Despite the immense favorable popularity of Bitcoin, the cryptocurrency is not without its fair share of those with a strongly polarized outlook. The concept of shorting within the financial markets is nothing new.
Investors have a plethora of different methods for doing so even with cryptocurrencies like traditional CFD trading, futures, options, special short-selling strategies, and even prediction markets.
A relatively new concept of using inverse exchange-traded products (ETPs) has recently come to the fore. As expected, ETFs are quite limited within the crypto sphere compared to other more established markets; inverse ETFs are rarer.
Nonetheless, 2021 has been the year of an increasing introduction of such products dedicated to the exposure of Bitcoin’s value. In the realm of inverse Bitcoin ETFs, the three most prominent include the 21Shares Short Bitcoin ETP (by Amun), the BetaPro Bitcoin Inverse ETF, and BetaPro Bitcoin ETF (the latter two by Horizons ETFs).
This article will simplify the complexity of an inverse Bitcoin ETF, how it works, and the advantages and disadvantages to observe.
So, what is an inverse Bitcoin ETF?
It’s beneficial first to understand what a traditional ETF is. An ETF or exchange-traded fund is a financial instrument tracking an underlying asset such as an index, commodity, stock, or bonds both individually or as a diverse bunch, often referred to as a benchmark.
The composition of an ETF can consist of tens or hundreds of individual financial instruments or particular sectors. As the term suggests, such derivatives are tradable through an established exchange.
Experts consider this investment approach as possessing lower expenses in terms of commissions than buying the individual assets in the ETF.
Although investors can buy and sell an ETF like with other financial instruments, an inverse ETF (sometimes referred to as a bear ETF or short ETF) is strictly designed for shorting or selling to profit from the decline of particular instruments.
When the markets within a traditional ETF lose value, the inverse ETF will move in the opposite direction. Investors utilize inverse ETFs in crypto on a short-term basis, typically not longer than a day. They may also use them to hedge against other correlated investments by buying the ETF instead of selling it.
How inverse ETFs work with Bitcoin
We have just established the value of any ETF is derived from an underlying individual instrument or a collection of markets.
For instance, the inverse Bitcoin ETF from Horizons is based on its proprietary ETF known as the Bitcoin Front Month Rolling Futures Index (BFMRI), which itself measures the performance of the Chicago Mercantile Exchange’s Bitcoin future.
In simpler terms, when the BFMRI goes up, the BITI and HBIT go down, and vice versa. BITI and HBIT are currently available on the Toronto Stock Exchange. As per Horizons website, these two ETFs are meant to deliver daily investment results, meaning positions do not go beyond a defined trading day.
This is because the total performance return of the ETF resets back to a factor of -1 daily. Hence, ETFs of this nature are only suitable on a short-term basis rather than a long one.
Advantages of inverse Bitcoin ETFs
Any inverse ETF provides the benefit of not using any margin as most traders would do when shorting cryptocurrencies as a CFD. Most investors see leverage as posing huge financial risks because of its ability to equally magnify profits and losses.
Thus, you can only lose what you’ve paid for the ETF and nothing more. By the same token, an investor needs significantly more capital than they would with leverage, which is an obvious drawback.
Nonetheless, as not everyone can open a brokerage trading account for various reasons, inverse ETFs could be an alternative for them.
Disadvantages of inverse Bitcoin ETFs
The drawbacks of inverse Bitcoin ETFs are present with inverse ETFs generally as short-term investments come with higher expenses such as brokerage commissions. These costs can be more than conventional ETFs.
One of the causes boils down to the frequent buying and selling performed by traders. Experts consider the recalculation methods of such ETFs as not accurately reflective of the true opposite movement of their counterparts beyond a specific day. Generally, ETFs aren’t conventional investments, meaning they are inherently risky.
This risk factor is further amplified when considering an exchange-traded product of a highly volatile instrument like Bitcoin, historically known for experiencing wild and unexpected price swings. Overall, inverse Bitcoin ETFs are better suited towards more sophisticated investors who understand the complexities behind these alternative selling strategies.
Lastly, as briefly referenced, inverse ETFs are already less popular in other instruments, even more so with cryptocurrencies. Therefore, there will be a greater learning curve for understanding how they work within this space.
Final word
In summary, an inverse Bitcoin ETF seeks to replicate the opposite movement of an underlying Bitcoin-based derivative. Presently, this instrument is not so widespread. Therefore, the known inverse Bitcoin ETFs are those based on the products from Amun and Horizons, which themselves mimic all or some part of a Bitcoin-based market.
Investors use such ETFs to hedge their positions in other markets in the short term as part of a diversification strategy. When the two ETFs from Horizons launched in April 2021, the CEO, Steve Hawkins, described the product’s goal of allowing investors with a “high degree of conviction on both the bullish and bearish cases for the asset class.”
Interestingly, the launch of this inverse ETF coincided with Bitcoin reaching its all-time high of close to $65 000 on 14 April 2021, suggesting many had begun to believe the cryptocurrency was due for some significant correction.
As it happened, the cryptocurrency dipped roughly 50% in value over the following month. Thus, there is certainly a market for people who have strong bearish views on Bitcoin. As with any investment, it’s essential to perform your due diligence and recognize all the risks involved.
