Bitcoin Futures ETF: Definition, How It Works, and How to Invest

What Is a Bitcoin Futures ETF?

Bitcoin futures exchange-traded funds (ETFs) are pools of Bitcoin-related assets offered on traditional exchanges by brokerages to be traded as ETFs. The intent behind these ETFs is to give retail and other investors exposure to cryptocurrencies without needing to own them.

Understanding Bitcoin Futures ETFs

An exchange-traded fund—a type of exchange-traded product (ETP)—is an investment fund that holds assets and issues securities as shares of the fund which trade on an exchange. ETFs are traded on stock exchanges, providing investors with diversified exposure to various asset classes and the flexibility to buy or sell shares throughout the trading day at market prices. Instead of holding a bunch of different stocks, an investor can simply own shares of one ETF that is invested in those companies.

A futures contract is a standardized contract where two parties agree to exchange a specific quantity of a standardized asset on a specific day for a particular price. Bitcoin futures contracts are traded on the Chicago Mercantile Exchange. So, a Bitcoin futures ETF is an exchange-traded fund that holds Bitcoin futures contracts and sells shares of the fund to investors. These shares are bought and sold on a mainstream exchange.

These ETFs are created by purchasing futures contracts from the CME Group and bundling them into a fund. Next, the company offers shares of the fund to investors. The futures contracts in the fund are then actively managed while the shares are trading. So, instead of trading Bitcoin on a cryptocurrency exchange, investors can trade these shares on a traditional exchange and gain exposure.

Bitcoin Futures ETF History

The first concept for an ETF that held Bitcoin (not Bitcoin futures) emerged shortly after investors and brokers noticed that Bitcoin prices were trending upward and gaining popularity amongst investors. This signaled an opportunity to generate returns by trading Bitcoin.

As Bitcoin's price rose to tens of thousands of dollars, retail and average investors lost the opportunity to invest directly in Bitcoin. Brokerages, responding to demand for investor access to Bitcoin, began to design Bitcoin exchange-traded funds. Applications with the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers.

In an exchange-traded fund that tracks stocks, the fund purchases the stocks. These are the fund's holdings, and the company that runs the fund offers fractionalized shares of the fund on exchanges.

The first official Bitcoin-linked ETF was the Proshares Bitcoin Strategy ETF (BITO), which mainly uses futures contracts. It was approved by the SEC in Oct. 2021 and is listed on the New York Stock Exchange.

In many crypto fans' minds, a Bitcoin ETF would consist of Bitcoin purchased by a company, which would securitize them and offer shares to investors. However, the Security and Exchange Commission rejected these proposals until 2024.

A court order in Aug. 2023 forced the SEC to reconsider these proposals, and on Jan. 10, 2024, the Commission approved 11 Bitcoin spot ETFs. These spot ETFs, which hold Bitcoin as opposed to futures like the Proshares ETF, began trading in Jan. 2024.

Goals of Bitcoin Futures ETFs

Bitcoin futures ETFs are designed to allow more people to invest in Bitcoin without the necessary expenses and hassles of buying them directly. They eliminate the need for security procedures and excessive funds while providing a familiar investment type.

Security

While you don't technically have cryptocurrency in your wallet, you have security keys that you need to safeguard if you own Bitcoin. If you buy your cryptocurrency through an exchange, you can choose to have your keys stored on that exchange if it offers that service.

However, wallets and exchanges can be hacked and keys stolen—which means your cryptocurrency can be stolen. You can store your keys offline using several methods, but none of these methods are 100% secure or guaranteed.

An ETF doesn't require you to own any cryptocurrency, store keys safely, or move the keys back and forth between different types of storage—you own shares of the fund, which doesn't own any cryptocurrency either if it's a futures fund.

Affordability

One of the most significant obstacles for average investors is price. Bitcoin (BTC) set a record high of nearly $69,000 per BTC in 2021. Over the next two years, its price dropped to under $17,000, then rose to between $20,000 and $30,000. Since late 2022, the price has slowly risen, floating around $30,000 for a period and sitting at around $41,000 as of Jan. 2024.

The high price means that even at today's medium prices, retail investors may not have the assets to purchase one BTC. While you can buy smaller Bitcoin denominations on cryptocurrency exchanges, an ETF allows you to gain exposure to BTC within your budget, risk tolerance, and investing goals on a fully regulated exchange using an approved instrument.

Familiarity

Perhaps most importantly, ETFs are much better understood across the investment world than cryptocurrencies. So, if you're only interested in becoming involved in digital currency investing, an ETF lets you focus on trading an asset you already understand rather than learning about blockchain, mining, decentralized exchanges, distributed ledgers, key storage, and cryptocurrency.

Limitations of Bitcoin Futures ETFs

Though there are advantages to investing in future ETFs, there are also some downsides. These limitations are further amplified by the legal uncertainty and risk within the cryptocurrency industry. Several limitations to keep in mind are below.

Tracking Errors

Tracking error refers to the discrepancy between the performance of the ETF and the actual price movement of the underlying Bitcoin futures. This can happen for several reasons such as management fees, transaction costs, or logistic issues in replicating prices of a security. This means that the value of the ETF may, at times, not directly match the actual current exact value of Bitcoin at any given moment.

Regulatory Uncertainty

The regulatory landscape for cryptocurrencies is still evolving. Authorities worldwide consider and implement new regulations. Changes in regulations can impact the legality, trading, and valuation of Bitcoin futures, introducing uncertainty for investors in Bitcoin futures ETFs.

Market and ETF Liquidity

The liquidity of the underlying Bitcoin futures contracts is crucial for the ETF to operate smoothly. Limited liquidity in the futures market may result in wider bid-ask spreads, making it more expensive for investors to buy or sell shares of the ETF.

Because Bitcoin Future ETFs are relatively new (compared to more established equity ETFs), newer funds may temporarily have higher liquidity risk as they ramp up with investments and share issuance.

Rolling of Futures Contracts

Bitcoin futures contracts have expiration dates. The ETF has to roll contracts before they expire. The process of rolling involves selling expiring contracts and buying new ones, incurring transaction costs. This strategy may very slightly erode the fund's return, especially during periods of contango or backwardation.

Security Concerns

Cryptocurrencies are digital assets, making them susceptible to cybersecurity risks. Hacks, fraud, and security breaches in cryptocurrency exchanges can impact the value of Bitcoin. Depending on where the future contracts reside, they may be susceptible to unique security challenges compared to other forms of electronic investments.

For instance, it may or may not be possible for certain future contracts to be held in a cold wallet, thus limiting the amount of protection the digital contract may have.

How to Invest in Bitcoin Futures ETFs

If you're looking to invest in Bitcoin futures ETFs, you can purchase them through your broker or advisor if they offer them. Many Bitcoin futures ETFs trade on exchanges such as the New York Stock Exchange ARCA and Nasdaq:

• Proshares Bitcoin Strategy ETF (BITO)
• Valkyrie Bitcoin and Ether Strategy ETF (BTF)
• VanEck Bitcoin Strategy ETF (XBTF)
• Global X Blockchain & Bitcoin Strategy ETF (BITS)

There are also bitcoin futures ETFs that let investors short the cryptocurrency, such as the ProShares Short Bitcoin ETF (BITI).

It's important to note that these ETFs are not entirely comprised of Bitcoin futures. For the most part, they invest in traditional securities, holding Bitcoin futures contracts when they meet the fund's strategy.

For example, the Proshares Bitcoin Strategy Fund is designed to hold Bitcoin futures contracts only when positions are profitable. Otherwise, it can hold securities of Bitcoin-related companies and money market instruments. It can also borrow using reverse purchase agreements.

The Bottom Line

Bitcoin futures ETFs are funds that bundle Bitcoin futures contracts. They provide investors without the means or desire to invest directly in cryptocurrency a way to gain exposure to these volatile and sometimes lucrative assets. You can purchase them on official exchanges.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own Bitcoin futures ETFs.