Ben Strack

Direxion and ProShares have filed for ETFs that, if approved, would hold futures contracts tied to both bitcoin and ether.



With Wednesday’s filings, Direxion and ProShares have put a different type of crypto-centric investment product in front of the US Securities and Exchange Commission.&nbsp;



The SEC filings came after various firms — including ProShares — revealed plans in recent days to launch ETFs that would focus only on ether (<a href="https://blockworks.co/price/eth">ETH</a>) futures.&nbsp;



Two sources directly familiar with the latest ether futures ETF filings told Blockworks Wednesday the SEC has indicated its readiness to publicly consider such a product — a reversal from the <a href="https://blockworks.co/news/sec-ether-futures-etfs">US securities regulator’s apparent stance in May</a>.&nbsp;



Read more: <a href="https://blockworks.co/news/sec-consider-ether-futures-etfs">SEC now ready to consider ETH futures ETFs, sources say — but what’s changed?</a>



The <a href="https://blockworks.co/tag/sec">SEC</a> allowed <a href="https://blockworks.co/tag/etfs">ETFs</a> that hold bitcoin futures contracts to come to market in 2021. The first to launch, the ProShares Bitcoin Strategy ETF (BITO), gained $1 billion in assets under management in its first few days.&nbsp;



Aside from ProShares, Volatility Shares, Grayscale Investments, VanEck, Bitwise and Roundhill Investments, have filed for ETH futures ETFs over the past week.&nbsp;&nbsp;



“It seems illogical for the SEC to allow ETFs holding CME-traded bitcoin futures, but not ones owning CME-traded ether futures,” Geraci said of the ETH futures ETF filings. “Given the past history of these filings, it’s difficult to speculate on how the SEC will respond.”



But now, <a href="https://www.sec.gov/Archives/edgar/data/1174610/000168386323005816/f26029d1.htm">ProShares</a> and <a href="https://www.sec.gov/Archives/edgar/data/1424958/000119312523201742/d268575d485apos.htm">Direxion</a> seek to combine an investment type already allowed in US ETFs with one yet to be permitted in such wrappers. The latest proposed funds would not hold BTC or ETH directly.



In the absence of a spot bitcoin ETF — the SEC has rejected every proposal for such a product to date — fund issuers have looked to get creative in an effort to allow investors to get crypto exposure through familiar vehicles.



Neena Mishra, director of ETF research for Zacks Investment Research, <a href="https://blockworks.co/news/bitcoin-etf-creativity">told Blockworks last month</a> that fund providers constantly experiment with new products to see what resonates with investors. &nbsp;



“This is why we continue to see so many niche, interesting, and sometimes weird products,” she said at the time.



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Direxion, ProShares seek ETFs that would hold BTC and ETH futures

<div id="highlights-block_62509aac252fa" class="highlights">
 <ul>
 <li>Direxion originally filed to launch its Bitcoin Strategy Bear ETF in October but withdrew the application</li>
 <li>AXS Investments’ Short Bitcoin Strategy fund would be the firm’s third ETF in the US</li>
 </ul>
 
</div>



After ProShares <a href="https://cms.blockworks.co/proshares-plans-etf-mutual-fund-betting-against-bitcoin/" target="_blank" rel="noreferrer noopener">filed earlier this week</a> to launch an ETF that would allow investors to essentially bet against bitcoin, two other fund issuers followed suit.



AXS Investments revealed its plans to launch a Short Bitcoin Strategy ETF (SBCO) in a Wednesday <a href="https://www.sec.gov/Archives/edgar/data/1587982/000139834422007061/fp0074776_485apos.htm" target="_blank" rel="noreferrer noopener">regulatory disclosure</a>. The product seeks investment results corresponding to the inverse (-1x) of the return of the CME CF Bitcoin Reference Rate for a single day.



The actively-managed fund would invest most of its assets in short positions on cash-settled bitcoin futures contracts traded on exchanges registered with the Commodity Futures Trading Commission (CFTC).



It seeks to remain fully invested in contracts offering inverse exposure to the Bitcoin Reference Rate “without regard to market conditions, trends, direction or the financial condition of a particular issuer,” the filing notes. The fund does not take temporary defensive positions.



Similarly, Direxion <a href="https://www.sec.gov/Archives/edgar/data/1424958/000119312522098855/d308614d485apos.htm" target="_blank" rel="noreferrer noopener">filed to launch</a> a Bitcoin Strategy Bear ETF on Thursday that would offer managed short exposure to CME bitcoin futures contracts.



The fund manager <a href="https://cms.blockworks.co/proposed-direxion-etf-would-offer-short-exposure-to-bitcoin-futures/" target="_blank" rel="noreferrer noopener">originally</a> filed to launch this ETF in October but <a href="https://cms.blockworks.co/sec-asks-direxion-to-withdraw-bitcoin-etf-application/" target="_blank" rel="noreferrer noopener">withdrew the proposal</a> about a week later upon the request of the Securities and Exchange Commission.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Direxion files Short Bitcoin ETF using an existing filing, jumping ahead of AXS and Proshares! Direxion Bitcoin Strategy Bear ETF goes effective Jun 6 vs AXS and ProShares Short BTC ETFs&#39; Jun 20 *Direxion already had a Short <a href="https://twitter.com/hashtag/BTC?src=hash&amp;ref_src=twsrc%5Etfw">#BTC</a> ETF filed since Oct&#8230;?<a href="https://t.co/NlprelgCt2">https://t.co/NlprelgCt2</a> <a href="https://t.co/dPWFf59PdQ">pic.twitter.com/dPWFf59PdQ</a>&mdash; ETF Hearsay by Henry Jim (@EtfHearsay) <a href="https://twitter.com/EtfHearsay/status/1512183882996670464?ref_src=twsrc%5Etfw">April 7, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In addition to investing in swaps or futures contracts, the Direxion ETF may also short bitcoin futures ETFs. ProShares, Valkyrie Investments, VanEck and Global X launched such ETFs last year.



“The fund will generally maintain its short exposure to bitcoin futures during periods in which the value of bitcoin is flat or declining as well as during periods in which the value of bitcoin is rising,” the disclosure states.



None of the three funds would invest directly in bitcoin. The filings did not indicate expense ratios for any of the proposed products.



While AXS Investments has just two ETFs trading in the US with about $65 million in assets, according to ETF.com, Direxion has 82 ETFs that manage roughly $27.5 billion.



Spokespeople for Direxion and AXS Investments did not immediately return requests for comment.



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Issuers Race To Launch Short Bitcoin Futures ETFs

<div id="highlights-block_6182e57d08444" class="highlights">
 <ul>
 <li>Withdrawal comes days after fund manager Valkyrie pulled filing for its planned leveraged bitcoin futures ETF</li>
 <li>US Reps. Tom Emmer and Darren Soto wrote a letter on Wednesday to SEC Chairman Gary Gensler urging the agency to approve spot bitcoin ETFs</li>
 </ul>
 
</div>



Direxion has requested the withdrawal of its proposed ETF that would have allowed investors to short bitcoin futures just days after Valkyrie pulled its leveraged bitcoin ETF application.&nbsp;



The New York-based firm <a href="https://cms.blockworks.co/proposed-direxion-etf-would-offer-short-exposure-to-bitcoin-futures/" target="_blank" rel="noreferrer noopener">had filed last week</a> for the Direxion Bitcoin Strategy Bear ETF, which planned to offer managed short exposure to CME bitcoin futures contracts. The fund would not invest directly in bitcoin.&nbsp;



Grant Engelbart, a senior portfolio manager at Brinker Capital, told Blockworks at the time that the ETF would satisfy demand from active traders and short-to-intermediate-term investors who feel bitcoin is overvalued and would want to systematically short it.&nbsp;



But the staff of the SEC’s Division of Investment Management requested that the filing be withdrawn for reasons cited in former Division of Investment Management Director Dalia Blass’s <a href="https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm" target="_blank" rel="noreferrer noopener">January 2018 letter</a>, according to an <a href="https://www.sec.gov/Archives/edgar/data/1424958/000119312521316915/d254494daw.htm" target="_blank" rel="noreferrer noopener">SEC disclosure</a> filed on Tuesday.



The nearly four-year-old letter, titled “Engaging on Fund Innovation and Cryptocurrency-related Holdings,” notes that there are investor protection issues &#8211; such as liquidity, potential manipulation and valuation challenges &#8211; that need to be examined before sponsors begin offering crypto-related funds to retail investors.



“The trust intends to engage in an informal discussion with the staff regarding the proposed fund and to seek effectiveness via a subsequent amendment to the registration statement as soon as is practicable,” the filing by Direxion states.



Spokespeople for Direxion and the SEC did not immediately respond to Blockworks’ requests for comment.&nbsp;



The withdrawal request comes just days after fund group <a href="https://cms.blockworks.co/valkyrie-pulls-leveraged-etf-application-at-secs-request/" target="_blank" rel="noreferrer noopener">Valkyrie withdrew</a> its application to launch an ETF that would have provided 1.25x exposure to the bitcoin reference rate and held futures, swaps, options and forwards.



Bitcoin futures-based ETFs began trading last month with the launch of ProShares’ Bitcoin Strategy ETF (BITO) on Oct. 19. Valkyrie’s Bitcoin Strategy ETF (BTF) made its Nasdaq debut three days later.



Some industry professionals have said that the bitcoin futures ETF approvals should result in the SEC’s approval of the Direxion and Valkyrie offerings, as well as the various physically backed bitcoin ETFs that await the ability to launch.&nbsp;



US Reps. Tom Emmer (R-Minn.) and Darren Soto (D-Fla.), wrote a letter to SEC Chairman Gary Gensler on Wednesday noting that the agency allowing bitcoin futures ETFs should mean it will permit physically backed bitcoin ETFs to begin trading.&nbsp;



“Considering the SEC’s clear articulation of how concerns over fraud and manipulation in the bitcoin markets can be addressed,” they wrote, “we do not understand the SEC’s views around the perceived material difference in risk profiles, since both the futures and spot bitcoin markets are inherently intertwined and bear the same risks regarding fraud and manipulation.”



The Direxion and Valkyrie withdrawals are not the only crypto ETFs to be pulled recently. After filing for bitcoin futures ETFs, fund managers ProShares and VanEck each <a href="https://cms.blockworks.co/vaneck-and-proshares-apply-for-ethereum-futures-etfs/" target="_blank" rel="noreferrer noopener">filed to launch Ethereum futures ETFs</a>. The two firms subsequently <a href="https://cms.blockworks.co/vaneck-proshares-seek-to-withdraw-requests-to-launch-ethereum-etfs/" target="_blank" rel="noreferrer noopener">sought to withdraw</a> those applications two days later.

SEC Asks Direxion to Withdraw Bitcoin ETF Application

<div id="highlights-block_61795c02435e3" class="highlights">
 <ul>
 <li>Fund would provide an easily accessible way for investors to hedge their bitcoin position without selling, Brinker Capital senior portfolio manager says</li>
 <li>A similar fund that launched on the Toronto Stock Exchange in April has about $11 million (CAD) in net assets</li>
 </ul>
 
</div>



Fund group Direxion is seeking to launch an offering that would allow investors to systematically short bitcoin futures just days after the first bitcoin futures ETFs in the US hit the market.



The Direxion Bitcoin Strategy Bear ETF offers managed short exposure to CME bitcoin futures contracts, according to <a href="https://www.sec.gov/Archives/edgar/data/1424958/000119312521308123/d248159d485apos.htm" target="_blank" rel="noreferrer noopener">an SEC disclosure</a> filed Tuesday evening. It does not invest directly in bitcoin. The filing does not indicate a ticker or expense ratio for the planned offering.



“The fund will generally maintain its short exposure to bitcoin futures during periods in which the value of bitcoin is flat or declining as well as during periods in which the value of bitcoin is rising,” the document states.



The proposed fund may also short an ETF that invests in bitcoin futures and is expected to hold money market funds, deposit accounts with institutions with high-quality credit ratings, and short-term debt instruments, including US government securities and repurchase agreements.



New York-based Direxion has 79 ETFs trading in the US with combined assets of nearly $28 billion, <a href="https://www.etf.com/channels/direxion-etfs" target="_blank" rel="noreferrer noopener">according to ETF.com</a>. A spokesperson for the firm did not immediately return Blockworks’ request for comment. 



The filing comes after ProShares and Valkyrie Investments launched ETFs that would invest primarily in bitcoin futures contracts — the first of their kind in the US.&nbsp;



The ProShares Bitcoin Strategy ETF (BITO) has <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">more than $1 billion</a> in assets under management after trading for a week. Valkyrie Investments’ Bitcoin Strategy ETF (BTF) also debuted last week, <a href="https://cms.blockworks.co/valkyries-btf-trades-10m-in-first-5-minutes/" target="_blank" rel="noreferrer noopener">trading $10 million in its first five minutes</a> on the market.



Valkyrie also <a href="https://cms.blockworks.co/valkyrie-files-for-leveraged-bitcoin-futures-etf/" target="_blank" rel="noreferrer noopener">filed on Tuesday</a> to launch a leveraged ETF that would provide 1.25x exposure to the bitcoin reference rate.



While early demand for long bitcoin futures ETFs has been strong, there is likely demand on the other side as well, according to Grant Engelbart, senior portfolio manager at Brinker Capital.



<blockquote class="wp-block-quote">“Direxion is also likely taking advantage of the recent approvals with a product that is similar but different and arguably important to the marketplace,” he told Blockworks. “There is also a potential to take advantage of the steeply contangoed bitcoin futures curve.”</blockquote>



The Direxion fund would be similar to one already trading in Canada: Horizons ETFs Management’s <a href="https://www.horizonsetfs.com/ETF/BITI" target="_blank" rel="noreferrer noopener">BetaPro Inverse Bitcoin ETF (BITI)</a>. That fund launched on the Toronto Stock Exchange in April and has about $11 million (CAD) in net assets.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">They have a -1x bitcoin futures ETF in Canada called <a href="https://twitter.com/search?q=%24BITI&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$BITI</a> and while its gotten pretty wrecked, when it works it WORKS (as bitcoin tends to sells off fast), here it is up 52% in 6 wks flat earlier this yr. Thus, this ETF will prob find an audience (of vol-seeking traders) <a href="https://t.co/mtRElkw1cv">pic.twitter.com/mtRElkw1cv</a>&mdash; Eric Balchunas (@EricBalchunas) <a href="https://twitter.com/EricBalchunas/status/1453112630160277509?ref_src=twsrc%5Etfw">October 26, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Engelbart said he believes the proposed Direxion fund would see adequate demand split between active traders and short-to-intermediate-term investors, noting that there will be people who feel bitcoin is overvalued that will want to systematically short.&nbsp;



“While many people hold bitcoin in some fashion, there is not an easy way to play the other side of the market outside of futures, which have limited retail accessibility,” he explained. “There are many cryptocurrency investors that are sitting on large gains, and this tool provides a vehicle to hedge their position without selling that’s easily accessible.”