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Popular asset manager Bitwise has filed for a Bitcoin Exchange Traded Fund (ETF) product with NYSE Arca, a major move it is making after the rejection of its previous applications. As unveiled by the company’s Chief Investment Officer, Matt Hougan, Bitwise currently has an active Bitcoin Futures ETF application, however, the firm believes that an actual Bitcoin ETF is better for investors.
1/ Today @NYSE filed for a Bitwise Bitcoin ETF!
It would hold actual BTC, *not* futures.
There’s already a separate BTC futures-based Bitwise ETF filing. But actual BTC is better.
And we believe it’s finally possible.
We're sharing 100+ pages of analysis on why.
Thread— pic.twitter.com/uw6tcDKZgv
— Matt Hougan (@Matt_Hougan) October 14, 2021
Explaining the reasons why a Bitcoin ETF is better than the Futures-backed model, Hougan noted that it could cost as much as 5-10% per year to roll the futures (“contango”). The rollover will also incur another 1-2% in fees, making it an uneconomic adventure for an entity that wishes to pull in profit for its investors. Per existing rules, an 100% investment of funds into Futures by an ETF is not possible, and as such, most firms filing for the products are looking at an 85% dilution rate, with the remaining 15% committed to other investments which can be anything.
Hougan also pointed out that there are tail risks associated with Bitcoin ETFs that track futures, citing that Position limits, liquidity, and other factors can break, further increasing the uncertainties in the Bitcoin Futures options.
The Case for Approval
Hougan noted that the last Bitcoin ETF application rejection it received from the Securities and Exchange Commission (SEC) was accompanied by a 100-page memo in which the market regulator shared its biggest concerns about the Bitcoin ecosystem. The Bitwise CIO noted that the entire team has spent the last 2 years analyzing the concerns and how they can be addressed in future applications.
One of the focal concerns borders on the inability to stump price manipulation, and enforce broad surveillance of activities. In order to check the mark for this requirement, the SEC will require a “regulated market of significant size” to lead price discovery— just like for other commodity ETFs.
At present, the Chicago Mercantile Exchange (CME) fits both descriptions, as it is not only regulated, it is the major source of price discovery ahead of other prominent exchanges including Coinbase and Binance. Drawing on this development, Bitwise is confident the time is near for the SEC to approve its application.
Hougan reiterated that the investor protection that the SEC wants is also a top priority for the firm, and it has incorporated all of the concerns in its latest filing. With increasing expectations for a Bitcoin Futures ETF this month, there is enough gap to ascertain whether Bitwise’s application stands a chance this time around.
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