So the people manufacturing the synthetic Bitcoins for the ETF will charge for that service: They have to put up $80,000 of cash and then do a lot of hard password-remembering to keep their Bitcoin, while the ETF only has to put up $20,000 of cash and take the relatively pleasant credit risk of a registered U.S. commodity futures exchange. So if you buy a synthetic Bitcoin—as the Bitcoin ETFs plan to—you have to pay more for it than you would for a regular old Bitcoin:

In recent days, the annualized premium on CME bitcoin futures prices over bitcoin’s spot value was 15%, compared with about 7.7% on average over the first nine months of the year. Traders can make those returns by buying spot bitcoin and shorting the futures contract because the two prices will converge in the future, said Noelle Acheson, head of market insights at crypto lender Genesis Global Trading Inc. She chalks the gap in the premium up to institutions rushing to buy bitcoin futures in expectation of the ETFs’ approval.

But futures-based ETFs are vulnerable to divergences in the prices of the futures and the underlying assets they track—in this case bitcoin, which is notoriously volatile.

ETFs may also lag the performance of bitcoin if it keeps rising. Longer-dated bitcoin futures have tended to trade above short-term contracts, a market dynamic known as contango. This can lead to lower returns for funds as they pay to roll over monthly contracts.

“A lot of people really don’t understand how futures work,” said Kathleen Moriarty, an ETF lawyer, of individual investors.

The basic way that futures work is that you are paying someone else to store your Bitcoins for you, which is expensive. 

Why not just store the Bitcoins yourself? Really there are two questions there:

1. Why doesn’t the ETF just store the Bitcoins itself? You give the ETF $60,000 and, instead of spending that on money-market securities and futures margin, it just goes out and buys a Bitcoin.

2. Why not just store the Bitcoins yourself? Don’t give the ETF anything; just pay $60,000 to someone with a Bitcoin and get the Bitcoin.

The answer to the first question is essentially that the SEC is probably about to approve futures-based Bitcoin ETFs, but seems to be considerably more skeptical about “physical” Bitcoin ETFs, ETFs that would actually hold Bitcoins. This is, I suspect, mostly a matter of regulatory legibility: Bitcoin futures trade on registered U.S. futures exchanges,5 and if weird stuff happens on those exchanges U.S. regulators have lots of power to investigate and intervene; Bitcoins themselves trade in lots of different places, many of them not subject to much U.S. regulatory oversight. Also physical custody of Bitcoins does seem to be an issue that the SEC worries about, and if an SEC-approved physical Bitcoin ETF forgot its passwords and lost all of its customers’ Bitcoins that would be really, really, really, really … let’s not kid ourselves, it would be hilarious, but it would be really upsetting for the SEC. Whereas an ETF that just holds a pot of money-market instruments and some regulated exchange-traded futures is, you know, fairly normal.

The answer to the second question is … well, look, sure, go buy Bitcoins. Particularly if you think that Bitcoin is the future of the financial system, etc., it seems a little silly to give your money to an ETF to put into money-market instruments and bet on the price of Bitcoin. Just go to the blockchain and buy a Bitcoin. Greifeld reports:

Given the ease of access to cryptocurrency markets relative to previous years, it’s unclear that a Bitcoin ETF launch would spark a flood of demand, according to Juthica Chou, head of over-the-counter options trading at Kraken Digital Asset Exchange. Individuals can already buy and sell digital assets on crypto exchanges worldwide and through more retail-oriented platforms such as PayPal and Square. Meanwhile, institutional investors have been able to gain crypto exposure through vehicles such as the Grayscale Bitcoin Trust—though plagued by persistent discounts—for years. 

“Onboarding for individual investors, for retail, for institutions is already a lot better and safer and more approachable than let’s say crypto was back in 2017,” Chou said on Bloomberg’s “QuickTake Stock” streaming program.

Back in 2017, when regulated Bitcoin futures were launching in the U.S., owning physical Bitcoins was so unpleasant that I wrote a column with the headline “Bitcoin Futures Are a Great Way to Not Own Bitcoin.” Since then it has gotten much better. You can just go buy actual Bitcoins on the Robinhood app; why would Robinhood users want a Bitcoin ETF? Institutions have to think more about custody issues, but institutions that want to own Bitcoin have spent the last four years thinking about custody issues and now there are, you know, institutional custodians and best practices for remembering passwords and so forth.

Still my basic thinking on crypto is often that there is a crypto financial system and a traditional financial system, and they run on different rails, and there are costs and frictions in switching between them. If you are a crypto trader, it is irritating enough to transact in U.S. dollars that you’ll go use a weird stablecoin in order to send dollars using crypto rails. If you are a traditional-finance hedge fund, it might be irritating enough to transact in Bitcoins that you’ll go use a weird ETF in order to buy Bitcoins using traditional rails. Someone (the ETF provider, the futures arbitrageur, the stablecoin entrepreneur) is making money from those products; you are paying them that money for the service of doing the rail-switching so you don’t have to.