Another Bitcoin Futures ETF Launched Today. But Bitcoin Itself Is Ailing.

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Three Bitcoin futures exchange-traded funds are now trading.


Dreamstime

Anoth­er exchange-trad­ed fund hold­ing Bit­coin futures is hit­ting the mar­ket, even as prices for the world’s largest cryp­tocur­ren­cy keep dropping.

The VanEck Bit­coin Strat­e­gy Fund (tick­er: XBTF) start­ed trad­ing on Tues­day, hold­ing Bit­coin futures con­tracts list­ed on the Chica­go Mer­can­tile Exchange. 

The fund joins two oth­er Bit­coin futures ETF that launched in Octo­ber: the ProShares Bit­coin Strat­e­gy ETF (BITO) and the Valkyrie Bit­coin Strat­e­gy ETF (BTF)

All of the funds gain expo­sure to Bit­coin through futures con­tracts because the Secu­ri­ties and Exchange Com­mis­sion hasn’t approved an ETF that could own Bit­coin direct­ly. Last week, reg­u­la­tors reject­ed VanEck’s appli­ca­tion for a spot-based ETF, argu­ing the mar­ket could still be manipulated.

The VanEck fund will be low­er-cost than rivals, accord­ing to the invest­ment man­age­ment firm. Its expense ratio is 0.65% ver­sus 0.95% for both the ProShares and the Valkyrie ETFs. 

VanEck also said its ETF could be more tax effi­cient for long-term investors because it’s struc­tured as a C‑corporation rather than a reg­is­tered invest­ment com­pa­ny, or RIC—the struc­ture of the oth­er two ETFs. 

ETFs struc­tured as C‑corps have to pay tax­es at the cor­po­rate rate, which is 22.15% for the VanEck fund—at the state and fed­er­al lev­els. ETFs struc­tured as RICs can avoid fund-lev­el tax­a­tion by pass­ing through income to investors. 

That tax drag comes out of the VanEck ETF’s dai­ly net asset val­ue, which will make returns “look worse than the com­peti­tors in the near term,” explained Kyle DaCruz, VanEck’s direc­tor of dig­i­tal asset products. 

But DaCruz said investors in for the long haul could come out ahead for a cou­ple of rea­sons. For one, an ETF struc­tured as a C‑corp can accrue tax loss­es at the fund lev­el, off­set­ting gains; and it can reclaim tax­es paid on gains from pri­or years.

More­over, a futures ETF struc­tured as C‑corp may dis­trib­ute only 40% of income, which is eli­gi­ble to be taxed as qual­i­fied div­i­dend income, equiv­a­lent to long-term cap­i­tal gains rates—generally 15% to 20%. The oth­er 60% of income is held at the fund lev­el, sub­ject cor­po­rate taxation.

An ETF struc­tured as a RIC, by con­trast, must dis­trib­ute 100% of gains and income, and it may be taxed at ordi­nary income rates up to 37%.

The ProShares and Valykrie ETFs both hold Bit­coin futures through a Cay­man Islands sub­sidiary, mak­ing them inel­i­gi­ble for tax-loss accru­als at the fund level. 

The bot­tom line: The dif­fer­ent tax treat­ments each have advan­tages and draw­backs. If an investor is hold­ing a Bit­coin futures ETF in a non­tax­able account such as an IRA, an ETF struc­tured as a RIC may be the bet­ter choice since the investor wouldn’t pay tax­es anyway. 

On the oth­er hand, a C‑corp ETF that can accrue tax loss­es could wind up more tax effi­cient if the price of Bit­coin falls. Its dis­tri­b­u­tions also may be taxed at low­er rates if it’s held a tax­able account, com­pared to an ETF struc­tured as a RIC. 

“Our fund is appro­pri­ate for tax­able long-term investors,” said DaCruz.

One oth­er note: VanEck’s ETF can use lever­age to main­tain tar­get­ed expo­sure to Bitcoin—borrowing cap­i­tal to push the fund’s expo­sure above 100%. That may be great if Bit­coin is ral­ly­ing, but could ampli­fy loss­es in a down market. 

Indeed, more impor­tant than tax­a­tion may be the per­for­mance of Bit­coin itself—and the world’s largest cryp­tocur­ren­cy has been strug­gling late­ly. It was down 5.9% to about $60,600 in trad­ing on Tues­day, after dip­ping as low as $59,000. It’s now-well-below its all-time high of $69,000 near­ly a week ago.

The sell­off may reflect new ner­vous­ness about Chi­na, which has said it would crack down on state-owned enter­pris­es that par­tic­i­pate in min­ing or pro­duc­ing Bit­coin, accord­ing to dig­i­tal-asset research firm Fund­strat. Chi­na is also lay­ing blame on cryp­to min­ing for its strained ener­gy infra­struc­ture, Fund­strat said.

One oth­er fac­tor weigh­ing on Bit­coin could be new tax rules in the infra­struc­ture bill that Pres­i­dent Joe Biden signed into law on Mon­day. Cryp­to “bro­kers” may soon have to issue stan­dard 1099‑B forms for trans­ac­tions, and any busi­ness that receives more than $10,000 in cryp­to will have to report it like a cash trans­ac­tion, includ­ing iden­ti­fy­ing details of the sender. 

Write to Daren Fon­da at daren.fonda@barrons.com 

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