Long and Short of Bitcoin (ETF)

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Proshares’ bitcoin ETF application is the latest to come before the SEC. Now other bitcoin ETF applications have come and gone, including one from the Winklevoss brothers.

What’s important here is that Proshares’ application is for both a long and short bitcoin ETF.  The latter means that retail investors would able to bet against the direction of bitcoin.

Rather than own actual bitcoin, Proshares is investing in bitcoin futures; an approach also used by VanEck and Rex. Futures are financial contracts between two parties calling for the delivery and payment of goods at a time in the future.

Futures allow market participants to shift price risk and also act as substitutes for real assets, such as bitcoin in this case.

Any “synthetic” bitcoin ETF depends the listing and trading of bitcoin futures. The Chicago Board of Exchange announced the listing of bitcoin futures later this year or early next year. This is why the Van Eck was pulled, in part, because no bitcoin futures currently trade.

After listing, there must be enough market participants – traders, hedge funds, institutional investors, or coin exchanges – that want part of the action.

And without enough interest, there will be very little contracts trading and lots of illiquidity. This may be why the CME, the other Chicago futures exchange, decided at this time not to launch bitcoin futures.

An active market for bitcoin futures would help draw more institutional investors into the cryptocurrency space.

Retail investors would also benefit by being able to bet against bitcoin. Currently, the only way to short bitcoin is through a margin account on a coin exchange such as Kraken or Poloniex. A “short” bitcoin ETF, similar to Proshares other inverse products, would make shorting less costly and more accessible to retail investors.