Everything you need to know about the first-ever U.S. Bitcoin ETF

ProShares’ new “Bitcoin Strategy ETF” holds BTC futures contracts — but what exactly are BTC futures and why is this a big deal?

What is an ETF?

Published on October 19, 2021

Bitcoin prices, as all traders know, are driven up and down by a complicated set of market forces — including the impacts of positive and negative headlines known as “market sentiment.” In recent weeks, as prices have climbed back above the $60,000 mark set during spring’s bull run peak, one category of headline has been hard to miss:

SEC Set to Allow Bitcoin Futures ETFs as Deadline Looms, reported Bloomberg in mid-October: “Barring a last-minute reversal, the fund launch will be the culmination of a nearly decade-long campaign by the $6.7 trillion ETF industry.”  

Bitcoin Comes to the Big Board, said the New York Times a few days later: “An exchange-traded fund tied to the cryptocurrency is set to begin trading on the New York Stock Exchange, a milestone for the industry.”

Indeed, the first-ever U.S. BTC ETF — short for exchange-traded fund — debuted on the NYSE on October 19. Following a 75-day review, the SEC allowed the Bethesda, MD firm ProShares to begin trading its “Bitcoin Strategy ETF (BITO)” on October 19. Several similar products from other companies are expected to launch in subsequent weeks.

More than 12 million BITO shares (worth around $480 million) traded early on Tuesday — ”easily one of the busiest ETF debuts ever seen” according to Bloomberg. Retail traders appeared to be interested, with BITO becoming the most-bought asset on Fidelity’s platform in the first few hours of trading. Bitcoin prices rose as well — breaking the $63,000 mark for the first time since April. 

What’s so exciting about the arrival of a bitcoin ETF?

As Bloomberg noted, ETFs are a vast, popular investment category. Investors can now gain BTC exposure through a familiar investment vehicle that can be purchased from any brokerage — whether they’re individuals who might not feel confident buying BTC directly or institutional investors (like some pension funds) that may be bound by investment restrictions. 

One key note: this first BTC ETF doesn’t hold bitcoin directly — unlike many of the products that have been floated over the years, as well as popular crypto ETFs available in Canada and Latin America. Instead, it holds “bitcoin futures contracts.” (More on futures below.)

To understand why this news was met with such interest, we need to zoom out a little — and take a look at what ETFs are, what bitcoin futures are, and why it all matters. 

What is an ETF?

ETFs are a hugely popular class of financial product. They generally track the price of an asset (like gold or bitcoin) or basket of assets (like tech stocks). They can be bought or sold via conventional brokerages, tend to have low fees, and are popular with a wide range of investors — from individuals saving for retirement to big Wall Street funds. (Learn more about ETFs.) 

ETFs exist for almost every corner of human existence. The largest — the SPDR S&P 500 ETF Trust (SPY), nicknamed the Spider — tracks the S&P 500. But there are ETFs that focus on everything from marijuana companies to weight-loss related stocks — as well as sustainable energy, currencies, commodities of all kinds, and much more. 

Until now, though, there weren’t any BTC/crypto ETFs in the U.S. — despite at least a dozen applications over the last decade. 

How does the new BTC futures ETF work?

The ProShares ETF doesn’t hold bitcoin directly. Instead, it holds bitcoin futures contracts — bundles of agreements to buy BTC in the future at a specific price — which trade on the Chicago Mercantile Exchange (CME). 

Some analysts predict that BTC futures ETFs will pave the way for “spot-based ETFs” that hold crypto directly — like popular products currently available in Canada (including a new ETF that tracks both BTC and ETH). Firms that hope to launch ETFs in the U.S. submit proposals to regulators including the SEC. As regulatory clarity continues to emerge, a wider variety of crypto ETFs may finally get the green light and go to market (read our policy proposal).  

What are BTC futures?

Futures are part of a bigger financial category called “derivatives” — which are financial contracts that derive their value from the price of an underlying asset, like corn, gold, oil, or bitcoin. They’re typically used for two purposes: hedging and speculation. For example, a family running a corn farm could hedge, or protect itself, from the shock of a drought by locking in corn future prices through a derivative. There are a huge range of derivatives, ranging from the commonplace and well-known to the more esoteric (like “swaps,” which most people who don’t work on Wall Street learned about during the 2008 financial collapse).

Two of the most common types of derivatives are options and futures:

  • Options allow investors the opportunity to buy an underlying asset at a specific price (called the “strike price”) within a set time period. As their name suggests, the actual purchase is  optional — holders of an option are under no obligation to execute the contract, which, in practical terms, means that options are generally exercised only when the strike price is lower than the market price. 

  • Futures, on the other hand, aren’t optional: they’re a contract to buy a specific quantity of an asset on a specific date at a specific price. Bitcoin futures don’t exactly mirror BTC’s market price, but the two tend to be correlated (that is, they generally move up and down together). Indeed, the news that the Bitcoin futures ETF would be launching was reflected in both bitcoin’s price and the price of bitcoin futures. 

Remember, a BTC futures ETF doesn’t directly invest in bitcoin — it invests in bitcoin futures contracts. While the prices of BTC futures and bitcoin itself are correlated, a BTC futures ETF won’t track the value of bitcoin as precisely as a “pure” BTC ETF might. (Fees for the ProShares Bitcoin Strategy ETF are also higher than those charged by many index ETFs — likely reflecting the added complexity of tracking the value of a bundle of futures contracts.)