Investors are abuzz as ProShares Bitcoin Strategy ETF (BITO) , the very first Bitcoin-linked ETF to list in the United States, is set to hit markets Tuesday.
"The launch of the ETF is very exciting, it's a real watershed moment for Bitcoin and crypto generally," Sui Chung, CEO of Kraken-subsidiary CF Benchmarks, told Real Money. "It's been a long time coming and a very circuitous journey to this point, but this can really only be a positive development."
Indeed, in the weeks leading up to its release, the anticipation has helped lift Bitcoin to near all-time highs. Many bulls see significant upside still ahead, as well.
As the new vehicle attracts attention, there is reason to look past the initial excitement and be mindful of the audience it can court, its comparison to investment in Bitcoin itself, and the signal the success or failure of the ETF's debut on the NYSE will send to investors. All three factors could be pivotal not only for investors eager to buy the ETF itself, but for Bitcoin and crypto investors more broadly.
Inviting a New Audience
While excitement may be emanating from long-term crypto evangelists, the actual target audience of the new ProShares product is more likely to be found among an entirely new audience.
"Predominantly the ETF will be invested in by individuals and institutions that do not have exposure to crypto today," Chung surmised. "There is also a second constituency of investors that might have a Kraken, Robinhood (HOOD) , or Coinbase (COIN) account that invest and trade in cryptocurrencies."
He noted that the second group now has more scope to allocate assets to cryptocurrencies, whether it be by retirement accounts, 401(k)s, or other vehicles. Further, he suggested the lessened regulatory risk of investing in an ETF listed on the NYSE is likely to encourage adoption among previously apprehensive investors.
For these novice investors, Sylvia Jablonski, co-founder and CIO of Defiance ETFs, expects increased adoption based on ease of access.
She explained that if investors are not keen on mining or getting exposure to the currency via a crypto platform like Coinbase, trusts that invest in cryptocurrencies and these new ETF products are logical avenues to pursue.
"Trading ETFs is as easy as trading stocks, so for the novice crypto investor, an ETF is a simple way to do it," she told Real Money.
Even for sophisticated institutional investors, the ease of access, liquidity, and lessened regulatory risk is likely to encourage some adoption. This is particularly important for institutional investors that may have had trouble or were otherwise averse to adding cryptocurrency exposure in the past.
Per Fidelity Digital Assets, two-thirds of U.S. institutional investors lack any exposure to digital assets. While volatility is a primary concern cited in the report and not likely to be assuaged by the latest product, the regulatory risk cited as secondary by Fidelity is one that might be overcome by use of NYSE-listed and SEC-approved products like these ETFs.
Of course, if institutional adoption picks up, the price of Bitcoin is likely to follow suit.
The Real McCoin?
The ease of access is not without its drawbacks, however.
"There are additional risks that come with purchasing an ETF that utilizes futures for exposure," Jablonski noted. "They have tracking error potential, additional costs associated with contango and limits in terms of AUM available to rebalance the fund after a certain size which poses additional risk."
As has been seen with the Grayscale Bitcoin Trust (GBTC) , products ancillary to ownership of the coin itself can come saddled with significant shortcomings and a proclivity to trade out of step with the asset it was designed to track.
Chris Kline, co-founder and COO of Bitcoin IRA, a platform that fosters cryptocurrency investment via individual retirement accounts, seconded Jablonski's apprehensions. He noted that while the ETF is certainly a positive for 401(k) and IRA investment his firm facilitates, a futures-based ETF is intrinsically inferior to a physical currency-backed ETF.
"This is good for crypto to at least feel like traditional finance," he explained. "But, I have also said that using an ETF to invest in Bitcoin is a bit like putting gas in a Tesla (TSLA) ."
Further there is some pushback among early adopters as to the utilization of familiar wrappers like ETFs. This, yet again, arises mainly from qualms about the new product's indirect exposure to Bitcoin itself.
"A lot of investors are looking at [Bitcoin] as a hedge," Kline commented. "If the boat is going down, do you want a life jacket or a life-jacket certificate?"
Still, if the futures-based ETF can serve as a gateway for physically backed ETF offerings, much of these concerns will be moot. Indeed, the latest offering may simply be a stepping stone to building out a full slate of financial offerings associated with cryptocurrencies as the industry continues to evolve.
Cause for Correction?
Nonetheless, the debut of the ProShares ETF could be quite pertinent for investors in the near term. This is largely due to the potential for a groundswell of excitement in the space overall to signal a near-term top.
Noelle Acheson, Head of Market Insights at Genesis Global Trading, pointed to a few precedents for market blow-offs from levels of euphoria similar to the present moment.
"Disappointment from the BTC futures ETF listing could provoke a correction," she warned. "After other seminal BTC market moments such as the listing of BTC futures on the CME in December 2017 and the listing of Coinbase on Nasdaq in April 2021, the market fell sharply."
While she quickly put cold water on the idea that a selloff is likely to be especially deep or lengthy, it could be a cause for caution in the near term.
Overall, as excitement builds around new investment offerings and inflation concerns continue to push the crypto space to new heights, there seems to be very little to hinder bullishness on the space. A pop in price for the debuting ProShares ETF is likely to only cement that view. However, a flop might finally give the growing chorus of bulls reason for pause.
At the very least, there is good reason to watch carefully as the first day of trading plays out for the new product. It could signal a sustained surge for the hottest space in the market at present, or portend at least a short-term plunge for Bitcoin as investors that bought the rumor, begin to sell the news.