Should You Buy Crypto Futures ETFs?

Crypto Futures ETFs: A Better Way to Gain Cryptocurrency Exposure?

Cryptocurrencies are becoming increasingly recognized as a legitimate asset class, attracting growing interest from investors. One way to gain exposure to this market is through cryptocurrency futures contracts, agreements to buy or sell a specific cryptocurrency at a predetermined price on a future date.

However, directly trading futures requires specialized knowledge and may not be a suitable investment strategy for beginners. This is where crypto futures ETFs come in. These exchange-traded funds (ETFs) offer a potentially simpler and more accessible way for investors to gain exposure to Bitcoin and other cryptocurrency price movements without the complexities of managing futures contracts.

What Are Crypto Futures ETFs and How Do They Work?

Unlike traditional ETFs that hold a diversified portfolio of assets, the underlying assets in a crypto futures ETF aren't the cryptocurrencies themselves, but rather futures contracts tied to those cryptocurrencies. A futures contract is a legally binding agreement between an investor and the cryptocurrency exchange to buy or sell a specific amount of an asset at a predetermined price and date in the future.

The ETF provider buys and holds these futures contracts, and the ETF's share price is designed to track the performance of these contracts, which are, in turn, tied to the price movements of the underlying cryptocurrency. When you buy shares of a crypto futures ETF, you're buying a stake in a fund that holds these futures contracts, giving you indirect exposure to the cryptocurrency's price movements.

For example, the ProShares Bitcoin Strategy ETF (BITO) gives investors a way to gain exposure to Bitcoin and invest in Bitcoin futures without having to manage the complexities of futures contracts themselves. While BITO focuses specifically on Bitcoin, crypto futures ETFs do not necessarily have to be focused on a single cryptocurrency. Some ETFs offer exposure to Ethereum futures. Furthermore, some crypto futures ETFs may employ leverage, meaning they borrow money to amplify their returns (and potential losses). Leveraged ETFs are generally considered higher risk and are designed for sophisticated investors.

It's important to understand the mechanics of how crypto future ETFs maintain their exposure to the cryptocurrency market.

The "Rolling" Process

Futures contracts have expiration dates. To maintain continuous exposure to the cryptocurrency market, the ETF engages in a process called "rolling." This involves:

• Selling the expiring futures contracts.

• Simultaneously buying new futures contracts with a later expiration date. This keeps the ETF invested in the market.

The performance of a crypto futures ETF can be affected by market dynamics like contango and backwardation:

• Contango: When futures prices are higher than the current (spot) price of the cryptocurrency. This can negatively impact ETF returns as the ETF is essentially buying high and hoping the price continues to rise.

• Backwardation: When futures prices are lower than the spot price. This can be beneficial for the ETF as it is buying at a discount to the current spot price.

In addition to these market dynamics, fees and expenses associated with crypto futures ETFs can impact your overall investment returns.

Fees and Expenses

Crypto futures ETFs, like other ETF investments, have fees and expenses that investors should consider. These can include:

• Management fees: Charged by the ETF provider for managing the fund.

• Trading costs: Associated with buying and selling futures contracts during the rolling process.

• Other expenses: These may include administrative, legal, and accounting costs.

Advantages of Crypto Futures ETFs

• Accessibility: Crypto futures ETFs are readily accessible through traditional brokerage accounts, making them easier to invest in than directly buying and managing cryptocurrency on a cryptocurrency exchange. This opens up cryptocurrency investment to a wider range of investors who may not be comfortable navigating the technicalities of cryptocurrency exchanges and wallets.

• Regulation: ETFs operate within a regulated framework, providing investors with a greater sense of security

• compared to the often less regulated world of direct cryptocurrency purchases. Regulatory oversight can offer some protection and peace of mind for investors concerned about the risks associated with the cryptocurrency market.

• Diversification: Some crypto futures ETFs offer exposure to a basket of cryptocurrencies, providing instant diversification within the crypto asset class, and helping to mitigate risk compared to investing in a single cryptocurrency.

• Liquidity: Crypto futures ETFs are traded on major stock exchanges, providing greater liquidity than some cryptocurrencies, especially those with smaller market capitalizations. This allows investors to buy and sell shares of the ETF quickly and easily without significantly impacting the price.

Disadvantages of Crypto Futures ETFs

• Tracking Error: Crypto futures ETFs may not perfectly track the price of the underlying cryptocurrency due to factors like the rolling of futures contracts and market volatility. This "tracking error" can result in the ETF's performance deviating from the actual cryptocurrency's price movements, potentially leading to lower returns or losses.

• Rolling Costs: The process of rolling futures contracts incurs costs, which can eat into the ETF's returns. These costs can be significant, especially in markets with high contango, where futures prices are higher than the spot price.

• Futures Market Risks: Investing in crypto futures ETFs exposes investors to the inherent risks of the futures market, including the potential for leveraged losses. Futures contracts can be highly volatile, and even small price movements can result in significant gains or losses.

• Management Fees: While potentially lower than actively managed funds, crypto futures ETFs still have management fees that contribute to the overall cost of investing. These fees can reduce your overall investment returns over time.

Should You Buy Crypto Futures ETFs?

Ultimately, the decision of whether to buy or sell a crypto futures ETF depends on your individual investment strategy, risk tolerance, and financial goals. If you're looking for a more accessible and regulated way to gain exposure to Bitcoin or other cryptocurrencies, a crypto futures ETF might be a suitable option for you. However, understand that factors like management fees and tracking errors are the price you pay for convenience and can eat into your potential profits.

If you prefer to have greater control over your investments and want to avoid fees associated with ETFs, then consider trading crypto futures directly on a platform like Flipster to actively manage your positions and potentially capitalize on short-term market movements.

How to Trade on Flipster

Want to trade cryptocurrency futures? Here’s how you can do so on Flipster.

1. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).

2. Click the [Trade] tab.

3. Search for your preferred cryptocurrency and click on it.

4. Select the leverage (up to 100x).

5. Select either a Trigger Order or Market Order.

6. Enter the amount of coin you want to trade or choose a percentage of your available funds.

7. Once you have confirmed the details, click the [Long] or [Short] button to open a position.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.