JPMorgan: A Bitcoin ETF Could Dampen Yields on Bitcoin Futures

Bitcoin offers higher yields than fiat currencies when it comes to futures trading. But risks and pricing errors make up much of that premium and a Bitcoin ETF in the US could slash returns, research from investment bank J.P. Morgan shows.

Bitcoin futures contracts are derivatives that let people buy Bitcoin at an agreed-upon price in the future. If you sign a contract to buy Bitcoin at the end of the year for $100,000, your hope is that Bitcoin’s price would be greater than that on December 31.

According to a research note from JP Morgan analysts, Bitcoin’s futures market outperforms all major fiat currencies, as well as gold and silver. While most fiat currencies offer annual yields of about 5%, the Bitcoin futures market offers annual yields of 25%.

The analysts found that, aside from all the hype around Bitcoin and the coin’s volatility, Bitcoin future contract yields are so high because it’s difficult for futures markets to get a bead on Bitcoin’s price and expensive for institutional investors to fund their positions.

The Chicago Mercantile Exchange (CME), the main trading venue for Bitcoin futures that settles trades in cash, grabs the price of Bitcoin from several different exchanges. But this price was inaccurate to the tune of an average of 2% a day, found JP Morgan. The errors add up to roughly 10% a year, it said.

In addition to pricing errors, it’s difficult for institutional investors to get access to Bitcoin on regulated markets. CME and the Grayscale Bitcoin Trust, a closed-end trust that manages close to $40 billion, are all investors really have.

And these trusts, often invested in by institutional investors hedging against Bitcoin futures prices, also trade at widely volatile prices that stray from the price of Bitcoin. Shares in Grayscale’s trust have sold at a discount to the price of Bitcoin for over a month. “Under those circumstances, one should expect significant risk premium priced into the futures,” said the financial analysts.

Enter Bitcoin ETFs

So, what could bring the Bitcoin futures premium down? “The listing of a Bitcoin ETF tracking spot exchange rates in the U.S. or other major jurisdiction would likely be a major catalyst,” found the analysts. A Bitcoin ETF would be a regulated fund that sells shares that track the price of Bitcoin far more accurately, theoretically, than CME futures or Grayscale’s fund.

“It would also presumably be easier for prime brokers to take those securities as collateral,” said the analysts. All this means that it’d be cheaper to bet on the future price of Bitcoin, reducing some of that premium but increasing demand.

All sounds peachy, but the US Securities and Exchange Commission has thrown out all applications for Bitcoin ETFs, citing a manipulable market. However, with a new administration, SEC chair and renewed institutional interest, applications are on the rise and the SEC is taking another look at them.