Are you ready for Bitcoin ETFs?

Stocks traded higher yesterday on a wave of positive earnings announcements. Housing Starts and Building Permits fell last month, according to the latest numbers, leaving investors wondering if the housing market has peaked.

N O T E W O R T H Y

They’re here!  If you are of a certain age, those words are likely to evoke a memory of a young girl sitting in front of a TV set with distorted snow on the screen. These days, we would refer to that as corrupted content, but back then, that snowy screen in the 1982 movie Poltergeist, heralded the onslaught of angry spirits that would haunt a family into packing up… really fast, and heading out.  I am not referring to the fact that Halloween season is in full swing but rather to the long awaited debut of the first Bitcoin ETF, which began trading yesterday. Before you jump in, there are a few things you need to consider.

First, the exchange traded fund is a Bitcoin Futures ETF, meaning that it will hold Bitcoin Futures and not actual Bitcoin itself.  If you are wondering “why futures?” it is because that is all that the Securities Exchange Commission (SEC) will allow at this point.  The SEC has been reticent to approve a Bitcoin ETF over the past 8 years despite numerous attempts, but the agency decided to approve a futures-based ETF because Bitcoin Futures have already been around for a number of years and they have been regulated effectively by the CFTC (Commodity Futures Trading Commission), where Bitcoin itself is not yet regulated.  Additionally, the SEC has jurisdiction over the ETF itself which will offer investors additional protections under the Investment Company Act of 1940.  There you have it the first Bitcoin-based Exchange Traded Fund!  Now, here are the things you need to consider, as promised.  Because the ETF will hold futures, investors will be subjected to pass-through short term and long term capital gains because futures are taxed based on mark to market close.  Short term capital gains taxes are higher than long term gains taxes… at current.  So, if you typically invest with a longer term focus (1 year plus), you may be surprised to find a short term capital gains tax in your year-end statement.  Additionally, because the fund will invest in futures, which expire, the fund managers will have to roll over to current contracts, meaning they will have to sell the expiring contract and purchase the new front contract. That rolling is typical of any futures-based strategy, but they produce what is referred to as a roll yield.  That is the differential between the current contract price and the future one.  If the new current contract is trading higher than the outgoing contract, the market is in a state referred to as Contango.  That means that investors expect the underlying commodity to be trading higher in the future.  If a market is in contango, an investor will have a negative roll yield resulting from selling low and buying higher.  As you may not be surprised, Bitcoin futures are currently in contango. To be clear, roll yields are normal for all futures, they can be positive, they are not typically that large, and fund managers can minimize negative roll yields by purchasing some longer, cheaper contracts strategically (if they exist).  The goal of the fund is to mirror the moves of the underlying currency using futures contracts, and it did a fairly good job of it in yesterday’s session.   Though one day of trading is hardly considered a good statistical sample, we can look back at Bitcoin Futures versus Bitcoin Spot to see that futures do a good job at tracking the underlying commodity.  Prior to yesterday, investors wishing to gain exposure to Bitcoin had two vehicle choices.  Of course, one can purchase Bitcoin directly by converting Dollars to Bitcoin, however the sole investment vehicle was a closed-end mutual fund.  An example of this is the popular Grayscale Bitcoin Trust (GBTC).  Closed-end funds have their drawbacks as well.  They typically charge high management fees.  GBTC has an expense ratio of 2.0% and competitor Bitwise 10 Crypto Index Fund (BITW) has an expense ratio of 2.50%.  The ProShares Bitcoin Strategy ETF (BITO) which debuted yesterday will only charge a 0.95% fee.  In addition to high fees, closed-end funds can trade at discounts and premiums to their net asset values, meaning you could end up paying more for less, based on spikes in demand.  What it all comes down to is that now investors have another choice for gaining exposure to Bitcoin with the approval and launch of BITW. ProShares was the first to market and we can expect many more to follow in weeks ahead.  With these, like all investments, one must look carefully at the fine print and understand all the nuances of each investment.  

THE MARKETS

Stocks trucked higher yesterday, driven by a slew of positive earnings announcements.  The S&P500 rose by +0.74%, the Dow Jones Industrial Average climbed by +0.56%, the Nasdaq Composite Index added +0.70%, the Russell 2000 traded up by +0.36%, and the S&P500 ESG Index gained +0.71%.  Bonds fell and 10-year Treasury yields added +3 basis points to 1.63%. Cryptos gained +2.71% with Bitcoin climbing by +4.49% and Bitcoin Futures adding +4.88%.

NXT UP

– The Fed Beige Book will be released this afternoon and will give an account of the economic health across all of the various Fed regions.

– Fed speakers include Bostic, Kashkari, Evans, Bullard, and Quarles.

– This morning, Lithia Motors, Anthem, Winnebago Industries, Biogen, and Abbott Labs all beat on EPS and Sales.  Verizon and NextEra Energy beat on EPS and missed on revenues while Baker Hughes missed on both counts. Post market, we will hear from IBM, CSX, Tenet Healthcare, Lam Research, Discover Financial, Las Vegas Sands, Kinder Morgan, PPG Industries and Tesla.