A bitcoin futures ETF is an exchange-traded fund that allows people to gain investment exposure to bitcoin prices without having to go out and buy the cryptocurrency directly. Exchange-traded funds are regulated financial products that can represent a wide range of different assets.

Investors can purchase and sell shares of the ETF just like they would stocks. But unlike mutual funds, ETF shares can be bought and sold at any time during market trading hours.

With a bitcoin futures ETF, investors are offered an alternative method of profiting off the future price movements of bitcoin. Instead of tracking a range of assets, each share of a bitcoin futures ETF is underpinned by bitcoin futures contracts.

Bitcoin futures are a type of derivative trading instrument where two parties enter into a contractual agreement to buy or sell bitcoin at a predefined price at a later date, typically traded on a commodities exchange. A derivative is a term for any trading contract that tracks the price of an underlying asset.

In essence, you agree to buy or sell bitcoin at a particular price on a specific date no matter what the price ends up being. The agreed date when both parties must fulfill their obligations is known as the contract settlement date or expiration date.

Read more: CME Ethereum Futures, Explained

When a bitcoin futures contract expires, whichever party agreed to purchase bitcoin would have to buy it at either a premium or a discount (as it’s highly unlikely bitcoin will be exactly the same price upon expiry as it was when the contract was agreed). How much that person has to pay depends on the market price (also known as the spot price) at the time and the value of each of the futures contracts they have in their possession.

Below are some of the important details you need to know about bitcoin futures:

An ETF tracks the price movement of an underlying asset. It provides a way to profit off the price trend of an asset without having to physically own it. In the case of a bitcoin ETF, the underlying asset tracked by the investment instrument is bitcoin. The price of an ETF will typically maintain a high correlation with the price movement of the underlying asset because investors theoretically would be able to arbitrage away the spread between the ETF and the underlying asset should it get too wide.

The same applies to a bitcoin ETF – a popular approach is to anchor the price of the bitcoin ETF to a stash of bitcoin. All the company needs to do is consistently ensure that it has enough bitcoin in its possession to back the value of its bitcoin ETF.

While this approach is widely considered one of the most effective systems for creating a bitcoin ETF, it seems that the U.S. Securities and Exchange Commission has not been too receptive to the idea of a physically backed bitcoin ETF. However, the chairman of the SEC, Gary Gensler, hinted that he might consider approving a bitcoin futures ETF, particularly one tracking bitcoin futures on Chicago Mercantile Exchange (CME).

What, then, is a bitcoin futures ETF? Well, exactly like a bitcoin ETF but one that mimics the price of bitcoin futures instead of the market price of bitcoin.

In essence, the value of the ETF is derived from the price movements of bitcoin futures. Here, the company issuing the ETF must hold positions in the bitcoin futures market and anchor the price of the ETF to those bitcoin futures contracts.

Below are some of the unique traits of a bitcoin ETF and a bitcoin futures ETF.

The most notable issue associated with bitcoin futures ETFs centers around the accuracy of their price trackers. When the futures price of bitcoin is higher than its spot price, we can say the ETF is inaccurately tracking the price of bitcoin. This situation is known as “contango,” and it is detrimental to investors holding bitcoin futures ETFs. The opposite of this is known as “backwardation” and occurs when the futures price is lower than bitcoin’s spot price.

At the expiration of the bitcoin futures contracts, the company issuing the bitcoin futures ETF must roll the contracts over (that is, the process of renewing contracts by selling the almost expired ones and using the revenue to purchase new contracts with a farther expiration date). In a scenario where the prices of the bitcoin futures contract are lower than the price of the new contract, the proceeds generated for selling the contracts nearing expiration will not be enough to purchase the same number of contracts that would expire at a later date. This situation will adversely affect the performance of the ETF.