SEC and CFTC Caution Investors About Funds Trading in Bitcoin Futures

The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have warned investors of the risks of investing in funds with exposure to bitcoin futures.

• The SEC published an investor alert on funds trading in bitcoin futures Thursday. The alert comes from the SEC’s Office of Investor Education and Advocacy (OIEA) and the CFTC’s Office of Customer Education and Outreach (OCEO).
• They pointed out that some funds may engage in the trading of bitcoin futures contracts as a way to gain exposure to bitcoin, emphasizing that the cryptocurrency “is a highly speculative investment.” The document cautions:

Investors should consider the volatility of bitcoin and the bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying bitcoin market.

• They urge investors thinking about investing in a fund that buys or sells bitcoin futures “to weigh carefully the potential risks and benefits of the investment,” naming factors, such as their risk tolerance, the fund’s disclosure of its risks, and potential loss of investment.
• The alert further warns that a rise in the price of bitcoin may not result in an increase in the value of the fund holding positions in bitcoin futures contracts, citing several reasons. For example, the funds may not have direct exposure to the contracts’ underlying assets. In addition, bitcoin futures contract prices can vary by delivery months and differ from the BTC price itself. Futures contracts also expire periodically, resulting in fluctuations of portfolio exposure as expiring futures positions are typically rolled into new contracts.
• Meanwhile, the new chairman of the SEC, Gary Gensler, has been pushing for increased oversight of the crypto space, particularly crypto exchanges. The SEC has brought 75 crypto-related enforcement actions on the industry so far. Gensler has called on Congress to pass a law to protect investors.