Financial product developer First Trust has filed a request with the SEC (Securities and Exchange Commission of the USA) to issue a buffer Bitcoin ETF. Unlike traditional ETFs, this buffer fund offers the potential to reduce investment risks associated with the high volatility of Bitcoin's value. This instrument may appeal to traders looking to protect themselves from significant losses due to sharp declines in cryptocurrency prices.
When the value of shares in the corresponding ETP (Exchange Traded Product) decreases by more than 30%, the buffer fund will incur losses equal to the percentage of the price drop exceeding 30%. For example, if ETP shares lose 35% in value, the buffer fund will lose 5%. This buffer is calculated without considering commissions and other expenses that investors may incur, as stated in First Trust's application.
In other words, First Trust plans to issue a Bitcoin ETF that will absorb up to 30% of losses over the course of a month. However, the creators of this derivative limit the maximum profit traders can earn. The buffer Bitcoin ETF will be based on Grayscale Bitcoin Trust or another ETP, the share value of which depends on changes in the Bitcoin exchange rate.
