Only These 51 Things Could Go Wrong With Bitcoin ETFs

As long as it's not triple digits should be fine.. https://t.co/L4615YY2Ev

— Eric Balchunas (@EricBalchunas) December 27, 2017

That’s Bloomberg’s ETF guy and that’s sarcasm.

The reference there is to a list of all the risks associated with Bitcoin ETFs as derived from ProShares’ filing back in September.

Unfortunately, Bitcoin and other cryptocurrencies are on the fast track to mainstream adoption and we say “unfortunately” because you know, Bitcoin isn’t actually a real thing. If you’re new to Heisenberg and by virtue of your HR neophyte status are inclined to think our cynical assessment of Bitcoin stems from intellectual laziness or a general lack of effort when it comes to doing the homework, you’re encouraged to simply click on the “Bitcoin” section in the menu bar and scroll through the posts.

The bottom line here is that what you’re seeing in cryptocurrencies is pure, unadulterated speculation and it is not a coincidence that prominent figures from across the financial universe have issued dire warning after dire warning as this bubble (now the most egregious in the history of speculative manias after surpassing the tulip craze earlier this month) continues to inflate.

The launch of Bitcoin futures (itself a dangerous proposition as clearing these things with traditional assets sets the stage for crypto contagion) and the rush by established players to capitalize on crypto volatility in a world where trading revenues are suppressed by the enduring low vol. regime have seemingly blurred the line between legitimacy and demand. You can point to low volume in the futures as evidence of limited interest if you want, but it’s difficult to escape the conclusion that the proliferation of crypto products and the apparently imminent plunge into market making by Goldman is evidence that there’s only so much people can take in terms of watching something rise to the stratosphere before at least some “serious” people start clamoring for their piece of the pie.

Well naturally, Bitcoin ETFs are the next step in the evolution of this space. “Having a regulated, liquid futures market dramatically increases the odds that a bitcoin ETF would be approved as it checks off more boxes for the SEC,” the above-tweet-cited Eric Balchunas said earlier this month, adding “there’s a good chance we see a bitcoin ETF by next summer.”

Ok, so coming full circle (as regular readers know, we’ve got a penchant for writing intros that are far longer than necessary when it comes to making a point), Dan Caplinger (some guy for Motley Fool) has taken the time to make a list of the risk factors as they appear in the ProShares filing from three months ago. Here is that list:

1. The value of bitcoin futures contracts may not track the price of bitcoin on exchanges.
2. The market for bitcoin futures is new and could be less liquid and more volatile than other markets.
3. Bitcoin is a new technological innovation with a very limited operating history.
4. The price of bitcoin is highly volatile.
5. The price of bitcoin may change dramatically when the markets for bitcoin futures are closed or when ETF shares aren’t available for trading.
6. Bitcoin exchanges are new, largely unregulated, and could be exposed to fraud and security breaches.
7. Adoption of bitcoin could decline.
8. New competing digital assets could challenge bitcoin’s current market dominance.
9. Regulatory initiatives by governments could impact use of bitcoin.
10. It may be illegal now or in the future to own or use bitcoin in one or more countries.
11. The bitcoin network could be subject to adverse intellectual property claims.
12. Banks might not provide services to businesses that accept or use bitcoin.
13. Bitcoin ETFs could experience large losses when holding, buying, or selling bitcoin.
14. Bitcoin ETFs has no previous operating history.
15. Active trading markets for bitcoin ETFs might not arise.
16. Illiquid markets for bitcoin futures and ETF shares could make losses worse.
17. Rolling bitcoin futures positions could have a negative impact on ETF performance.
18. Bitcoin ETFs might not be able to track its objective of following bitcoin price changes.
19. Fluctuations in bitcoin-related financial instruments could hurt the ETF’s value.
20. Bitcoin ETFs aren’t actively managed and will merely try to track their respective benchmarks.
21. Fees could deplete assets.
22. Counterparty risks could exist that hurt the ETFs.
23. Bitcoin ETFs can invest in options, which are also risky.
24. Competition from rival bitcoin ETFs or investment vehicles could hurt the performance of these bitcoin ETFs.
25. The ETF sponsor might choose not to continue to provide services to the ETFs.
26. Bitcoin ETFs can terminate anytime, even if it’s a bad time for shareholders.
27. Redemption or creation orders for ETF shares from institutions can hurt individual investors.
28. Net asset value of the ETF might not track the actual market price of ETF shares.
29. The intellectual property rights that the bitcoin ETFs themselves use could be challenged.
30. Misstatement of net asset value is possible if valuation methods are imprecise.
31. If institutions don’t maintain relationships with the bitcoin ETFs, liquidity could suffer.
32. Noninstitutional investors can only obtain bitcoin ETF shares through secondary markets.
33. Exchanges could halt trading of bitcoin ETFs.
34. Legal protections covering many mutual funds don’t apply to bitcoin ETFs.
35. Indemnification of the trustees overseeing the bitcoin ETFs could result in losses.
36. A bitcoin ETF bankruptcy filing could force clawbacks of ETF distributions.
37. Companies assisting with futures transactions could improperly fail to segregate assets, resulting in greater bitcoin ETF losses.
38. Courts might not recognize legal separations between bitcoin ETFs or with other ETFs in the same fund family.
39. External events, such as disasters or power outages, could prevent the bitcoin ETFs from meeting its investment objective.
40. Cyberattacks pose operational and information security risks.
41. Taxation of bitcoin isn’t entirely clear.
42. Tax liability will exceed cash distributions on bitcoin ETF shares.
43. The IRS could make adjustments to tax consequences of bitcoin ETFs.
44. Bitcoin ETF shareholders will have to deal with K-1 partnership returns for tax reporting purposes.
45. Changes in long-term capital gains rates could hurt bitcoin ETF shareholders.
46. Bitcoin ETF shareholders could recognize substantial ordinary income and short-term capital gain.
47. Regulatory and exchange accountability provisions could restrict bitcoin ETF operation and the creation of new ETF shares.
48. For the inverse bitcoin ETF, returns over periods exceeding one day will differ from the benchmark return.
49. The inverse bitcoin ETF’s investments might not be correctly correlated to bitcoin prices.
50. The inverse bitcoin ETF’s intraday price might differ greatly from the behavior of bitcoin.
51. Use of inverse positions could result in total loss for inverse bitcoin ETF shareholders.

So you know, when you ask “what could go wrong?”, the answer is: “only those 51 things.”

But as Eric notes in the tweet cited here at the outset, you should be fine as long as the risk factors don’t stretch into the triple digits.

Oh, and don’t worry, because the White House is “monitoring the situation“…