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Short Bitcoin ETF Debuts At Best—Or Worst—Time

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Depending on your perspective, the launch of the first U.S.-listed inverse bitcoin ETF couldn’t have come at a better time. The ProShares Short Bitcoin Strategy ETF (BITI) debuted Tuesday, nearly eight months into a massive bear market in cryptocurrencies.

BITI joined its sister fund in ProShares’ bitcoin lineup, the ProShares Bitcoin Strategy ETF (BITO), the first-ever bitcoin futures ETF to be listed in the U.S. The fund launched back in late October to huge fanfare. It was the climax of an eight-year journey to bring a bitcoin ETF onto the U.S. market, though it fell short of the spot bitcoin ETF that many investors had wanted.

Nevertheless, BITO reached $1 billion in assets under management in just two days, the shortest time to that threshold ever. But its AUM peaked shortly thereafter at just around $1.4 billion. Since then, the bear market that sent bitcoin prices from more than $67,000 to less than $18,000—a drop of 74%—has helped push assets in the fund down to $659 million.

In hindsight, BITO’s debut came at the worst time, only two weeks before the peak in bitcoin prices. That has some wondering whether BITI’s launch could signal the opposite—the bottom for bitcoin prices.

 

Bitcoin Prices 

 

Decisively In A Bear Market 

In reality, a small, new ETF like BITI probably doesn’t have much significance for the $400 billion bitcoin market. And besides, ProShares first filed for the ETF in April, back when bitcoin prices were above $40,000.

For most people, that would have been a much better time to buy into an inverse bitcoin ETF than today.

On the other hand, some might argue that the downtrend in bitcoin is more defined today than it was back then. They might say that in April, with bitcoin above $40,000, you could make the case that it was merely in a correction within a bull market.

That’s no longer the case; bitcoin has decisively fallen into a bear market, along with the broader cryptomarket. And for as long as the bear market continues, BITI has a chance to capture the attention of aggressive traders looking to capitalize on further losses in bitcoin, especially those traders who don’t want to wade into the world of centralized and decentralized crypto exchanges.

Even beyond the bear market, BITI could be used as a short-term hedging instrument for those who own cryptocurrencies either directly or indirectly, much like other inverse ETFs are sometimes used today.

Exposure Through Futures

Like its sister fund BITO, BITI gets its exposure through near-month CME bitcoin futures contracts. And just like BITO, BITI rolls its positions as contracts expire. But whereas the roll acts as a drag on the returns of BITO, it adds a little bit of juice to BITI’s returns (as long as the futures curve is in contango).

That said, perhaps the bigger factor for BITI holders to consider is the impact on the fund’s returns from daily rebalancing.

BITI only promises to deliver the inverse of the return on bitcoin futures over a one-day period. Over longer time periods, the pattern of returns between bitcoin futures and BITI will likely deviate significantly due to the effects of daily rebalancing.

In general, the more volatile the underlying asset, the more detrimental the impact of daily rebalancing on long-term returns. Since bitcoin is extremely volatile, BITI will likely be impacted significantly.

To be absolutely clear, BITI is not a product suitable for long-term holding periods, and with few exceptions, this is an ETF for aggressive short-term traders.

 

Follow Sumit on Twitter @sumitroy2

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