Key Points
- An inverse Bitcoin ETF offers returns opposite to Bitcoin’s performance, increasing in value when Bitcoin’s price falls.
- These ETFs use derivatives, are designed for short-term trading, and don’t perfectly track Bitcoin’s inverse performance over long periods.
An inverse Bitcoin ETF is a financial instrument that gives returns contrary to those of its underlying asset, Bitcoin.
When Bitcoin’s price drops, the value of the inverse ETF rises, providing a way for investors to profit from Bitcoin’s price declines without having to short-sell the asset directly.
Working Mechanism of an Inverse Bitcoin ETF
These ETFs leverage derivatives to move against the direction of Bitcoin’s price. As Bitcoin’s price decreases, the ETF’s value increases, and vice versa.
However, these ETFs are typically designed for short-term trading and may not accurately reflect the inverse performance of Bitcoin over longer periods due to factors like fees and tracking errors.
Inverse vs. Regular and Short Bitcoin ETFs
While a regular spot Bitcoin ETF seeks to track Bitcoin’s performance, an inverse Bitcoin ETF aims to give returns opposite to Bitcoin’s performance.
These ETFs often use financial derivatives to achieve their objectives, which can introduce additional risks and complexities compared to traditional spot Bitcoin ETFs.
Both short and inverse Bitcoin ETFs offer ways to profit from Bitcoin’s price decline, but they use different mechanisms. A short spot Bitcoin ETF aims to profit from a decline in Bitcoin’s price by directly selling Bitcoin or derivative contracts representing Bitcoin.
On the other hand, an inverse Bitcoin ETF attempts to achieve the inverse daily return of the Bitcoin price using financial derivatives or other strategies, allowing investors to profit from a Bitcoin price decrease without directly shorting it.
The BetaPro Inverse Bitcoin ETF (BITI), a Canadian exchange-traded product, uses the Horizons Bitcoin Front Month Rolling Futures Index to deliver 1x the inverse daily Bitcoin price performance.
The investment firm ProShares filed for an inverse Bitcoin ETF on Jan. 16, 2024, just a week after the United States Securities and Exchange Commission approved spot Bitcoin ETFs.
ProShares stated in its prospectus materials that it would use derivatives such as swap agreements, futures contracts, forward contracts, and options on futures contracts, securities, and indexes to deliver inverse Bitcoin performance.
The fund aims to provide inverse leveraged exposure to the single-day returns of the Index, without directly shorting Bitcoin. The firm suggested that investors seeking to short Bitcoin directly should consider an investment other than the fund.