ProShares launches Inverse Bitcoin Futures ETF

Cryptocurrencies, like other risk assets, have been hit hard this year as geopolitical tensions, inflation, and rising rates weigh on investors’ minds. After reaching a new all-time high last November, the price of Bitcoin has since fallen by over 70%, sparking talk of a “crypto winter” where prices are expected to remain depressed for some period of time. 

Against this backdrop, ProShares launched the ProShares Short Bitcoin Strategy ETF (BITI) on Tuesday. This ETF is designed to provide inverse (-1x) performance of the daily performance of the S&P CME Bitcoin Futures Index. In simpler terms, this ETF is designed to perform well when the price of bitcoin futures falls. 

This exposure might be appealing to investors who believe that cryptocurrency prices have further to fall. However, there are certain things that should be kept in mind when purchasing this or any other inverse ETF.

The risks of Inverse ETFs

To generate their exposure, inverse ETFs typically rely on derivatives such as futures contracts. Though futures prices will generally trend in the same direction as the spot price of an asset, they are not perfectly correlated. 

Futures-based ETFs are also subject to “roll costs” – or the cost of moving from one contract to another to maintain the exposure over time. Depending on the shape of the futures curve, this can have a positive or negative effect on return over time.

Inverse ETFs are also not designed to perfectly track the index over long holding periods, instead of delivering the inverse return of daily performance. While this doesn’t sound like a big difference, returns can diverge significantly over time, especially for more volatile assets. Given that Bitcoin has been prone to wild price swings in the past, investors who hold a fund like BITI over a long-time period should be aware of this risk. 

Highlighting the risks of these types of products, the SEC has been stepping up its scrutiny of products such as inverse ETFs. In May, SEC chair Gary Gensler stated that funds that use derivatives “can pose risks even to sophisticated investors and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions.”

Interestingly, Gensler has frequently expressed concerns about a spot bitcoin ETF which would not be subject to these specific risks. So far, Gensler has only given the green light to futures-based ETFs, stating that as BTC futures are regulated by the U.S. Commodity Futures Trading Commission (CFTC), they provide another level of investor protection.

Is this the bottom of Cryptocurrency?

BITI follows up on ProShares’ success with the ProShares Bitcoin Strategy ETF (BITO), which hit the market last year on October 19. BITO was the first U.S. bitcoin-linked ETF, giving the issuer a strong first-mover advantage after years of intense competition from issuers vying to be first to market.

BITO was incredibly successful, reaching $1 billion in assets under management in just two days. The fund’s launch was seen as a sign of institutional acceptance of Bitcoin, and this enthusiasm helped to push the crypto’s price up to a high of over $68,000 the following month before beginning its descent to current levels.

Though no one can say with certainty what the cryptocurrency market will do going forward, this period of intense negative sentiment is nothing new for Bitcoin. There have been several other times where Bitcoin has lost over half its value before rebounding to new highs. 

ETF issuers have become incredibly quick to launch products that offer exposure to a hot theme in the market. While BITO may have marked the prior top on bitcoin, it is possible that BITI’s launch marks just the opposite. Perhaps sentiment has become so bearish on cryptocurrencies like Bitcoin, that now is exactly the wrong time to go short. If the crypto winter experiences a thaw and bitcoin’s price surge, investors should be aware that they could see most of their position be erased.

For U.S. investors who want to make a tactical bet on the future price performance of Bitcoin, ProShares stands out as being the only issuer to currently offer both long and short exposure to bitcoin futures. But buyers should be aware of the risks involved before trading these ETFs.