From a peak of $68,790 in November 2021, Bitcoin prices dropped by 72% in a span of nine months, dipping as low as $18,967 in July 2022.[1] Other cryptocurrencies also experienced a similar decline in prices in the first half of 2022. The recent collapse of the algorithmic stablecoin TerraUSD and ensuing lawsuits have further exposed the vulnerabilities underlying crypto markets.[2] A turbulent crypto ecosystem, fraught with its novel risks, has invited increased monitoring from regulators keen to prevent financial contagion and ensure investor protection.[3]
A potential for fraud and manipulative practices has been a deciding factor in the Securities and Exchange Commission’s (SEC) denial of Exchanged Traded Funds (ETFs) which physically hold cryptocurrencies to operate in the United States.[4] However, the SEC has approved futures-based cryptocurrency ETFs, as futures-based products might provide stronger investor protections.[5]
The first US Bitcoin-linked ETF, the ProShares Bitcoin Strategy ETF (ticker symbol BITO), was launched on October 19, 2021, at a time when Bitcoin prices were soaring above $65,000.[6,7] The ETF does not hold spot Bitcoin, but holds a long position in the Chicago Mercantile Exchange’s (CME) Bitcoin futures offering (ticker symbol BTC), which is designed to track the value of Bitcoin. BITO allows investors to benefit from an increase in the price of Bitcoin without any direct exposure to the actual cryptocurrency.
In a timely fashion, ProShares launched the first US short Bitcoin-linked ETF (ticker symbol BITI) on June 21, 2022 amidst a plummeting crypto market. BITI, in contrast to BITO, affords investors a way to profit from declines in the price of Bitcoin.[8]
These ETFs increase the ease with which a broad group of investors – with varying levels of sophistication and regulatory requirements – can obtain exposure to crypto assets. However, an expanded investor base and multiple levels of asset separation between the ETFs and the underlying cryptocurrency create the risk of disputes and litigation if ETF prices do not move as investors expect.
In this Insights piece, we provide an overview of a stack of exchange traded crypto assets – cryptocurrency ETFs, crypto derivatives, and spot cryptocurrencies. We also show that open interest and volume traded of the CME’s Bitcoin futures offering peaked around the BITO ETF launch.
