Tuesday, September 28, 2021

SEC and CFTC Alert Investors to Risks of Bitcoin Futures: Finance and Banking

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Cadwalader, Wickersham & Taft LLP
21 June 2021

The SEC Office of Investor Education and Advocacy

(“OIEA”) and the CFTC Office of Customer Education and

Outreach (“OCEO”) cautioned investors on the risks associated

with investing in a fund that has exposure to the Bitcoin futures

market.


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In a bulletin, the OIEA and OCEO reminded investors that (i)

Bitcoin is a digital asset that is derived from blockchain

technology, (ii) a Bitcoin futures contract is an agreement to

purchase or sell a certain amount of Bitcoin at a set price on a

specific date in the future, and (iii) such trading in the U.S. is

required to take place on a CFTC-regulated futures exchange.

The OIEA and OCEO recommended that investors looking to invest

in a fund that purchases or sells Bitcoin futures should

consider:


the potentially heightened risk of financial loss associated

with Bitcoin futures contracts considering (i) the high volatility

of the value of Bitcoin and (ii) the possibility of falling victim

to fraud or manipulation in the underlying cash Bitcoin

market;

the potential for a difference between the price of Bitcoin and

the value of a fund’s positions in Bitcoin futures contracts as

a result of (i) a fund’s lack of direct exposure to the futures

contract’s underlying assets, and (ii) the periodic expiration

of futures contracts, which can lead to fluctuations in the

portfolio’s exposure;

their risk tolerance; and

disclosures in the fund’s prospectus concerning the

principal risks associated with investing in such fund.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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