VanEck's Bitcoin Strategy ETF Begins Trading at Cboe

Another bitcoin exchange traded fund (ETF) has made its debut in the markets.

Less than a month after ProShares launched the first bitcoin ETF in the markets, investment firm VanEck's Bitcoin Strategy ETF (XBTF) began trading at Cboe Global Markets on Nov. 16, 2021. The fund tracks prices for bitcoin futures traded at the Chicago Mercantile Exchange (CME). It is a cash-settled fund, meaning it is settled in cash, instead of actual bitcoin.

"While a 'physically backed' bitcoin ETF remains a key goal, we are very pleased to be providing investors with this important tool as they build their digital asset portfolios," said Kyle DaCruz, VanEck's director of digital assets, in a statement.

The XBTF listing marks a return of sorts for Cboe to Bitcoin. The exchange beat CME in listing bitcoin futures on its platform. In 2019, however, it discontinued them due to low trading volumes.

XBTF is the third Bitcoin ETF to trade in the U.S. markets in less than a month. The ProShares Bitcoin Strategy Fund (BITO) was launched on Oct. 19, and Valkyrie Investment's Bitcoin Strategy Fund (BTF) followed less than a week later. Like the VanEck fund, both ETFs are cash-settled futures funds.

What You Should Know About VanEck’s Bitcoin ETF

There are two significant ways in which VanEck's Bitcoin ETF differs from its predecessors.  

In its marketing and publicity material, VanEck is emphasizing its relatively cheaper costs and taxation as compared to other, similar funds. "Cost and tax treatment are two essential considerations for investors, and we have made both front and center in the design of XBTF," stated DaCruz.

The fund has an expense ratio of 0.65% as compared to an expense ratio of 0.95% for the ProShares Bitcoin Strategy Fund and Valkyrie Bitcoin Strategy Fund.

However, the fee advantage might not amount to much, according to some observers. Bloomberg ETF analyst Eric Balchunas tweeted that lower fees will help but not much in the near term. "I do see it being successful but it will take some time," he stated. According to Laurent Kssis, director of CEC Capital, XBTF's low fees are "compressing downwards" the charges for bitcoin ETFs at a much faster than in Europe.

The fund also promises an effective tax rate of 22.15% by structuring itself as a C-corporation instead of a Regulated Investment Company (RIC) as is common with most ETFs.

In a C-corporation structure, the fund is responsible for paying corporate taxes at the federal, state, and local level, whereas RICs are designed as pass-through entities. Such entities pass on income and most of their tax obligations to fund investors.

A C-corporation is more tax-efficient for long-term investors, such as large investment firms, because it allows them to spread their tax obligations over a period of time. For example, they can carry back their losses for three years and forward by five years, thereby decreasing their overall tax amount and, at the same time, providing exposure to a volatile asset class.

The flipside of investing in a fund like VanEck's Bitcoin Strategy Fund is that its performance will lag that of peers during periods of rising prices in bitcoin because it will have to pay taxes on its net asset value (NAV) before distributing gains to investors.  

The other issues for XBTF remain the same as for other bitcoin futures-based ETFs that are currently trading in the markets. Bitcoin futures are derivatives of the cryptocurrency's actual spot price; therefore, an ETF based on them might trade at a significant premium or discount to the spot price.

Investors might also be on the hook for significant rolling costs as monthly futures contracts expire and the fund rebalances its holdings. A contango condition, one in which the fund sells low and buys high in the form of lower-priced front-month futures contracts, is possible, as is backwardation, the opposite of a contango.

"There are decent rolling cost (soon to expire) contracts to futures months which are passed onto the product and hence the investors," said Kssis from CEC Capital. "In addition to 'roll' issues are conditions that are unique within futures known as contango and backwardation that will result in the fund's performance at points diverging from spot bitcoin values."