The sharp widening of the spread, or the so-called steepening of the contango, has grabbed eyeballs in the crypto market, said Matthew Hougan, chief investment officer at crypto index fund and ETF provider Bitwise Asset Management. This generally points to why a spot bitcoin ETF would be superior for most investors vs. a futures-based ETF. People just want to own bitcoin, safely, with no ifs, ands, or buts. A spot-based ETF would achieve that goal.
The recent rally of Bitcoin (BTC) has brought to light a market peculiarity that puts traders of futures and futures-based exchange-traded funds (ETFs) at a disadvantage compared to coin holders. The cryptocurrency recently reached its highest in a year, topping $31,000. This caused the spread between the Chicago-Mercantile Exchange (CME)-listed July futures contract and the now-expired June futures contract to explode to nearly $500, the highest gap since the bull market days of late 2021.
The spread raises the cost of pre-expiry futures rollover, or shifting of bullish long positions from front-month to next-month contracts, and affects the performance of the futures-based products offered by ProShares, VanEck and others. This has led to excitement about a potential launch of a spot-based ETF.
Futures have an expiry date, which mandates the rollover of positions ahead of the settlement. When the spread between the front-month and the next-month contract widens, rollovers are characterized by traders selling the expiring contract at a low price and entering the new one at a high price, inadvertently bleeding money.
U.S.-based futures ETFs invest in CME-listed bitcoin futures. Last month, bigwigs from traditional finance like BlackRock (BLK), Invesco (IVZ), Fidelity, and others filed spot-based bitcoin ETF applications with the U.S. Securities and Exchange Commission (SEC). Bitcoin rallied nearly 12% in June.
A spot-based ETF, if approved, will be like SPDR Gold Trust ETF, which owns gold bars. The product will allow investors to hold their positions indefinitely while eliminating the rollover cost associated with futures ETFs and bypassing complexities involved with storing the cryptocurrency in a wallet. Besides, the spot-based ETF will track bitcoin’s spot price more closely than futures-based ETFs.
Ryan Kim, Head of Derivatives at institutional crypto derivatives platform FalconX, said, We might expect underperformance vs. holding spot BTC. The cost of carry emphasizes that futures-based ETFs incorporate the effects of either contango, where holders experience lagging performance or backwardation, where holders experience outperformance. This emphasizes that there is a cost to investors to restricting them to just a derivatives-based ETF.
Ravi Doshi, co-head of trading at Genesis Global Trading, said, The bullish market sentiment has driven up the front-end CME futures basis.
If bitcoin continues to rally, bringing more buyers to the derivatives market and keeping futures premiums elevated across the different expiries, the situation is unlikely to improve.