Short Bitcoin ETFs are popular as traders profit from crypto's bear market

Short Bitcoin ETFs are popular as traders profit from crypto's bear market

Crushed cryptocurrency markets have sparked interest in stocks, allowing bets on Bitcoin's further collapse.

Trading volume for inverse Bitcoin ETFs has increased 44% since the algorithmic stablecoin TerraUSD (UST) collapsed in early May, according to data compiled by Blockworks.

Zooming out, the daily moving average of BetaPro's inverse Bitcoin ETF, BITI, which trades on Canadian exchanges, has risen nearly 220% since its initial listing in April 2021 - when Bitcoin was valued at $60,000.

BITI's price reflects Bitcoin and reflects short trades on BTC - BITI's share price rises when Bitcoin falls, which is the case all year round.

Traders who bought BITI when the fund launched are now up more than 60%, with Bitcoin-induced gains falling by a similar amount to $20,000.

Better yet, BITI has gained 150% since Bitcoin peaked at $69,000 in early November, easily outperforming the benchmark S&P 500 and NASDAQ 100 indexes, which have fallen 18% and 27%, respectively.

In fact, BITI has easily eclipsed some of the best-performing stocks of the year so far.

Energy games have proven extremely popular as a result of supply shortages resulting from the Russian invasion of Ukraine; Shares of Halliburton (HAL), Hess, Valero and Exxon Mobil (XOM) are up between 26% and 38% in 2022. BITI, the reverse Bitcoin bet, is up 77%.

While U.S. investors can trade on Canadian exchanges, they 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.

Proshares' BITI has attracted a lot of attention. CoinShares, a European digital asset investment firm found it attracted $51 million worth of inflows last week, accounting for 80% of all funds flowing into crypto investment products during the period.

James Butterfill, head of research at CoinShares, told Blockworks that Proshares' BITI launch resulted in a doubling of assets under management for short Bitcoin ETFs - suggesting that the recent inflow may be due to pent-up demand in the US rather than specific market events.

“Prior to the launch of BITI in the US, we had seen two consecutive weeks of outflows in short Bitcoin ETFs, indicating that short investors were beginning to capitulate to trading,” Butterfill said.

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

Not everyone piled into inverse Bitcoin ETFs at the top of BTC

But U.S. investors who have been waiting for the Proshares version of BITI to launch on Arca have missed out on most of the returns so far - the stock is up just 1% since its initial listing. Those who bought BITI on Canadian exchanges last year are in the green.

Townsend Lansing, head of product at CoinShares, said in an email that European investors view short and leveraged products as short-term trading opportunities rather than longer-term fundamental trades, typically due to their structure and higher management fees.

If U.S. investors follow the European approach, it makes sense that the recent market disruptions would serve as an entry point for short investors, Lansing added.

“As a result, it doesn’t necessarily follow that people would look to invest in short ETPs when prices are at all-time highs,” he said. “Rather, many of them are looking for momentum to open short positions.”

In fact, short Bitcoin ETF trading volume has increased since Terraform Labs' algorithmic stablecoin was first depegged; At the time, Bitcoin was trading for around $35,000.

Regarding the correlation between short Bitcoin ETF inflows and the crypto ecosystem's worst developments this year, Butterfill argued that there is a small correlation between major events and inflows into short Bitcoin ETFs.

“In my view, investors delayed adding short Bitcoin ETFs until they realized that the crypto markets were experiencing a full-blown bear market, highlighted by events like Terra and Three Arrows Capital,” he said.

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The post Short Bitcoin ETFs Popular as Traders Capitalize on Crypto’s Bear Market is not financial advice.