Should I Invest in a Bitcoin Futures ETF?
Is investing in a Bitcoin Futures ETFs right for you? Futures contracts of any commodity are highly speculative investments – so is crypto. Here's some things to consider about your portfolio and risk appetite before you invest.
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The Securities and Exchange Commission (SEC) approved the first Bitcoin futures Exchange-Traded Fund (ETF), ProShares’ Bitcoin Strategy ETF (BITO), in 2021. Trading began on Tuesday, Oct. 19.
The fund brought in about $570 million in assets on its first day and was the second most heavily traded ETF on record, according to Bloomberg.
Since BITO’s launch in 2021, more Bitcoin futures ETFs have followed. The SEC approved the first spot Bitcoin ETFs in January 2024; funds that hold Bitcoin directly rather than futures contracts have become a more popular way for investors to gain Bitcoin exposure. Cryptocurrency enthusiasts and investors are all excited, but is a futures-based ETF right for you?
I can’t answer that for you, but you can answer that after some due diligence. Here are four questions to ask yourself while you weigh your options.
What is a Bitcoin Futures ETF? Do I understand the investment?
The short version is: BITO and other Bitcoin futures ETFs do NOT invest directly in Bitcoins. If you invest in a Bitcoin futures ETF, you will NOT own bitcoins. This type of ETF invests in Bitcoin futures contracts.
Futures contracts can be complicated, but put simply: a futures contract is an agreement to buy or sell something at a future date and at a price agreed upon in advance. On the day the contract comes due, the asset’s value will be lower, higher, or the same (rarely).
If the value of the asset is lower than the agreed price, the buyer will lose money and the seller will make money. If the asset’s value is higher than the agreed price, the buyer makes money and the seller loses money.
The Bitcoin Futures ETF will invest in contracts to buy and sell bitcoin at a set price, but BITO does not have investments in bitcoin, bitcoin mining, bitcoin utilities or bitcoin exchanges.
When you invest in any company, you are essentially betting on its success or failure. This is especially true with a Bitcoin Futures ETF. You are betting on the ETF’s ability to succeed in investing in Bitcoin futures.
Fund managers need to predict what will happen in the Bitcoin market, which futures contracts will gain if they buy them, and when to buy them.
Between buys, the mix of investments in the fund may include short-term money instruments (like U.S. Treasury bills with one year or less to maturity).
Like other ETFs, investing in a Bitcoin Futures ETF allows you to spread your risk across multiple investments – in this case, multiple bitcoin futures contracts. Spreading risk reduces overall risk because if one investment is a big loss, potential gains in hundreds of others in the fund could offset it.
One of the best places to start getting a solid understanding of a fund like this one is with its prospectus (a formal document required by the SEC that provides details of an investment offering to the public).
Do I understand cryptocurrency and Bitcoin?
Maybe you’ve known about cryptocurrency for years or even for a couple of decades, but
cryptocurrency is relatively new in the world of investing. Make an effort to fully understand what cryptocurrency is about before investing in it or in this ETF.
If you can’t make sense of it, consider consulting a financial advisor or avoiding cryptocurrency investment altogether. The SEC is an unbiased source of information on cryptocurrency and bitcoin futures.
What are the Risks for a Bitcoin Futures ETF?
Many financial advisors and professional investors view cryptocurrencies as speculative investments that carry a high risk of loss. So far, cryptocurrency track records back that up. These investments are highly volatile (their value can and does fluctuate sharply).
Futures are also highly speculative investments.
One investing principle is to determine the level of risk you find acceptable. Since speculative investments are generally viewed as high risk, investors should carefully consider how much of their portfolio to allocate to Bitcoin Futures ETFs.
“The principles are the principles for a reason, and their main purpose is to keep you away from scenarios that can be financially ruinous,” said Navy veteran Sean Gillespie, a financial planner with Redeployment Wealth Strategies who specializes in financial planning for military and veteran families.
“Layering a speculative bet on futures on top of (another) speculative bet on an unproven asset class is super risky,” Gillespie said. “Sure, you might see a big payoff – (or) you might see your position go to zero.”
The fund’s prospectus and the SEC are two good sources to help you consider the risks of investing in a Bitcoin Futures ETF.
Does a Bitcoin Futures ETF fit with my
investment strategy?
If you feel uncomfortable with Bitcoin Futures ETFs after taking the time to understand and consider futures, cryptocurrency and the involved risks, it probably doesn’t make sense to include it in your investment strategy.
If you have a financial advisor, you should have a strategy you and the advisor have agreed on. Many advisors prefer that cryptocurrency and futures make up only a small percentage of your portfolio because of the risks associated with both.
“We’ve had a few of these conversations with clients,” said Gillespie. “We typically say ‘no more than 10%’ when a client wants to include a few specific stocks in their portfolio. When it’s a cryptocurrency they want to include, we’re typically trying to keep that to no more than 1% or 2%.”
If you don’t have an investment strategy, then this may be a good time to develop one.
This is an exciting time for cryptocurrency and investing, but don’t forget the fundamentals when making investment decisions.
Just because everyone else is talking about an investment doesn’t make it right for you
Along with the four questions above, consider any investment’s fees and taxes.
If you have a financial advisor, make sure that you consult with them about any important investment decisions.
