Evaluating the Utility of Bitcoin Futures | ETF Trends

Bitcoin futures have been around for several years, and while the asset class has proved useful to futures-savvy traders and other professionals, these contracts are receiving renewed attention and going more mainstream with the recent debuts of futures-backed bitcoin exchange traded funds.

The launches of those products is putting a spotlight on bitcoin futures. In fact, futures contracts tied to the largest digital currency recently saw volume exceeding that of some heavily traded commodities.

“Total Bitcoin futures open interest, of which the CME has an 8% market share has exploded in the last week, reaching $105B, up from $42B on the day before any Bitcoin futures ETFs began trading. For comparison, gold futures total $98B and copper futures at $90B,” says Matthew Sigel, VanEck head of digital asset research.

That turnover could rise in the coming days because the first U.S.-listed bitcoin amassed $1 billion in assets under management in just two days and is already bumping up against the limit of bitcoin futures contracts it can hold.

As Sigel notes, futures-backed strategies aren’t the ideal bitcoin ETF structure, but there are some benefits, and until regulators approve physically backed funds, futures strategies are what ETF investors have to choose from.

“But these ETFs nevertheless provide differentiated access points for institutions and individuals looking for a hard-money alternative to a classic balanced portfolio,” adds Sigel.

Interestingly, hurdles in getting a physically backed bitcoin ETF to market in the U.S. could have something to do with demographics. Gary Gensler, head of the Securities and Exchange Commission (SEC), is 64 years old, and Treasury Secretary Janet Yellen is 75. As VanEck research points out, the percentage of Americans 65 years old and up that own digital assets is less than 5%, but for those in the 18-34 demographic, that percentage swells to nearly 35%.

Alas, it could be a while before a physically backed bitcoin ETF comes to market in the U.S. In the meantime, the futures ETFs could be useful because futures as an asset class are decent inflation fighters, and bitcoin is also displaying increasing inflation-fighting properties — a highly relevant trait in the current market climate.

“Indeed, in the wake of recent acceleration in global inflation, Merrill Lynch recently declared ‘the end of the 60/40 portfolio,’ noting that since 2009, both a 60/40 mix and a 100% equity portfolio had Sortino ratios of about 1.6, meaning annual returns were 1.6 times the downside portfolio volatility. In other words, the lower volatility gained by owning some bonds didn’t make up for significantly lower total return in bull markets,” concludes Sigel. “We should also note that Merrill Lynch followed up that ‘end of 60/40’ report with 150 pages on digital assets titled ‘Only the First Inning.’”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.