Putting Bitcoin Futures in Perspective
November 19, 2021
Read Time 4 MIN
"Science really does advance one funeral at a time," proclaimed a 2019 headline in the trade magazine Chemistry World.1 It explained the phenomenon by which superstar academics often hoover up outsized funding, thereby crowding out potential disruptive ideas, which often flourish after the demise of the superstar. The idea is not so different from that of German theoretical physicist Max Planck, who famously observed in 1950 that "a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it." There are lessons for Bitcoin in these insights.
Many have observed that COVID helped accelerate digitalization trends and spurred innovation, amidst a massive intergenerational wealth transfer expected to total $68T over the next 25 years.2 New business formation in the U.S. is running 50%+ above 2019 levels, and more Americans quit their jobs in August than during any month in history.3 And yet despite that rapid turnover, the broad unemployment rate remains elevated at 8.5%.4 How is it possible to have both a worker shortage and high unemployment?
Perhaps, rapidly changing consumer preferences in the face of sticky government support for failing institutions might explain some of this phenomenon, which the below chart of Bitcoin + Ethereum market cap ($1.66T) vs. that of the top six U.S. banks ($1.41T) helps illustrate. The banks' $1.4T market value derives from the gap between their $12.4T in assets and $11.2T in liabilities, and the market's expectations of the return to be earned on that spread.5 Bitcoin's $1.2T market value, on the other hand, is derived from no such liability, and requires no such spread to sustain it. Thermodynamic energy, code and silicon suffice.
Still, total Bitcoin futures open interest, of which the CME has an 8% market share6, has exploded in the last week, reaching $105B, up from $42B on the day before any Bitcoin futures ETFs began trading.7 For comparison, gold futures total $98B and copper futures at $90B.8 Seen from this vantage point, perhaps the $1B in assets accumulated by the world's first Bitcoin (futures) ETF in two trading days may be less surprising.9 Yes, the futures-based structure is hardly ideal due to the costs of rolling futures contracts (see VanEck Bitcoin Futures primer here). But these ETFs nevertheless provide differentiated access points for institutions and individuals looking for a hard-money alternative to a classic balanced portfolio.10 Indeed, in the wake of recent acceleration in global inflation, Merrill Lynch recently declared "the end of the 60/40 portfolio," noting that since 2009, both a 60/40 mix and a 100% equity portfolio had Sortino ratios11 of about 1.6, meaning annual returns were 1.6 times the downside portfolio volatility. In other words, the lower volatility gained by owning some bonds didn't make up for significantly lower total return in bull markets.12 We should also note that Merrill Lynch followed up that "end of 60/40" report with 150 pages on digital assets titled "Only the First Inning."
As for the impact of the Bitcoin futures ETF on the prospects for an Ethereum futures fund or other physically backed crypto ETFs: November 14 is the date by which the SEC must rule on VanEck's physical Bitcoin ETF application. While we have no reason to believe a different result this time around, please read again the quotes at the top of this page. According to Morning Consult's just-released "State of Consumer Banking Q4 2021," 35% of Americans age 18-34 own cryptocurrencies; among those aged 65 and older, the number is just 4%.13
VanEck has long believed that investors should have the ability to get direct exposure to Bitcoin through regulated investment products. Today, a 64-year old SEC Chair and a 75-year old Treasury Secretary object. And yet someday soon, I believe Ethereum futures' liquidity may surpass where Bitcoin futures were on the day Chairman Gary Gensler blessed them in his Aspen Security Forum speech. By then, there will likely be more Ethereum users and more Bitcoin users on each network. In the absence of an enforcement action against Ethereum, which would represent a change in precedent, it will get increasingly harder for the older generation to deny the youth what they already hold. Successful execution of the futures ETFs only reinforces this view.
Market Cap: Bitcoin + Ethereum vs. Top 6 U.S. Banks
Source: Bloomberg, as of 10/21/2021. JPM: JPMorgan Chase, BAC: Bank of America; WFC: Wells Fargo; C: Citigroup; USB: U.S. Bancorp; TFC: Truist Financial Corp; BTC: Bitcoin; ETH: Ethereum.
Younger Adults More Likely to Be Crypto Owners: Share Reporting Crypto Ownership
Source: Morning Consult, State of Consumer Banking Q4 2021.
Notional Futures Outstanding: Bitcoin vs. Ethereum Futures
Source: Bloomberg, as of 10/21/2021. Notional futures outstanding refers to the value of all futures contracts concluded and not yet settled on the reporting date.
Average Trade Ticket, 10/19/2021-10/20/2021
Source: Bloomberg. GDX: VanEck Gold Miners ETF; BITO: ProShares Bitcoin Strategy ETF; GBTC: Grayscale Bitcoin Trust; ARKK: Ark Innovation ETF; GLD: SPDR Gold Trust; SPY: SPDR S&P 500 ETF Trust; TSLA: Tesla.
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DISCLOSURES
Important Information Regarding Cryptocurrencies.
VanEck assumes no liability for the content of any linked third-party site, and/or content hosted on external sites.
The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The cryptocurrencies discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any cryptocurrencies, or to participate in any trading strategy.
Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.
Futures carry additional risks and are not suitable for all investors. Before Investing in Bitcoin Futures Contracts, make sure you carefully weigh the potential risks and benefits.
An investment in the VanEck Gold Miners ETF (GDX) may be subject to risks which include, among others, investing in gold and silver mining companies, Canadian issuers, foreign securities, foreign currency, depositary receipts, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's return. Small- and medium-capitalization companies may be subject to elevated risks.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies, such as Bitcoin, comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
- Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
2 Cerulli Associates
3 Bloomberg, US Census Bureau (BFMSSAUS Index)
4 BLS, U-6 includes workers marginally attached to the labor force or working part-time because of economic reasons
5 Source: Bloomberg
6 Skew, as of 10/21/2021
7 Glassnode
8 Bloomberg, LME, CME, COMEX, SHFE, as of 10/20/2021
9 Bloomberg
10 That said, early trading in the BITO ETF has been dominated by small ticket sizes, indicating a high proportion of retail traders. See figure 4, Source: Bloomberg.
11 Sortino ratio is a measure of the risk-adjusted return of an investment asset, portfolio, or strategy.
12 BofA Global Research "It's not quite that '70s show" October 12, 2021
13 Morning Consult, "State of Consumer Banking Q4 2021"
Information provided by VanEck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
Related Funds
DISCLOSURES
Important Information Regarding Cryptocurrencies.
VanEck assumes no liability for the content of any linked third-party site, and/or content hosted on external sites.
The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The cryptocurrencies discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any cryptocurrencies, or to participate in any trading strategy.
Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.
Futures carry additional risks and are not suitable for all investors. Before Investing in Bitcoin Futures Contracts, make sure you carefully weigh the potential risks and benefits.
An investment in the VanEck Gold Miners ETF (GDX) may be subject to risks which include, among others, investing in gold and silver mining companies, Canadian issuers, foreign securities, foreign currency, depositary receipts, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's return. Small- and medium-capitalization companies may be subject to elevated risks.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies, such as Bitcoin, comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
- Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
2 Cerulli Associates
3 Bloomberg, US Census Bureau (BFMSSAUS Index)
4 BLS, U-6 includes workers marginally attached to the labor force or working part-time because of economic reasons
5 Source: Bloomberg
6 Skew, as of 10/21/2021
7 Glassnode
8 Bloomberg, LME, CME, COMEX, SHFE, as of 10/20/2021
9 Bloomberg
10 That said, early trading in the BITO ETF has been dominated by small ticket sizes, indicating a high proportion of retail traders. See figure 4, Source: Bloomberg.
11 Sortino ratio is a measure of the risk-adjusted return of an investment asset, portfolio, or strategy.
12 BofA Global Research "It's not quite that '70s show" October 12, 2021
13 Morning Consult, "State of Consumer Banking Q4 2021"
Information provided by VanEck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.