Last month’s arrival of the first US exchange traded fund linked to the bitcoin price made history as the strongest ever ETF launch, quickly amassing more than $1bn in assets.

Valkyrie Investments’ Bitcoin Fund was second to market, soon after the ProShares Bitcoin Strategy ETF. Several other bitcoin futures ETFs are expected to launch soon.

For US investors it is a chance to make up the lost ground on Canada and Europe where dozens of exchange traded products tracking both the spot price and futures in bitcoin, and other cryptocurrencies have already amassed tens of billions of dollars in assets.

But one feature of the new US launches could limit their success: they are based not on the price of bitcoin directly, but on bitcoin futures. That is why the amount of outstanding trades in bitcoin futures on the Chicago Mercantile Exchange has soared from $1.5bn to an all-time high of $5bn last month, according to Glassnode, a crypto analytics company.

Why does that matter?

Futures lock in a price for bitcoin in the months ahead. But they can differ from the spot price of bitcoin on any given crypto exchange.

In part that is because CME Group’s bitcoin futures prices are based on composites of prices at five crypto exchanges.

In addition, any ETF that relies on futures can underperform the underlying asset it is supposed to track. Futures contracts expire on a fixed date and have to be “rolled over” in to newer versions. The transaction costs and management fees for thousands of new contracts comes out of the fund.

United States Oil Fund, the $2.4bn oil futures ETF, has underperformed the price of WTI crude it is supposed to track by 70 per cent over the past decade, according to data from Refinitiv.

Solactive, an index provider, estimates futures have made about 13 percentage points less than bitcoin’s near 120 per cent rise so far this year.

“Investors in futures-based ETF funds will be exposed to additional price volatility risk and tracking discrepancies between bitcoin and futures prices,” said Alastair Sewell, senior director of fund ratings at Fitch, the rating agency.

Can a futures bitcoin ETF be too successful?

In a way, yes. The ETFs are intended to closely track the bitcoin price so the most in-demand futures contract is the one that expires closest to the current date, known as front month or spot contracts. For this reason, ProShares holds all its 3,900 futures positions in November contracts.

CME Group, however, has imposed limits on the number of contracts one party can buy, to stop one company cornering the market. This could pose problems in bitcoin futures because the market is relatively small.

When a company hits the limits of 4,000 contracts per entity it has to buy longer dated futures contracts, for which there are no limits.

This comes at a cost. If the market expects the price of bitcoin to rise over the longer term, then the price of longer term futures contracts will rise above the short-term contracts, in what is known as contango. That incurs higher costs for the fund when the futures contract is rolled into the next month, effectively selling low and buying high.

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These costs could mean the ETF underperforms the price of the underlying asset, and has been put at an average of up to 5-10 per cent a year for bitcoin, according to industry estimates.

The CME could also, in theory, ask the ETF provider not to buy more longer dated contracts.

ProShares has indicated that it views the risks stemming from these positions are overstated.

“We have . . . the potential to buy additional contracts pursuant to an exemption. We are pursuing that and we believe we will qualify for it,” said Michael Sapir, chief executive of ProShares.

“We have additional capacity available to use. This is an evolving and growing market. We believe the market will continue to grow and new participants will join the market,” he added.

What other potential problems stem from the structure of the crypto market?

Crypto developers disagree on how the underlying blockchain technology should operate and if they cannot settle their differences, the ultimate step is to create a fork in the network.

If that were to happen, it is unclear which branch of the fork the ETFs should follow. One side will use newer software and the existing network will rely on the older version. Prices can vary between the two.

Bitcoin has already been subject to several forks. Ethereum, another cryptocurrency, also forked this summer. The version that will be used to form a bitcoin price index will not be in the hands of the ETF sponsor, but a decision of an industry benchmarks committee.

Many investors are hoping US regulators will in coming months approve an ETF backed by bitcoin itself. That official green light could open the doors to money from institutional investors wanting exposure.

For retail investors wanting the exposure a tempting alternative may simply be to buy bitcoin.

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