Bitcoin ETF: Regulatory arbitrage – by US regulators

After years of delays and setbacks, a Bitcoin exchange-traded fund finally made its debut in the US. Somehow.

The ProShares Bitcoin Strategy ETF (BITO) began trading on the New York Stock Exchange on Tuesday. Some experts hailed it as a turning point that would bring the digital currency another step closer to the mainstream. But it could be a bigger step for the nervous regulators who approved it than the investors buying it.

First of all, the ETF is not directly backed by Bitcoins. Instead, it holds futures contracts that track the cryptocurrency. Potential investors hoping for the speculative volatility of the real will be disappointed. According to the prospectus, only 25 percent of the fund is invested in Bitcoin futures. The remaining 75 percent flows into staid money market instruments such as treasury bills.

Then costs apply. Funds that invest in futures must continue to roll contracts upon contracts to maintain their exposure. They pay a fee every time they do this. This can create special costs if longer-dated futures cost more than shorter-dated futures, the fund says.

All of this comes on top of a 0.95 percent management fee. A futures ETF offers investors modest indirect exposure to Bitcoin through a regular brokerage account. However, the returns are diminished by relatively high costs compared to owning Bitcoin directly.

The ProShares ETF introduces a range of Bitcoin-flavored futures ETFs. However, these will make little ripple among crypto investors: they will continue to buy their volatile, carbon-intensive tokens through Coinbase or other crypto exchanges.

The real target of the ETF is financial advisors who have previously been unable to recommend unregulated Bitcoins to their clients. Regulators view futures that are heavily backed by money market instruments as safer. The new funds allow regulators to claim they are giving retail investors access to a popular asset while protecting them from its worse excesses. It is regulators rather than crypto-curious investors who are having their cake and eating it too.

This is the third in a series of articles on digital assets that Lex is publishing this week. We also investigatedBitcoin correlationsandInvestment analysisSister.