Bitcoin and ETFs

Yesterday (20 Oct 2021), the impossible had happened. Bitcoin ETF by ProShares (aka “BITO” ticker)was approved by the SEC under the mutual fund rules, which requires funds to provide investor protection.

On its debut, the ETF recorded the second-best performance in terms of volume traded, touching ~ US$ 1B.

Is the hype justified, though?

Firstly, let’s define quickly what an ETF is. An ETF is an exchange-traded fund, which means that units of funds traded to/from an asset management company can now trade on an exchange just like any other company share. ETFs have gained popularity because of their lean cost structure, with low expense ratios (typically < 1%), attracting significant investor capital.

So why create an ETF for Bitcoin when you could purchase the Bitcoin itself?

BITO is a Bitcoin Futures ETF?

Futures are financial derivative contracts that allow investors to speculate or hedge on the future prices of an underlying asset.

BITO is traded in the New York Stock Exchange (NYSE). Although the interest in this product is genuine, there are some palpable limitations, which may not be immediately felt as necessary:

  • no physical redemption
  • not traded 24/7 (although an alternative trading platform called Blue Ocean is bridging this gap)
  • not custodial
  • not collateralized with real Bitcoin

The ETF is essentially providing exposure to an asset that represents freedom from institutional go-betweens, yet, the hype has obfuscated the urgent need to have assets traded globally and across time zones without stops.

By purchasing this ETF through brokers, not only do investors abandon the idea of managing their finances by self-custodising, but they wouldn’t be able even if they wanted to: futures are not collateralized with Bitcoin. Futures are usually meant to be cash-settled as the primary purpose is to either hedge other positions (most of the time) or speculate.

Several projects in DeFi are tokenizing funds and listing them on decentralized exchanges, creating what are known as decentralized traded funds.

DEXTF is one of these protocols that provide portfolio tokenization capabilities. XTF2s (all fund tickers’ heading starting with this acronym) are collateralized with tokens, redeemable for the same tokens, and most importantly traded 24/7 because decentralized exchanges don’t take rest days.

Additionally, creating XTF2 is a permissionless operation, quickly done in a matter of seconds through the dApp. The platform has recently pushed the rebalancing module (read “The Power of Rebalancing”), enabling funds to be dynamic rather than maintain their fixed allocations.

In summary:

  • physical redemption
  • traded 24/7
  • custodial
  • collateralized with real assets

Investors can create carbon-neutral strategies and tokenize funds by pairing $MCO2 (tokenized carbon offsets) to your favorite tokens.

A first iteration is the green bitcoin.