Short Bitcoin ETFs Popular as Traders Capitalize on Crypto’s Bear Market

Crushed cryptocurrency markets have spurred interest in stocks that allow bets on bitcoin’s further collapse.

Trade volumes for inverse bitcoin ETFs are up 44% since algorithmic stablecoin TerraUSD (UST) collapsed in early May, according to data compiled by Blockworks.

Zooming out, the daily moving average across BetaPro’s inverse bitcoin ETFs, BITI, which trade on Canadian stock exchanges, has surged almost 220% since they were first listed in April 2021 — when bitcoin was valued at $60,000.

BITI’s price mirrors bitcoin and echoes short trades on BTC — BITI’s share price goes up when bitcoin falls, which it has all year.

Traders who bought BITI when the fund launched are now up more than 60%, gains triggered by bitcoin falling a similar amount, down to $20,000.

Better still, BITI has pumped 150% since bitcoin peaked at $69,000 in early November, easily outperforming benchmark indexes S&P 500 and NASDAQ 100, which are respectively down 18% and 27%.

In fact, BITI has readily eclipsed some of the best performing stocks for the year thus far. 

Energy plays have proven wildly popular as a result of supply crunches resulting from Russia’s invasion of Ukraine; Halliburton (HAL), Hess, Valero, and Exxon Mobil (XOM) stocks are up between 26% and 38% in 2022. BITI, the inverse bitcoin bet, is up 77%.

US investors, while able to trade on Canadian stock exchanges, now have an anti-bitcoin stock a little closer to home. ProShares listed its own inverse bitcoin ETF, also under the BITI ticker, on the New York Stock Exchange’s Arca network in late June.

The various BITI ETFs have recently garnered significant attention. European digital asset investment firm CoinShares found they attracted inflows worth $51 million last week, accounting for 80% of all funds plowed into crypto investment products over the period.

James Butterfill, head of research at CoinShares, told Blockworks that ProShares’ BITI launch led to a doubling of assets under management for short bitcoin ETFs — indicating the recent influx may be more about pent-up demand in the US rather than any particular market events.

“Prior to the launch of BITI in the US, we had seen two consecutive weeks of outflows in short bitcoin ETFs, suggesting short investors were beginning to capitulate on the trade,” Butterfill said.

Still, short bitcoin ETFs boasted about $26 million in assets under management at the start of the year. Now, they manage $140 million, Butterfill noted. Net inflows have hit $77 million, “highlighting that it has been a profitable trade so far this year,” according to Butterfill.

Not everyone piled into inverse bitcoin ETFs at the BTC top 

But US investors who waited for ProShares’ version of BITI to launch on Arca have missed out on most of the returns to date — the stock is only up 1% since it was first listed. Those who bought BITI on Canadian exchanges last year are well in the green. 

CoinShares head of product Townsend Lansing explained in an email that European investors tend to look at short and leveraged products as short-term trading opportunities, rather than longer-term fundamental trades, typically due to how they’re structured and their higher management fees.

If US investors follow Europe’s approach, it makes sense that recent market disruptions would serve as an entry point for short investors, Lansing added.

“As a result, it does not necessarily follow that people would look to invest in Short ETPs as prices hit all-time highs,” he said. “Rather, many of them look for momentum to initiate short positions.” 

Indeed, short bitcoin ETF trade volumes have swelled since Terraform Labs’ algorithmic stablecoin first depegged; bitcoin traded for around $35,000 at the time.

As for correlation between short bitcoin ETF inflows and the crypto ecosystem’s most dire developments this year, Butterfill reasoned there is a small link between major events and inflows into short bitcoin ETFs.

“My view on this is investors delayed adding to short bitcoin ETFs until they realized the crypto markets were experiencing a full-blown bear market, which was crystallized by events such as Terra and Three Arrows Capital,” he said.

This article was updated at 2:57 pm to clarify that inverse bitcoin funds overall had attracted $51 million in inflows last week.

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