Bitcoin ETFs could have the same result as CME group futures launch in 2017

The SEC has rejected a number of Bitcoin ETFs, citing the lack of regulation and the inability to properly value the cryptocurrency. This decision could lead to a similar outcome as what occurred with CME Group futures launch in 2017.

The eth futures are Bitcoin ETFs that could have the same result as CME group futures launch in 2017.

By the end of October, the SEC is expected to approve five futures exchange-traded funds. While the whole market is anticipating a massive parabolic surge, a negative possibility must be considered. The bitcoin-related businesses included in the ETF will aid investors in gaining exposure, but owning the underlying asset will become costly. 

Many of us anticipate a big increase in the price of bitcoin in the next two weeks, as financial companies prepare to roll out their ETFs to all of their customers. And the majority of them can afford futures contract rollovers. If you’re not acquainted with rollovers, they’re when traders decide to keep holding a contract despite the fact that they believe the trend will not alter. BTC’s price now has the potential to rise much further, perhaps surpassing its previous all-time high. Bitcoin futures will have a negative yield as a result of this. 

Contango Bleed is the market phenomenon we’re talking about. Investors must pay a greater premium to roll over their futures contract if the fund underperforms the real spot price of the asset. 

Bitcoin ETFs based on futures may be inefficient.

The forward curve is used to assess whether or not the futures market is in backwardation or contango phase. The market is now bullish about bitcoin ETFs, but if we see a massive parabolic boom, the market will suffer significant pullbacks. It may not happen this year, but it will happen in the future. 

“Futures ETFs will rule the markets, bringing down the price with severe volatility,” Willy Woo said on Twitter the other day. Hedge funds benefit from this since they can simply short the market and receive a good annualized return. At the same time, since the contango hemorrhage will not cease, the performance of ordinary investors’ portfolios will suffer. The bullish picture may be alive and well, but if the futures price falls below the spot price, we’ll be in a backwardation phase, which will lead to a correction. 

Let’s look at an example of why bitcoin ETFs may be inefficient to help you understand. With a $500 premium, the October contract is now selling for $58,000. The price would rise to $58,500 in the following month, causing investors to sell for a $500 loss (0.86 percent ). This equates to 10.34 percent in a year. As a result, if investors chose to trade prolonged periods of contango, the fund may suffer substantial losses. 

Few people realize that if this bitcoin ETF is authorized, it will be backed by futures. Because futures are typically in severe contango (futures > spot), the ETF would *sell low to buy high* at rollover, resulting in Contango Bleed.

Assets with a lot of contango tend to bleed.

For instance, https://twitter.com/fVa7Fu81Db

October 7, 2021 — Alex Krüger (@krugermacro)

Will this have an effect on investors’ decisions? Experts believe it won’t make a difference. Institutions want a lot of exposure to this new asset class and are prepared to pay a roll-over fee to get it. However, if the BTC ETF suffers a significant amount of contango, investors may choose to buy directly in bitcoin. 

History is going to repeat itself.

BTC’s price soared over $20,000 in the second half of 2017 before falling in the last months of the year. This was largely due to the CME Group establishing the first bitcoin futures market. In ten months, the price reached its peak and then fell by more than 60-70 percent. 

Traders might gamble on the price of bitcoin falling if futures were made available to them. The CME made short selling feasible. When futures began trading on the CME on December 17, the speculative demand faded quickly.

At the time, not everyone was aware of the concept of the future, but things have changed in the past five years. The price gap between spot and futures will not be as large as it was in 2017. The negative argument may be much stronger than the last bull cycle. 

As a result, don’t anticipate the price to continue to rise in this current bull cycle. Traders may drive the price down and create selling pressure when the ETFs become live. When futures become more prevalent in the crypto sector, the price dynamics will alter. Finally, it is preferable to prepare an exit strategy in order to maximize earnings while avoiding the contango bleed. 

Karthikeya Gutta, a crypto writer and freelance contributor for ItsBlockchain, was born and raised in India. With in-depth analysis and research, he covers different areas of the sector. His enthusiasm for blockchain and the crypto ecosystem stems from his belief that it has the potential to transform the world and benefit millions of people.

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