Thomson Reuters
- The New York Stock Exchange is looking to list a number of funds linked to bitcoin futures on its NYSE Arca venue.
- The leveraged ETFs, which go long and short, would multiple the spine-tingling volatility of bitcoin.
- Some products could also expose investors to more risk.
The New York Stock Exchange is asking regulators for permission to list five new funds linked to bitcoin futures on one of its markets, according to a filing to the Securities and Exchange Commission.
The new leveraged and inverse exchange-traded funds, planned by ETF-maker Direxion Asset Management, are designed to track trading in bitcoin futures markets, not bitcoin itself. The leveraged ETFs, according to the filing, seek to provide investors returns that multiply returns in the underlying market.
“The 1.25X Bull Fund, 1.5X Bull Fund, and 2X Bull Fund … seeks daily leveraged investment results (before fees and expenses) that correlate positively to either 125%, 150%, or 200% the daily return of the target benchmark,” the filing said.
For instance, a 1% move up in the price of bitcoin futures would ideally translate into a 1.25% move in the price of a share of the 1.25X Bull Fund. Such products also expose investors to more risk. If an investor were to go long by buying a share of the 1.25X Bull Fund, and bitcoin dropped, their losses would be multiplied by 1.25.
On the other hand, the inverse ETFs, or so-called “bear funds,” provide a way for investors to profit on bitcoin futures going down by offering returns that “correlate to two times the inverse (-200%) of the daily return of the target benchmark.”
“Investors will likely see these leveraged products as a way to profit on price moves without taking either the security risks of buying actual bitcoin or having approved accounts to trade futures,” Dave Weisberger, the CEO of CoinRoutes, a cryptocurrency market structure company, told Business insider.
To be clear, leveraged and inverse ETFs are an investment product designed for the very short term and typically don’t achieve their investment objectives over the course of weeks or months.
Josiah Hernandez, chief strategy officer at Coinsource, said an ETF tied to bitcoin futures would likely be approved before one tied to bitcoin, but he said the former is riskier.
“Derivatives sometimes stray meaningfully from the underlying in terms of price with markets as young as bitcoin,” Hernandez told Business Insider.
“This has already occurred with futures, evidenced by the spread that has existed between futures products and spot markets,” he added. “Developing an ETF on top of this can compound the risk of decoupling of price movements between ETF and spot markets.”
This makes the market more risky because it makes hedging more challenging, according to Hernandez.
If approved by the SEC, they would trade on NYSE Arca, a secondary marketplace. The exchange said the products would “enhance competition among market participants, to the benefit of investors and the marketplace.”
NYSE, however, used this exact language in a separate filing dated December 15 for an unrelated product it was seeking to list on its NYSE American market.
The New York Stock Exchange has multiple filings with the SEC regarding bitcoin-linked products. As previously reported by Business Insider, the exchange asked regulators to approve two bitcoin ETFs in a December 19 filing.
Rival exchanges Cboe Global Markets and CME Group both launched bitcoin futures contracts in December, which allow investors to bet on the future price of bitcoin. The red-hot cryptocurrency, which is known for its volatility, has captured the attention of both Main Street and Wall Street.
Bitcoin is up 26% since the start of the year. In 2017, it roared by more than 1,300%.
A spokesperson for NYSE declined to comment on the matter.
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