Approval of a Bitcoin ETF comes with a catch…

Bitcoin rose 68% in the past month — breaking $50k at one point — but there’s more in the news than its rising price.

In early August, regulators signaled a path to approval for a Bitcoin ETF with a catch — they must use futures contracts, instead of holding Bitcoin directly.

Bitcoin futures-based ETFs use futures contracts, a financial instrument similar to options, to replicate Bitcoin’s value. But using futures contracts can potentially cost investors more in returns.

Price to pay: According to Bloomberg, futures-based ETFs could cost investors as much as 10 percentage points more in annual returns each year — on top of ~1% in annual fees. Here’s how a futures-based ETF can go wrong:

• The worst-case scenario: The United States Oil Fund (NYSE:USO) — a futures-based ETF replicating the price of oil.
• The fund’s futures structure caused investors to lose twice as much in the past decade compared to the fall in oil prices.

Matters because? With Bitcoin directly accessible to investors through crypto exchanges, why does a bitcoin ETF matter? Well, a bitcoin ETF is more accessible to:

• Investors — as they don’t have to open a crypto wallet or crypto trading account.
• Institutional investors — as many can’t directly hold Bitcoin.

Bitcoin ETFs are already available in Canada, Brazil and Dubai, but the US has been reluctant on its approval.

One of the biggest potential impacts from a Bitcoin ETF is — higher Bitcoin prices. If a Bitcoin ETF gets approved in the US, the asset could see even more demand and acceptance.