Why do professionals expect a spot Bitcoin ETF? How is it different from futures products?

Why is There High Demand for a Bitcoin ETF Among Professionals? How is it Distinct from Futures Products?

Author: André Dragosch, CoinDesk; Translation: Song Xue, LianGuai

As they say, Bitcoin (BTC) is gradually going mainstream. The world’s largest asset management companies, such as BlackRock and Fidelity, are queuing up to launch spot Bitcoin ETFs in the United States. Market participants believe that the Securities and Exchange Commission will approve such instruments since the discount on the net asset value of the Grayscale Bitcoin Trust has narrowed significantly.

But why is there such a high demand for spot Bitcoin ETFs, especially when there are already futures-based Bitcoin ETFs available?

Firstly, there are many drawbacks to Bitcoin futures ETFs compared to spot products, including high roll costs which can lead to an annual performance decline of 30% if the Bitcoin futures curve exhibits a steep futures premium.

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In simple terms: Bitcoin futures investors would give up a large portion of their performance if the price of Bitcoin futures is significantly higher than the spot price today. Therefore, when investing in futures-based products, you do not realize all the performance advantages of holding Bitcoin.

Expanding the investment channels for Bitcoin and other cryptocurrencies opens up a new potential area for portfolio allocation, which was previously impossible.

To put it in the words of a portfolio manager: investing in Bitcoin significantly expands the so-called “efficient frontier” of possible multi-asset portfolios.

The efficient frontier represents all potential portfolios displayed in a risk-return graph based on different weights of different asset classes. For example, a point represents a portfolio where X% is invested in stocks, Y% in bonds, and the rest in Bitcoin.

Portfolio managers aim to be on the edge of this frontier, as they seek to achieve the highest possible return with the lowest possible risk.

For illustrative purposes only. Source: ETC Group.

The black cloud represents the range of potential portfolios based solely on traditional asset classes. The green cloud represents the new area of potential portfolios when Bitcoin is added. As you can see, the inclusion of cryptocurrencies like Bitcoin greatly expands the possibilities.

Therefore, it is not surprising that including Bitcoin in a classic 60/40 stock-bond multi-asset portfolio leads to a significant increase in risk-adjusted returns (Sharpe ratio) in the past, while the portfolio drawdown only slightly increases.

The approval status of these Bitcoin ETF applications is still uncertain, but it is widely expected that they will most likely be approved in January.

These potential Bitcoin ETFs manage a significant amount of assets (we estimate around $16 trillion), so they could have a huge impact on the cryptocurrency. If only a small portion is invested in Bitcoin, the effect could still be significant because, according to our calculations (including Grayscale’s trust), the total assets of Bitcoin exchange-traded products currently amount to only $38.8 billion.

However, this money won’t be invested overnight. Investors may need several months to begin replacing a portion of their traditional asset allocations with Bitcoin.

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