The Daily Dive #080 — Bitcoin Futures ETF Impact
Market Impacts Of Futures ETF
In today’s Daily Dive, we’re talking about the market implications of a futures ETF. In short, a futures ETF is a bullish sign for the market that allows for more capital on the sidelines to get bitcoin exposure through an added stamp of SEC-regulated approval.
This signals the asset is being taken more seriously across professional investors and that there’s growing institutional demand. That said, the futures ETF is a piece of paper and not bitcoin. They are not the same, and it’s not even a spot bitcoin ETF, which may not come until 2022-2023. Futures ETFs will be best utilized for intraday trading and making money off the cash and carry trade.
Because future contracts must be rolled over, sold and bought each month to carry over positions, you’re constantly buying bitcoin at higher prices as long as futures are in contango above the spot price. As an exercise to backtest how a futures ETF would perform against bitcoin spot, an ongoing futures ETF position rolling over would have returned -35.78% less than holding spot bitcoin over the last year. That said, in this bullish time frame, the futures ETF position still yielded over 360% returns so some investors may not care, if understanding or mastering bitcoin custody is a bigger concern to them.
Bitcoin Contango
On an annualized rolling one-month basis, the contango yields on CME that investors can get from longing spot and selling futures are back over 16%, but have been under 5% for the last few months. This will be an incentive for investors, during a near-zero interest rate environment, who may not even care about bitcoin to come in and capture the “risk-free” trade as long as they can manage the custodial risks. Increased futures demand drives futures prices up, widening the contango yield spread. As more come in to capture this arbitrage opportunity, more spot bitcoin will be purchased, driving the price up.
Market Neutral Arbitrage As A Spot Market Incentive
One can think of an increased basis on a futures curve as a black hole in capital markets in a zero-interest-rate global economic environment. The ability to capture a risk-free spread of even 5% is something that hedge funds and capital allocators will find themselves salivating to capture, with real yields in global bond markets negative across the spectrum. A similar dynamic occurred earlier in 2021 when shares of Grayscale Bitcoin Trust (GBTC) traded far above net asset value, which incentivized institutions and accredited investors to buy shares directly from Grayscale and receive GBTC at a premium.
The GBTC premium dynamic, while different in practice, is similar in the incentive it provided to allocate capital to bitcoin regardless of the allocator's affinity for the asset itself. A futures market contango can be thought of in a similar manner, and a bitcoin futures ETF will be a net positive in this regard.
The increased demand for futures open interest has been brewing over the last few weeks, especially at CME which now accounts for 16.34% of all futures open interest volume, up from 9.10%. That’s $3.24 billion of $19.84 billion total open interest. Last time we saw this level of total open interest was back in April and May when the market was over-leveraged in long positions with bitcoin as collateral, and derivatives-market-caused cascading liquidations. But this time it is different and we cover the structural changes that drove that move in Daily Dive #028.
Another interesting dynamic, in anticipation of the approved futures ETF, is that bitcoin ETFs and fund flows have increased through September and October and now account for 4.3% of circulating supply. Over 5,364 bitcoin has flowed into bitcoin-traded products already in October. At the same time, gold ETF fund flows, which are an important signal of institutional demand, have been declining since August as bitcoin flows have risen.
