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JPMorgan: A BTC ETF Could Dampen Yields on BTC Futures

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JPMorgan: A BTC ETF Could Dampen Yields on BTC Futures

BTC 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 BTC ETF in the US could slash returns, research from investment bank J.P. Morgan shows.

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

According to a research note from JP Morgan analysts, BTC’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 BTC futures market offers annual yields of 25%.

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

The Chicago Mercantile Exchange (CME), the main trading venue for BTC futures that settles trades in cash, grabs the price of BTC 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 BTC on regulated markets. CME and the Grayscale BTC 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 BTC futures prices, also trade at widely volatile prices that stray from the price of BTC. Shares in Grayscale’s trust have sold at a discount to the price of BTC for over a month. “Under those circumstances, one should expect significant risk premium priced into the futures,” said the financial analysts.

Enter BTC ETFs

So, what could bring the BTC futures premium down? “The listing of a BTC ETF tracking spot exchange rates in the U.S. or other major jurisdiction would likely be a major catalyst,” found the analysts. A BTC ETF would be a regulated fund that sells shares that track the price of BTC 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 BTC, reducing some of that premium but increasing demand.

All sounds peachy, but the US Securities and Exchange Commission has thrown out all applications for BTC 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.

The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.

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All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.
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