A bitcoin futures exchange-traded fund (ETF) allows investors to gain exposure to bitcoin futures contracts, without actually holding the cryptocurrency itself.

A futures contract is a financial derivative that obligates the buyer to purchase or the seller to sell an asset (in this case, bitcoin) at a predetermined future date and price.

How does a bitcoin futures ETF work?

The primary goal of a bitcoin futures ETF is to track the performance of the underlying bitcoin futures contracts.

This works by an investment company creating a subsidiary, which acts as a commodity pool, according to the CFTC. The pool trades the futures contracts and does so with the goal of roughly imitating the actual price of bitcoin.

However, futures contracts have expiration dates. To maintain exposure, the ETF may need to periodically "roll" its futures contracts by selling contracts nearing expiration and buying contracts with later expiration dates. The process of rolling can impact the fund's performance, especially during times of contango (when futures contract prices surpass spot prices) or backwardation (futures prices below spot prices) in the futures market.

Like other ETFs, bitcoin futures ETFs also charge management fees to cover operational and administrative expenses. Investors should be aware of the fee structure and how it may impact overall returns.

Bitcoin BTC -0.087% futures ETFs are subject to regulation. Regulatory bodies, such as the Securities and Exchange Commission in the United States, need to evaluate and approve these financial products before they can be offered to the public. There are multiple bitcoin futures ETFs in the U.S. at present.

Why would investors choose a bitcoin futures ETF?

Investors may choose a bitcoin futures ETF for various reasons, depending on their investment objectives, risk tolerance and market outlook. Here are some common reasons why investors might consider a bitcoin futures ETF:

• Indirect exposure to bitcoin: Investors who are interested in gaining exposure to the price movements of bitcoin without directly owning the cryptocurrency may choose a bitcoin futures ETF. This allows them to participate in potential gains or losses in the bitcoin market without the need for a cryptocurrency wallet or dealing with the complexities of owning and storing actual bitcoin.

• Risk management: Bitcoin futures ETFs can be used as a risk management tool. Investors may use these ETFs to hedge against potential losses in other parts of their investment portfolios. By having exposure to bitcoin futures, investors can offset risks associated with traditional assets like stocks and bonds.

• Leverage opportunities: Some bitcoin futures ETFs use leverage to magnify returns. Investors with a higher risk tolerance and a belief in the direction of bitcoin's price movement may choose leveraged ETFs to potentially amplify their returns. However, it's crucial to understand that leverage also increases the level of risk.

• Convenience and accessibility: ETFs, including bitcoin futures ETFs, trade on traditional stock exchanges, making them easily accessible to a broad range of investors. This convenience allows investors to buy and sell shares throughout the trading day at market prices, providing liquidity and flexibility.

• Regulatory oversight: Bitcoin futures ETFs are subject to regulatory oversight and approval by financial authorities. Some investors may prefer the regulatory framework associated with ETFs compared to investing directly in cryptocurrency exchanges, where regulatory clarity may still be evolving.

• Diversification: Investors seeking to diversify their portfolios may consider bitcoin futures ETFs as a way to add exposure to a different asset class. Diversification aims to spread risk across different investments and can be a strategy to reduce overall portfolio volatility.

• Speculative trading: Traders with a short-term speculative outlook may use bitcoin futures ETFs to capitalize on price movements in the cryptocurrency market. These traders may take advantage of both rising and falling bitcoin prices, depending on their market predictions.

How is a spot bitcoin ETF different from a bitcoin futures ETF?

Unlike a futures-based product, a spot bitcoin ETF invests directly in physical bitcoin, and its performance is closely tied to price movements of the cryptocurrency.

Thus, investors in a spot bitcoin ETF are directly exposed to the volatility of the spot market. If the price of bitcoin increases, investors may experience gains. If it decreases, they may incur losses.

Spot ETFs generally do not use leverage. There is also no need to roll contracts since the ETF holds physical bitcoin and there are no expiration dates associated with spot holdings.

What are the risks of a bitcoin futures ETF?

Since the value of a bitcoin futures ETF is directly influenced by the price movements in the bitcoin futures market, factors such as contango or backwardation can impact the returns of a bitcoin futures ETF. Rolling futures contracts to avoid expiration can also lead to trading costs. 

Some bitcoin futures ETFs use leverage to amplify returns. While leverage can enhance potential profits, it also increases the level of risk. Losses can be magnified as investors may be exposed to higher volatility.

Bitcoin futures contracts are traded on futures exchanges, and there is a counterparty risk associated with the entities facilitating these trades. If a counterparty fails to meet its obligations, it can impact the performance of the ETF.

The regulatory environment for bitcoin and related financial products is evolving. Changes in regulations or legal issues can impact the operation of the bitcoin futures ETF and the value of its underlying assets.

It's important to note that the regulatory landscape and availability of bitcoin futures ETFs can vary by jurisdiction. Investors should carefully review the prospectus and risk factors associated with any ETF, considering factors such as regulatory approval, fees, and the fund's investment strategy.