Cryptocurrency enthusiasts and the exchange-traded fund industry are bracing for the first bitcoin futures ETF to begin trading Tuesday, when the ProShares Bitcoin Strategy ETF is scheduled to debut at the New York Stock Exchange.
There is, however, one catch: The ETF goes active unless the Securities and Exchange Commission objects to the filing, which can happen right up until midnight Monday.
Despite the uncertainty, many believe the odds are in favor the ETF will begin trading as scheduled.
"I would give it a 75% chance of approval," ETF Trends director of research Dave Nadig said.
The ETF is based on bitcoin futures that trade on the Chicago Mercantile Exchange. It's a disappointment to many in the bitcoin community, who would prefer a pure-play ETF backed by physical bitcoin. They complain that the high cost of rolling into futures contracts will not adequately track the spot price of the cryptocurrency, and that the SEC should proceed to approval of a pure-play bitcoin ETF.
"A futures is a derivative of the spot market, so if you are comfortable with futures, why wouldn't you be comfortable with the spot market?" Grayscale Investments CEO Michael Sonnenshein said. Grayscale is a digital currency asset manager; it runs the Grayscale Bitcoin Trust. Grayscale has indicated it intends to convert GBTC into a bitcoin ETF should they receive regulatory approval.
Regardless, most bitcoin activists — and the ETF community — are cheering it as a small but critical step to open the crypto market to a much wider audience.
"This is a crawl, walk, run market," Bitwise Asset Management chief investment officer Matthew Hougan said. "The smallest step the SEC can take right now is to launch a bitcoin futures market because it is a regulated market."
That fact — that futures are a regulated market — is critical to understanding why SEC Chair Gary Gensler is likely to allow a bitcoin futures ETF to begin trading, but not a pure-play bitcoin ETF.
Gensler wants to be supportive of financial innovation like crypto, but he lacks regulatory authority over critical areas like crypto exchanges.
"Gensler wants to be innovative and yet balanced," Hougan said. "He doesn't want to kill financial innovation [around crypto]. He wants to crack down on the fraud and nefarious elements and the criminal activity. He wants to put a regulatory framework around it."
But he doesn't have a regulatory framework, at least not yet. It's likely that Congress will need to step in and provide a broad regulatory structure for the whole crypto space, but the chances of that happening soon are slim.
However, the crypto space is growing so fast Gensler is under enormous pressure to do something. The SEC can only go so far in claiming regulatory jurisdiction without ruffling the feathers of other agencies.
So the temporary solution is to allow a bitcoin futures ETF to begin trading.
A bitcoin futures ETF allows the broader public to get involved without many of the problems around owning the virtual currency. First, you don't have to worry about custody. There's also no one complaining they forgot their exchange password; and there are no issues around someone owing bitcoin on an unregulated exchange who had their crypto stolen by cyberthieves.
One big reason a bitcoin ETF has not been approved is the worry over market manipulation. A similar concern has been expressed about a bitcoin futures ETF: that the futures market could be manipulated by the spot market.
In a recently released paper, Hougan and his associates at Bitwise Asset Management claim this worry is unfounded.
"We have showed that the CME bitcoin futures market is the leading source of price discovery in the bitcoin market worldwide," Hougan told me. "Prices move first on the CME ahead of Coinbase, Kraken and other offshore exchanges. The CME is the big dog. The spot market does not wag the futures tail."
ETF Trends' Nadig agreed, noting that in the commodity world, pricing has long been dominated by the futures. "The futures is where the liquidity is."
Hougan has taken this reasoning one step further. Bitwise on Thursday filed for a bitcoin ETF that would hold the actual virtual currency, not futures, arguing that the market is sufficiently mature.
"This is not your grandma's bitcoin," Hougan said. "It is a mature market."
The SEC is unlikely to take that next step and approve a pure-play bitcoin ETF, at least not yet. They will likely want more regulatory control over the spot market and will want further proof that the regulated market [futures] is doing a good job and not being manipulated by the spot market for bitcoin.
Should the ProShares ETF begin trading Tuesday, others will likely quickly begin trading, including the Invesco Bitcoin Strategy ETF, the VanEck Bitcoin Strategy ETF, the Valkyrie Bitcoin Strategy ETF and the Galaxy Bitcoin Strategy ETF.
Hougan said Tuesday will be a big day for crypto investors.
"This is a positive step," Hougan told me. "People should cheer for it. You don't see regulatory courage like this too often."