Must Read for Loss Making Traders: Risk Management Strategies for Investing in Pre-Sale Crypto
These ETFs charge a small amount of money to manage customer funds, often in the range of 0.1% to 2%.
There are several Bitcoin Futures all over the world and they have been present since October 2021.
Terms Related to Bitcoin Futures ET
Bitcoin
Bitcoin is a cryptocurrency and the first one to solve the double spending problem. Previously, all other cryptocurrencies could be just copied and pasted several times to create multiple yet identical copies. Bitcoin used a unique method called proof of work to make sure that a certain user could only spend their crypto once.
Futures
Futures and Options, together called derivatives, allows users to place intelligent bets on the future price of a certain asset, here Bitcoin. A future trade is composed of two traders who have different and opposing views on the price of Bitcoin at a future date, say 1 month ahead.
ETF
An Exchange Traded Fund or ETF is a share of a trust fund that trades solely in Bitcoin Futures. Whatever proceeds are obtained as a result, are shared between the subscribers of the ETF based on their percentage of ownership.
Margin
Margin is the minimum amount you have to put forward in order to trade a Future contract. For example, if you are trading a 10x Futures contract with a nominal value of $100, you would need a margin of $10.
A Comprehensive Guide To Bitcoin Futures vs. Margin Trading, Spot Markets
Derivative
Futures and Options are collectively called as derivatives because they derive their value from a separate independent financial asset such as stocks, crypto or commodities. For this article, a financial asset refers to Bitcoin, Ethereum or any other cryptocurrency.
Leverage
Leverage is the ratio of the nominal amount of your trade and the margin you put forward. In the above example of Margin, the leverage is 10x since it allows you to trade a contract that has a nominal value of 100 with a margin of $10.
Liquidation/Liquidated
Liquidation, in the scope of this article, is the act of terminating a futures contract because its losses have either exceeded the amount of margin put forward or simply because the exchange cannot settle this trade beyond a certain level. This acts as a safety mechanism and prevents a sell-off or shoot-off in a crypto’s price.
Advantages of Bitcoin Future ETFs
There are several advantages of investing in a Bitcoin Futures ETF.
- Your funds are managed by seasoned experts.
- The funds are easily invested and redeemed without any lock-in period.
- Bitcoin futures ETFs allow investing with leverage which allows investors to reap multi-fold benefits.
- ETFs are regulated by government bodies which ensure consumer protection.
- The ETFs also benefit from Bitcoin fundamentals such as growing adoption and scarcity introduced due to Bitcoin halving.
- Despite their high appeal, Futures Bitcoin ETFs barely hold just 12% of the market share among all Bitcoin ETFs.
Disadvantages of Bitcoin Future ETFs
- The risk factor is higher than spot Bitcoin ETFs due to the use of leverage trading in Bitcoin Futures.
- The ETFs are not suited for all investor types, especially the risk averse investors.
- A wrong time of entry would mean that you would lose a great portion of your invested money.
- Crypto is still a sparsely regulated sector and there are serious regulatory risks with any investment.
- Bitcoin’s price often reduced to one-fifth of its cycle high during the bear markets.
Must Read: Crypto Futures Traders: What Are the 8 Common Trading Mistakes to Avoid?
List of Top 16 Bitcoin Futures ETFs
The list below contains all the major Bitcoin Futures ETFs. Some of them help increase your invested capital through Bitcoin Futures while others use a mix of Bitcoin Futures, Options, Ethereum Futures, and several other financial instruments.
Below is a series of 3 charts showing the investment trend in all Bitcoin and Ethereum Future ETFs. There are separate charts for Bitcoin and Ether derivatives along with a combined chart.
These ETFs do not directly invest in any Bitcoin, and do not even track the price of spot Bitcoin. Most of these ETFs track Bitcoin price that is provided by the Chicago Mercantile Exchange (CME).
ProShares Bitcoin Strategy ETF
This was the first Bitcoin strategy ETF launched on October 19, 2021 and relies on Bitcoin Future contracts solely.
2x Bitcoin Strategy ETF
This is a leveraged Bitcoin Futures ETF which uses 2x leverage to trade. This feature allows it to increase its profits at twice the pace with the same level of investments.
ProShares Short Bitcoin Strategy ETF (BITI)
The ProShares ETF only invests in bearish derivatives contracts and seeks to make most of its gains in bearish markets and during contra trades in bull markets.
Valkyrie Bitcoin and Ethereum Strategy ETF (BTF)
This ETF dynamically allocates its funds to Bitcoin and Ethereum derivative contracts. The allocation is not fixed and is actively adjusted to reap the full benefits of the prevalent market conditions.
Valkyrie Bitcoin Futures Leveraged Strategy ETF (BTFX)
This ETF like the 2x Bitcoin Strategy ETF uses leveraged trade to make multi-fold returns in Bitcoin Future contracts. Though there is a risk associated with this fund, yet it has been performing well and has given high returns since inception.
GlobalX Blockchain and Bitcoin Strategy ETF (BITS)
This ETF is a hybrid ETF that seeks to invest for both the long term and the short term. For long term investments, it invests in equity of various blockchain companies. However, for short term investments, it relies on Bitcoin derivatives.
The ETF is good for those who seek a balanced approach to investing in crypto.
Simplify Bitcoin Strategy Plus Income ETF (MAXI)
This ETF issued by Simplify invests in Bitcoin futures as well as in debt instruments. The ETF provides dual benefits. When markets are good, the ETF gives a yield which is obtained through Bitcoin Futures and during bad markets, the debt instruments provide a fixed income, making the ETF an all-weather one.
Ark Shares21 Active Bitcoin Futures Strategy ETF (ARKA)
This Ark Shares21 ETF uses dynamic allocation in Bitcoin derivatives to take advantage of prevalent market conditions.
ProShares Ultra Short Bitcoin ETF
This ETF by ProShares purely invests in shorting or bearish opportunities in Bitcoin which helps it profit everytime there is a dip in Bitcoin.
The best time for any trader to invest in this ETF is during the bear cycle in Bitcoin which happens once every 4 years and could last up to a year. The last bear cycle started in November 2021 and lasted till January 2023.
Bitwise Bitcoin Strategy Ultimate Roll ETF (BITC)
The BITC ETF uses money market securities for collateral to invest in the highest yield Bitcoin derivatives contracts.
Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP)
This ETF by Bitwise invests equal amounts in both the future and options contracts of Bitcoin and Ethereum.
ProShares Bitcoin and Ether Market Cap Weight Strategy ETF
This ETF is yet again unique in its approach where it just invests in Bitcoin and Ether derivatives but in the ratio of 11:3 respectively. The ratio of 11:3 represents the domination of Bitcoin(54%) and Ethereum(15%) over the entire crypto market.
The benefit of this ETF is that it lets you bet at almost 70% of the crypto market. The choice of just Bitcoin and Ethereum futures avoids unnecessary volatility which is seen in broader markets.
ProShares Bitcoin and Ether Equal Weight Strategy ETF
This ProShares derivatives ETF invests in both Bitcoin and Ethereum derivative contracts in equal weight, i.e., equal capital allocation.
ARK 21Shares Active Bitcoin Ethereum Strategy ETF (ARKY)
The ETF invests in both Ethereum and Bitcoin Futures and Options contracts. The active tag in its name shows that portfolio allocation is dynamic.
Such ETFs tend to benefit you in highly volatile markets such as one which was seen around the 4th Bitcoin halving.
CyberHornet S&P 500 and Bitcoin 75 / 25 Strategy ETF (ZZZ)
This is a unique hybrid ETF which allocates 25% of its funds to Bitcoin derivatives such as futures and options. The other 75% is allocated to S&P 500 which is one of the stock market indices in the USA.
ARK 21Shares Active On-Chain Bitcoin Strategy ETF (ARKC)
This ARK 21Shares ETF uses on-chain metrics and models to prepare strategies which it then uses to invest in Bitcoin futures and options. On-chain metrics help in identifying real-time usage of Bitcoin and is widely used throughout the world to make informed investments in Bitcoin.
Conclusion
Bitcoin Future ETFs invest in Bitcoin Future contracts to reap greater benefits than ordinary Bitcoin investors. They use leverage trade to reap multifold returns in a very short period.
Suggested Reading: Trading Bitcoin vs. BTC Futures: A Comprehensive Guide
These ETFs often create a win-win situation for retail and institutional traders. Retailers use it to quickly make a good profit while institutions use it for better risk management.
However, these ETFs are also much more riskier than the spot ETFs and could potentially wipe out participant’s capital during a bearish market.
