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Bitcoin ETF: regulatory arbitrage — by US regulators

After years of delays and setbacks, a bitcoin exchange-traded fund finally made its debut in the US. Sort of.

The ProShares Bitcoin Strategy ETF (BITO) started trading on the New York Stock Exchange on Tuesday. Some pundits hailed it as a watershed event that would bring the digital currency another step closer to the mainstream. But it may be a bigger step for the nervous regulators that approved it than the investors who buy it.

For starters, the ETF is not backed directly by bitcoins. Instead it holds futures contracts that track the cryptocurrency. Potential investors hoping for the speculative volatility of the real thing will be disappointed. Only 25 per cent of the fund will be invested in bitcoin futures, according to the prospectus. The remaining 75 per cent will go into staid money-market instruments such as Treasury bills.

Then there are costs. Funds that invest in futures need to keep rolling contracts over contracts to maintain their exposure. They pay a fee every time they do this. This can impose particular expenses when longer-dated futures cost more than shorter-dated ones, the fund says.

All this comes on top of a 0.95 per cent management fee. A futures ETF will give investors modest indirect exposure to bitcoin via any ordinary brokerage account. But returns will be eroded by relatively high costs compared to owning bitcoin directly.

The ProShares ETF presages a series of futures ETFs with a bitcoin flavouring. But these will make few waves with crypto investors: they will go on buying their volatile, carbon-intensive tokens via Coinbase or other crypto exchanges.

The real target of the ETF are financial advisers, who until now have not been able to recommend unregulated bitcoin to their clients. Regulators see futures, heavily damped by money-market instruments, as a safer proposition. The new funds allow watchdogs to claim that they are giving retail investors access to a popular asset while continuing to protect them from its worse excesses. It is regulators, rather than crypto-curious investors, who are having their cake and eating it.

This is the third in a series of articles on digital assets Lex is publishing this week. We have also examined bitcoin correlations and investment analysis.

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