The recent debuts of futures-backed bitcoin exchange traded funds is already fostering innovation in the category.
For clients, that's a plus because the product the investment community really wants – a physically backed bitcoin ETF – remains elusive on the regulatory front. Forecasting when the Securities and Exchange Commission (SEC) will sign off on such an ETF is an increasingly difficult task.
Still, today's U.S. bitcoin ETF landscape is a marked improvement over what was seen at the start of 2021. Hey, bitcoin futures, though not appropriate for all investors, are an avenue to consider for risk-tolerant clients that want some crypto exposure without the full commitment of direct bitcoin ownership. Plus, futures have hedging properties and can act as portfolio diversification tools.
Thanks to the always inventive minds in the ETF industry there are ways to blend bitcoin futures with crypto-correlated equites – another disruptive, emerging assets.
Banking on BITS for New Look at Crypto
The Global X Blockchain and Bitcoin Strategy ETF (BITS) debuted last week and is the first domestically traded ETF to marry both bitcoin futures and blockchain equities – the latter of which is a more approachable asset class for many clients than direct ownership of bitcoin. The new BITS is actively managed and it takes long positions in bitcoin futures.
What makes BITS alluring for tactical investors isn't just the bitcoin futures exposure with the convenience of the ETF wrapper, it's the emerging versatility of the blockchain investment thesis, which expands beyond the confines of the crypto universe.
“Blockchain is often times referenced synonymously with cryptocurrency, largely due to the Bitcoin network being the first application of blockchain technology,” writes Global X analyst Matt Kunke. “However, it’s clear that the benefits of this technology can accrue beyond just cryptocurrencies today, improving operational efficiencies across many different types of businesses. One particularly interesting use case is in the grocery industry. When a grocer receives a contaminated food shipment, like the 2019 romaine lettuce E-coli incident in the U.S., grocers have traditionally pulled their entire inventory off the shelves, unable to precisely identify the contaminated inventory.”
While BITS is a rookie ETF – not a point of derision – it offers utility on another front. Simply put, the universe of blockchain and crypto-correlated stocks is increasing in population, making it difficult for clients to stock pick on their own in this space.
“Due to an accelerating pace of Initial Public Offerings (IPOs), SPACs, shifting business models, and rising market capitalizations, there are now a couple dozen public equities that are clear beneficiaries of blockchain technology and can provide targeted exposure to this theme,” adds Kunke. “These companies hail from several sub-themes within the blockchain ecosystem, including digital asset mining, blockchain & digital asset transactions, blockchain & digital asset hardware, and blockchain applications & integration.”
Additionally, the equity exposure in BITS is easily explained. The new fund's stock holding is actually a single holding: The Global X Blockchain ETF (BKCH). That ETF debuted in July and already has $112.25 million in assets under management.
BKCH holds 25 stocks and is “positioned to benefit from the increased adoption of blockchain technology, including companies in digital asset mining, blockchain & digital asset transactions, blockchain applications, blockchain & digital asset hardware, and blockchain & digital asset integration,” according to the issuer.
Offsetting Futures: Underrated Trait
As noted above, when it comes to bitcoin ETFs, future are the only game in town. At least for the moment, but futures aren't a free lunch and that's something for advisors to make clients aware of.
When it comes to bitcoin futures, they often trade in contango, meaning the further out contracts sport higher prices than the spot price.
“This dynamic in bitcoin futures is often attributed to two primary factors. First is the demand for leveraged exposure which can be achieved through futures,” notes Global X's Kunke. “Second is the inability to post spot bitcoin as collateral to short bitcoin futures, making it capital inefficient to arbitrage futures positions versus bitcoin itself.”
Bottom line: BITS isn't perfect, but, new or not, it's a useful approach to blending bitcoin and stocks while offsetting some of the issues associated with dedicated futures funds.