Bitcoin Market's ‘Open Secret’ Could Disappear as Coinbase Offers Crypto Futures in US

Cryptocurrency exchange Coinbase announced on Tuesday it’s received regulatory approval to roll out crypto futures to customers in the U.S., and the move could marry two of Bitcoin’s markets in a substantial way while spurring more adoption.

Through its newly registered merchant with the Commodities Futures Trading Commission (CFTC), Coinbase Financial Markets will offer spot crypto trading alongside crypto futures, which serve as the basis for several Bitcoin ETFs in the U.S.

Bitcoin futures ETFs, first launched in 2021, give investors exposure to contracts that trade on CFTC-regulated exchanges. While futures contracts convey the right to buy or sell Bitcoin at a set price in the future, they do not warrant ownership of Bitcoin itself.

Often used by traders to hedge positions or bet on movements in the coin’s price, Bitcoin futures and their associated ETFs are a lackluster way for institutions to gain exposure to Bitcoin, according to MicroStrategy Founder and Chairman Michael Saylor.

“The open secret in this industry right now is futures ETFs aren't tracking Bitcoin,” Saylor said on the company’s latest conference call. “In fact, they're underperforming Bitcoin’s performance this year.”

However, Bitcoin futures will likely do a better job of tracking the coin’s spot price now that Coinbase Financial Markets gives clients the ability to seamlessly trade both, Volatility Shares Co-Founder and CIO Stuart Barton told Decrypt.

He said disparities between the spot price of Bitcoin and how it’s reflected in futures contracts should be diminished as money easily flows from one market to the other.

“It brings it all together,” he said. “By having them both in the same venue, it’s going to improve liquidity and the arbitrage opportunities [...] I think it makes a futures ETF much more similar to a spot ETF.”

A spot Bitcoin ETF, which tracks the coin’s price as issuers buy up the asset and dole out corresponding shares, has been widely anticipated within crypto circles for years. The investment vehicle would let institutions that can’t custody crypto get exposure to Bitcoin by purchasing ETFs on a traditional stock exchange.

BlackRock, one of the world’s largest asset managers, is one of several firms with spot Bitcoin ETF applications under consideration at the Securities and Exchange Commission (SEC). So far, the regulator has dragged its feet on giving a green light, citing its belief that the Bitcoin market is easily manipulated in every Bitcoin ETF denial letter since 2013.

But when it comes to the institutional adoption of crypto futures, CoinFund President Christopher Perkins told Decrypt that Coinbase’s newly approved venue is a big deal. He said more institutions will likely become involved in trading futures as it gives them the opportunity to conduct transactions in a regulatory-compliant manner.

“If we have scalable and liquid capabilities to hedge risk, it will enable and empower more institutional adoption,” he said. “This is a great step in opening up greater access to derivatives markets."

Perkins said that Coinbase is entering an area of finance that big banks dominate, yet are effectively boxed out of when it comes to crypto futures.

Coinbase Financial Markets received approval to operate as a futures commission merchant (FCM), which is effectively a broker that accepts orders to buy and sell futures contracts for customers.

Because of regulatory capital requirements that make crypto futures transactions prohibitively expensive for most FCMs, many crypto-native market participants struggle to find one that will “take” them, Perkins said. Additionally, there are collateral requirements that make FCM’s return on equity in this area unattractive.

“We're coming into an environment where if you want to trade futures in the United States and you're a crypto-native, it's hard to find people to give you access to those markets,” he said. “And it's prevented deep, liquid markets from taking off.”

Coinbase’s ability to offer services as an intermediary for crypto futures could be a remedy, Perkins said. A previous solution proposed by FTX, giving customers open access to futures markets, has been tarnished by the exchange’s collapse, he added.

Still, the options for hedging risk in the U.S. are limited, Perkins explained, noting that the only two tokens with futures markets are Bitcoin and Ethereum. Even then, questions surrounding whether Ethereum is a commodity or security add uncertainty.

“Without having certainty around whether [a token] is a commodity or security, we can't construct compliant derivatives in the United States,” he said. “Because of this uncertainty, market participants are being hurt because we can't hedge risk.”