Bitcoin ETFs: What to Know If You Plan to Invest
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Here's your money briefing for Tuesday, October 19th. I'm J.R. Whalen for The Wall Street Journal. The price of Bitcoin is up above $60,000 for the first time since April. Much of that run-up is due to investors anticipating the launch of a Bitcoin Futures Exchange Traded Fund, or ETF.
There was a lot of enthusiasm that the SEC is finally going to at least permit some of these products. And again, this has been an eight-year process, so there's been a lot of attention, a lot of eyes on the twists and turns of it.
So what does this mean for individual investors who want to get in on the Bitcoin craze? And what's the difference between investing in Bitcoin futures versus actual Bitcoin? We'll ask our markets reporter Michael Wursthorn about the nuts and bolts of Bitcoin ETFs after the break.
What is a Bitcoin futures ETF and how does it differ from a traditional ETF?
You've probably heard of exchange-traded funds or ETFs and how they allow investors to buy a mix of stocks and other equities. Well, today, the first U.S.-listed ETF based on Bitcoin futures prices is expected to launch from a firm called ProShares. But how does it work and what kind of risk do investors face if they decide to put their money into it? WSJ Markets reporter Michael Wursthorn is here with some answers. Michael, thank you so much for coming on the show.
Thanks for having me.
So Michael, we typically describe an ETF as a fund that tracks a basket of equities. What would this ETF from ProShares be tracking?
This ETF will work like any other ETF in terms of the underlying mechanics. And just like any other ETF, it's holding a basket of securities. And in this case, those securities are Bitcoin futures contracts, which trades separately and distinctly from Bitcoin itself. But that's primarily what these funds are going to hold. This fund, ProShares, and the other ones that eventually come online.
Bitcoin ETFs have been a long time coming.
Why are ProShares and others launching Bitcoin futures ETFs now after years of delays?
So can you just bring us up to speed and how do we get to this moment?
So this has been an eight-year effort, really. It started in 2013 when the Winklevoss twins tried to get their first Bitcoin ETF application through the SEC. That hasn't happened. And basically, regulators have been very uncomfortable with this idea of opening up the crypto market to fund investors when there is no ability for the SEC itself to to surveil, to monitor the underlying trading of Bitcoin. Right there, there's some concerns about the potential for fraud and manipulation in that trading. And investors in those funds could be getting prices or seeing prices or be subject to some of that fraud and manipulation that wouldn't be in their best interest. So there's been a huge holdup. In August, this all sort of diverted onto a new path when SEC Chairman Gary Gensler suggested that Bitcoin futures could be a better tool to introduce to the market.
And because there is oversight by the SEC and other regulators of futures trading, that would get around some of those concerns around the actual crypto market itself. So that started a path since the summer where a number of issuers, ProShares being first in this case, launching or at least starting the effort to get a Bitcoin futures ETF out there. So 75 days later, here we are. ProShares is preparing to launch its Bitcoin futures ETF today.
Now, you mentioned SEC Chair Gary Gensler's view that an ETF based on Bitcoin prices will be better. Why is that? And why do these ETFs track futures prices and not Bitcoin itself?
So that all gets to sort of this regulatory process approval, the path that it really took. And the fact that Bitcoin futures trading, that's a mature market and that's a regulated market in the eyes of the SEC. So there you have those protections built in basically for investors in the sense that if there were to be some type of fraudulent manipulative trading of Bitcoin futures, the SEC and other regulators can identify that trading. So that put them at more ease of allowing an ETF to operate in this sense. And there's a number of other futures focused ETFs that are already out there. There's obviously in the commodities market where there's a lot of futures trading.
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