On its own, the futures market is no cause for alarm, but when the SEC prevents corporations and individuals from purchasing BTC through regulated means, only allowing futures ETFs, we have an issue.
Let me explain.
Companies in the Bitcoin industry have been applying for a “spot Bitcoin ETF” for many years, but to no avail. If this spot ETF were to get accepted, you could invest $100 into the ETF, which would then purchase $100 of bitcoin held by the fund, giving you direct exposure to bitcoin. This would provide pension funds, corporations, asset managers, etc., easier access to bitcoin. But this is not yet available in the U.S.; only a futures ETF is.
If not already evident from the gold futures explanation above, this may pose a threat to bitcoin.
When someone purchases a bitcoin futures ETF, they do not own bitcoin. Instead, they own exposure to an ETF which holds bitcoin futures contracts. In short, this futures ETF purchases contracts for the delivery of bitcoin at a future date. As that date approaches, it rolls the futures contract, selling the old contract and purchasing a new contract further out.
Don’t worry if you don’t quite understand how these ETFs work. The point here is not to understand the functionality but rather the drawbacks.
It is essential to understand two characteristics of futures ETFs over spot ETFs. In regular, functioning markets, if you want the right to buy something at a specified price in the future, you pay a premium over today’s price, and the further out in time you wish to lock in a price, the more premium you pay. Each time the contract is rolled, more premium is paid. This is called roll yield.
Even if bitcoin’s price stays the same throughout the life of the futures contract, the ETF will still decline in value because the ETF is paying a premium to purchase the right to
buy bitcoin in the future. As that date nears, it’s selling the contract and purchasing a new one further out in time. This is known as rolling.
A byproduct of this rolling is that any paid premium diminishes as contract expiration approaches (roll yield). This creates a decay in the value of the ETF and is incredibly unfavorable for long-term holders.
As a result, this decay incentivizes short-term trading, increased volatility and short selling of the ETF as a portfolio hedge, suppressing the price.
Is it possible to see the effects of these futures ETFs in action? Below is a chart from Willy Woo. The date of the approval for the first futures ETF was in October 2021.
Immediately preceding the inception of the first regulated futures ETF, we saw a considerable increase in futures dominance. The futures market currently dictates 90% of bitcoin’s price (green line in the chart above).
In summary, just like gold from the 1930s to the 1970s, individuals and corporations alike have no regulated way to purchase bitcoin efficiently for long-term storage. The only difference being in the age of censorship, rather than overtly suppressing what the government deems as unfavorable or infringing on certain aspects of the economy, it can covertly suppress them. However, not all hope should be lost.
Many people and corporations are tirelessly petitioning for the approval of a spot ETF, a way to gain direct exposure to bitcoin. But this begs the question: Is bitcoin one of the last remaining bastions for the free market and self-sovereign individuals, or is it already under the thumb of the central planners?
This article was originally written for Seb Bunney’s weekly newsletter exploring what it means to be free in an increasingly not-so-free world.
This is a guest post by Seb Bunney. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.