Valkyrie appears to be the first to have filed with the SEC for a bitcoin futures ETF, doing so confidentially in May under rules designed to enable emerging managers to protect intellectual property
Bloomberg Intelligence ETF Analyst James Seyffart said he believes the SEC should let several issuers launch together rather than give one a first-mover advantage

ETF investors wanting exposure to bitcoin anytime soon will likely have to first get it through a product focused on futures contracts. But which issuer, if any at all, will be the first to market remains unclear.

Bloomberg Intelligence ETF Analysts James Seyffart and Eric Balchunas wrote in a research note this week that they expect at least one bitcoin futures ETF to launch in the US during the fourth quarter.

Seyffart noted that ProShares filed for its bitcoin strategy ETF a day ahead of Invesco. The two filings came just days after SEC Chairman Gary Gensler hinted during a virtual forum that ETFs limited to investing in bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) could gain approval faster than others.

Lara Crigger, managing editor at ETF Trends, previously told Blockworks that CME bitcoin futures are likely favored by the SEC because they represent the average prices across five exchanges with the highest volume rather than the spot price of bitcoin on any one exchange, making manipulation more improbable. Bitcoin futures are cash-settled, she added.

The proposed actively managed products by Invesco and ProShares would both invest in bitcoin futures contracts traded on the CME, and may also allocate to Canadian bitcoin ETFs and investment offerings such as the Grayscale Bitcoin Trust (GBTC).

Valkyrie’s secret filing

While Valkyrie Investments had submitted a filing to the SEC for its proposed bitcoin futures ETF about a week after ProShares and Invesco, a recent filing revealed that the firm had applied for another bitcoin futures fund a few months ago.

Valkyrie filed for its first bitcoin futures ETF on May 21 confidentially, Valkyrie CIO Steven McClurg told Blockworks. He noted that SEC rules enable emerging managers to file applications this way to protect intellectual property and give them a chance to compete against larger firms.

Both Valkyrie funds differ from competing issuers’ proposed offerings in that they would not also hold Canadian bitcoin ETFs and GBTC, McClurg said.

“Each of our futures filings are pure bitcoin futures funds, with some treasuries because they are required as margin to purchase the futures contract,” the CIO said. “We believe this is the only such fund currently on application and, based on SEC Commissioner Gensler’s comments made recently around CME-traded bitcoin futures products, are very hopeful this application is approved.”

The initial filing was filed under the Securities Act of 1933 while the one proposed two weeks ago would be a ’40 Act fund, meaning it was filed under the Investment Company Act of 1940. Gensler said earlier this month that the ’40 Act provides “significant investor protections.”

The SEC is likely to soon put the first proposed ETF application up for formal review, McClurg said, noting that once the review period begins, they have 45 days to either approve, deny, or extend the application.

“We would very much hesitate to put any kind of timeframe on the regulator,” he explained, “and fully encourage them to move at their own pace and make sure all requirements are met, any concerns are answered, and that everyone involved has a clear understanding of what the product is, what its objective is, and why we think it makes sense to offer it to investors.”

Will all be approved at once?

Industry eyes have turned to bitcoin futures products as more than a dozen physically backed crypto assets await approval.

“I’d imagine the SEC is gonna let a handful launch together rather than give one a first-mover advantage,” Seyffart told Blockworks. “At least that’s how I think they should do it. Time will tell.”

A spokesperson for the SEC did not immediately respond to Blockworks request for comment.

While first-mover advantage is often key for ETFs, Seyffart and Balchunas wrote in the research note that they were surprised by how much of a difference it made in the case of Canadian issuers launching physically backed bitcoin ETFs.

The Ontario Securities Commission allowed the Purpose Bitcoin ETF (BTCC) to launch on Feb. 18 before all competitors, while Evolve ETFs’ Bitcoin ETF (EBIT) launched a day later. BTCC has grown to have $1.4 billion (CAD) assets under management, while Evolve’s offering holds about $115 million (CAD).

The brand power of 3iQ and CoinShares helped its bitcoin ETF (BTCQ) overcome a later launch, Seyffart and Balchunas noted. BTCQ hit the Canadian market in April and about three weeks later became the the fastest bitcoin ETF in Canada to reach $1 billion (CAD) in assets.

“A US bitcoin ETF launch would be much larger, and a single winner could generate billions of dollars more in revenue over its lifetime than peers,” the Bloomberg analysts wrote.

Ric Edelman, founder of RIA Digital Assets Council, said that the SEC has not yet indicated its intent, but noted that approving all of the bitcoin futures ETFs at once would be unusual. There may be some advantage if one issuer’s ETF is approved well ahead of others, he said.

“More likely, other products would gain approval fairly soon, diminishing the first-mover advantage,” Edelman explained. “But there is a question that the first to market will have long-term benefits – if only in bragging rights.”

Crigger has noted that downsides to a bitcoin futures ETF include contango – a situation in which the futures price of a commodity is higher than the spot price – as well as position limits, tax differences and changes in the risk-return profile.

“Futures are eschewed by most advisors, so use of such a product might be more limited than an actual bitcoin ETF,” Edelman said. “But once providers explain their product, and advisors realize there’s no alternative, adoption levels will likely rise.”

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