What was expected to be a wave of US exchange-traded funds pegged to Bitcoin futures has all but dried up, for now, after demand off the charts for the former rocked Wall’s biggest brokers. Street.
Wall Street analysts expected up to four Bitcoin futures ETFs to go live in October following tacit approval of the structure by the Securities and Exchange Commission; Instead, only two products, from ProShares and Valkyrie Investments, debuted. While optimism still abounds that several funds could begin trading in the coming weeks, a similar VanEck ETF is in a holding pattern despite the 75-day window for regulators to reject or delay it has ” it’s been a long time. ”
The delay is partly due to reluctance among futures commission traders, who act as intermediaries between derivative-backed funds such as the ProShares Bitcoin Strategy ETF (ticker BITO) and the exchanges on which those contracts are traded. Known as FCM, these companies, usually banks, handle buy and sell orders for futures contacts on behalf of their clients and then settle those operations with exchanges such as the Chicago Mercantile Exchange.
Under normal circumstances, it’s a pretty mechanical and unfocused relationship. However, the impressive appetite observed by BITO, which last month amassed more than $ 1 billion in assets in just two days, one of the largest launches in history, has FCMs thinking twice. The inflow of cash quickly ate into the balance sheet of the company that acted as FCM for BITO at its launch, exposing regulatory capital constraints against Bitcoin futures exposure, according to a person familiar with the matter.
While the Valkyrie ETF managed to debut two days after BITO, and with somewhat less fanfare, the dizzying demand for the first fund has created a crisis for upcoming online issuers like VanEck. It has yet to launch its pending Bitcoin strategy ETF (XBTF ticker) despite being ‘post-cash’, essentially authorized to start trading by the Securities and Exchange Commission, due to the difficulty of aligning the FCMs, according to a person familiar with the matter who asked not to be identified. Beyond VanEck, there are a handful of applications for similar futures-based products filed with the SEC.
What compounds the problem is the fact that the world of the future has been slowly emptying out over the years. Heading into 2020, a wave of cuts and consolidation of the workforce hit the industry, including companies that facilitate trade, such as FCMs. That created a form of “concentration risk” for FCMs, as the industry has shrunk over the last decade.
And so even as cryptocurrencies and their signature volatility have emerged as a profitable new asset class, allowing smaller non-bank players like ED&F Man and StoneX to take hold, their size creates limitations.
“If you have a client who poses a big risk to your book, it’s an additional capital hit,” said Craig Pirrong, a finance professor at the University of Houston’s Bauer College of Business. “If you look at volatility, if you look at concentration risk, if you look at size, it’s possible that that would go up, that that would cause problems with FCM’s capital problems.”
ED&F Man and ProShares declined to comment. VanEck did not respond to multiple requests for comment.
“They have some of the smaller FCMs that can be more retail, so they have retail type customers. And then there are some of the very big banks and some of them have an appetite for these new products, some of them don’t. It only has a few well-capitalized non-bank FCMs that I think are potentially suitable for this type of business, ”Vincent Angelico, StoneX’s head of clearing and enforcement services, said in a telephone interview. “We are excited about the opportunity to provide market access for some of the well-capitalized ETFs.”
The entries in BITO have also forced the fund to drive purchases towards further futures to avoid breaching the first month’s position limits. The ETF has already bought December contracts with just one trading day through November, Bloomberg Intelligence analysts noted Tuesday.
The jam is a product of pent-up demand for Bitcoin exposure in an ETF envelope, something that had been out of reach in the US despite nearly a decade of effort. Cameron and Tyler Winklevoss filed the first application for a Bitcoin ETF in 2013, but the SEC objected for years, citing concerns about everything from price manipulation to a lack of liquidity. The landscape changed in August, when SEC Director Gary Gensler noted that he would be more open to a futures-backed fund than one physically holding Bitcoin.
While Gensler’s reasoning lies in the fact that futures are traded on the regulated CME, Bitcoin derivatives require more margin. For example, commodity futures typically have a leverage ratio of about 10 to 1, which means that for every $ 100 million of exposure, a deposit of $ 10 million is required. However, for $ 100 million of Bitcoin futures exposure, about $ 40 million must be deposited, according to Bloomberg Intelligence analyst Mike McGlone.
The bottleneck will be alleviated as larger FCMs and other participants become more comfortable with the Bitcoin futures market, according to Jesse Proudman, co-founder and CEO of Makara, a crypto advisory firm.
“It will take time for all participants to feel comfortable with how this works,” Proudman said. “The big providers are in wait-and-see mode, while the smaller providers are hungry and ready to adapt.”
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