SQFs are CFTC-regulated, perp-like contracts designed to trade at spot prices. They share similarities with perpetuals (perps) found in crypto-native markets and come with distinct advantages:

• Spot pricing: They trade at the reference spot prices.
• Accessibility: Smaller contracts, requiring less upfront capital.
• Regulated safety: SQFs are centrally cleared with virtually no counterparty risk.
• Long-dated: They are listed for up to one year, reducing the need to frequently "roll" (close and re-open) positions, making them ideal for "buy and hold" strategies.

Traders typically access crypto through direct ownership, spot ETFs or perps: 

Direct ownership: The most traditional route. Centralized exchanges (CEXs) typically offer greater liquidity and familiarity, but involve surrendering custody. Decentralized exchanges (DEXs) provide full self custody via personal wallets and use automated market makers (AMMs) for pricing.

Spot exchange-traded funds (ETFs) track spot crypto prices by holding the underlying token. They are accessible through traditional stock exchanges, but incur management fees and introduce the risk of tracking error.  

Perps do not have an expiration date and use a “funding rate” mechanism to stay aligned with the underlying spot prices. Driven by market demand, this rate facilitates periodic payments between traders. If the perp’s price is above spot, longs pay shorts (a positive rate), and if it is below spot, shorts pay longs (a negative rate). Perps are generally offered by offshore, unregulated platforms that offer high leverage while posing significant risks, including the potential for large losses.

In the table below, we show how QBTC fits into that landscape based on an illustrative scenario of a gaining $900 exposure and a bitcoin price of $90,000:

*Spot ETFs are Regulation T margin eligible, allowing for up to 2x capital efficiency in margin accounts.

**During recent crypto liquidation events, numerous DEX's insurance funds were depleted. To cover the remaining losses, ADL was activated to forcibly close the most profitable, highly leveraged positions, taking the winnings of the top traders to stabilize the market for everyone else.

Bottom line: SQFs offer high capital efficiency and transparency within a secure U.S. legal framework, avoiding the custody risk of crypto exchanges and management fees of ETFs.

To understand how SQFs work, a trader must distinguish between price and value. While SQFs trade at spot prices, they’re designed to deliver the economic value of a futures contract, just like perps. 

Because SQFs trade at spot prices rather than the price of a futures contract (which typically includes a premium known as the "basis"), the financing of the position is handled separately. This is done via the total financing adjustment (TFA).

Intraday: If you open and close a trade on the same day, the TFA does not apply.

Overnight: You simply pay or receive the change in the TFA value between your entry and exit dates. Think of the TFA as a daily interest tally. You don't pay or receive the full tally; you only settle the difference in the tally from the day you enter the trade to the day you exit.

The TFA is calculated once per day and its function is similar to the "funding rate" used by perps, as it helps align the SQF price with the underlying spot prices. Additionally, unlike sentiment-driven funding rates on other exchanges, the TFA is derived from the transparent and publicly available CME Group futures basis.

Below, we illustrate an intraday and overnight scenario using QBTC prices from the CME Group Spot-Quoted futures pricing calculator:

You buy and sell within the same trading session.

• Trade: Bought 3 QBTC contracts (3 x 0.01 = 0.03 bitcoin) on Dec. 8 at $90,000.
• Exit: Sold on Dec. 8 at $92,000.
• Price gain: $2,000 per bitcoin.
• TFA adjustment: $0 (no overnight hold).
• P&L: $2,000 per bitcoin x 0.03 size = +$60.

You hold the position for more than one day.

• Trade: Bought 3 QBTC contracts (0.03 bitcoin) on Dec. 8 at $90,000
• Exit: Sold on Dec. 9 at $93,095.61
• Price gain: $3,095.61 per bitcoin x 0.03 size = +$92.87
• TFA adjustment:
  • TFA entry: -$3752.5
  • TFA exit: -$3703.11
  • TFA change: $49.39
  • TFA adjustment: $49.39 per bitcoin x 0.03 size  = $1.48 credit to the account.
• P&L: $92.87 (spot gain) + $1.48 (TFA change) = +$94.35

In scenario 2, the trader received a credit to maintain the position overnight.

A key advantage of SQFs is the ability to do more with your cash.

In scenario 2 above, a trader needs ~$2700 to buy 0.03 bitcoin directly. With QBTC, the margin requirement is only ~$648.

This creates a significant difference in return on invested capital (ROIC):

• Direct purchase: A $92.87 gain on a $2,700 investment is a 3.44% return.
• SQF: A $94.35 gain on a $648 margin requirement is a 14.56% return.

By requiring less upfront capital, SQF effectively frees up 75% of your cash for other opportunities, though it is important to remember that leverage also increases downside risk.

The crypto market offers many ways to access spot prices, from direct ownership to ETFs. However, these methods often lack capital efficiency and have opaque risks.

CME Group Spot-Quoted futures offer a compelling alternative for traders:

• Transparency: Regulated pricing and clear mechanics.
• Accessibility: Smaller-size contracts.
• Efficiency: Greater buying power.
• Security: Virtually no counterparty risk via central clearing.

As always, understanding your specific goals, risk tolerance and the mechanics of the product is critical before trading.