Bitcoin ETFs issued ‘market disruption’ warnings during crypto tumult

Two Canadian bitcoin ETFs issued “market disruption” warnings during this week’s crypto turmoil, highlighting the risks these types of vehicles that are popular with retail traders face from the market’s acute volatility.

Bitcoin tumbled by almost a third at one point on Wednesday in an abrupt lurch lower that triggered curbs meant to ease panicky trading in the market for futures that track the cryptocurrency. This brief trading halt on the Chicago Mercantile Exchange posed a potential problem for two funds run by Horizons ETFs Canada that track bitcoin futures.

The Horizon funds sent an alert in the Toronto morning to their market makers, which facilitate trading in ETFs, that they would not be able to honour the day’s buy and sell orders if the futures price remained stuck at the close of trading. 

“We were on high alert at 9am,” said Steve Hawkins, chief executive of Horizons ETFs Canada. “We had to put in place all the business continuity plans for these ETFs.”

The futures price eventually became unstuck as bitcoin recovered, but the incident illustrates that even crypto-linked products that trade on regulated exchanges face risks from the large swings in the market.

“I’m hoping this has opened the eyes of the retail investing public to understanding how volatile this asset class is,” said Hawkins.

The situation comes as US regulators are considering at least 11 applications to launch crypto ETFs, vehicles that would be easily accessible to regular retail investors. In a statement last week, the Securities and Exchange Commission said its staff would consider whether “the Bitcoin futures market could accommodate ETFs” and cautioned on the risks of “highly speculative investment”. 

Horizon launched the pair of ETFs in April based on bitcoin futures traded on the CME, after winning approval from Canadian securities regulators. The two funds, which are priced in Canadian dollars, allow traders to take bets on whether bitcoin’s price will rise or fall through regular investment accounts.

Horizons’ funds are part of a handful of bitcoin and ethereum-based ETFs launched on the Toronto Stock Exchange this year, which were hailed as a milestone for exchange-traded crypto products. Some of these funds and their proposed US counterparts are backed by direct holdings of crypto assets, while the Horizons funds are based on futures.

Despite the volatility on Wednesday, Hawkins said many retail traders remained interested in traded these kinds of ETFs. “This is something that people want to trade and own,” he said. “[Bitcoin] is a very, very high risk underlying asset and people have to know that. ETFs are very clear about the risk disclosure.”