By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters] – While Tuesday’s launch of the first bitcoin exchange traded fund (ETF), is a huge step in legitimizing the cryptocurrency market, ETF investors could face greater costs than those who buy the currency directly.

The trading of the ProShares Strategy ETF is set to begin on Tuesday, barring any objections from the U.S Securities and Exchange Commission. The CME Group’s (NASDAQ) bitcoin futures will back ProShares, instead of the virtual asset.

The company’s offer is expected to result in more futures-based ETF launches over the next few days after many years of regulatory obstacles.

Overall, market participants praised the relative ease and safety that an ETF offers over buying bitcoins from brokers and exchanges. Although investors don’t have the responsibility of securing and custodianing their digital wallets or keeping them safe, analysts indicated that there are top-tier platforms who offer this service to customers.

Martha Reyes is the head of research for digital asset prime brokerage and trade exchange BEQUANT.

An ETF that is based on futures may not be ideal, as it incurs a cost for rolling into futures contracts. She also said contango could lead to lower performance compared to the underlying asset.

Rolling over futures is a common way for traders to move from a contract close to expiration to a contract later in the month. Rollovers come with costs.

The term “contango”, which is more popular in commodity markets and financial futures, refers to the fact that futures prices tend to be higher on long-term contracts than they are on the front. This means that ETFs must sell low-priced futures to purchase higher-priced options as they approach settlement. These will reduce the returns each time contracts roll off.

Bradley Duke, chief executive of ETC Group (the largest European provider of ETPs), stated that one problem has been solved.

Duke explained that ETPs from Europe that are 100% backed by the underlying bitcoin follow the spot price more consistently.

FUTURES

The current price of an underlying asset will be different from the futures ETF’s price. In most cases, futures ETFs based on commodity assets such as gold tend to underperform physical ETFs, said Mikkel Morch, executive director at crypto and digital assets hedge fund ARK36.

Some analysts stated that the ETF is not only susceptible to bitcoin underperformance, but also has the potential for futures roll-over.

However, analysts still believe investors will buy the futures ETF even though it is more expensive.

“Bitcoin Futures are subject to commodity exchange regulations. Investment company regulations regulate mutual funds and ETFs,” stated Karan Sood (CEO and managing director, Cboe Vest), an asset management partner on the derivatives exchange Cboe Global Markets.

Both regulations offer strong protections for investors. There is a rich history of strong enforcement of such regulations, which creates a high level of financial stability and integrity.” 

A few weeks back, Gary Gensler, the Chairman of U.S. SEC reiterated his support for Bitcoin ETFs. These futures contracts would be used to invest instead in digital currency.

ProShares’ prospectus explains that bitcoin futures can be subject to certain margin and collateral requirements. There are also other restrictions that could limit the ETF’s ability to generate returns. This investment is risky, especially if the ETF’s value falls.

The VanEck Bitcoin Trust and ProShares are just a few of the fund managers that have submitted applications to create bitcoin ETFs for the United States.

Invesco stated late on Monday that they are not planning to launch an ETF for bitcoin futures in the immediate short-term.

CNBC reports that Grayscale, the largest global digital currency manager and Grayscale have plans to transform their flagship product, Grayscale Bitcoin Trust, into an ETF spot bitcoin.

Bitcoin hovered late Monday at six months highs. At $62,104 the largest cryptocurrency in the world, Bitcoin was last at its highest point of April when it hit $64,895 which is just shy of its record high.