Understanding the Bitcoin Short ETF

The price of Bitcoin is often incredibly volatile. While most investors make money passively owning Bitcoin as the price rises, others seek to take advantage of short term price drops. To cater to this demand, various financial institutions are now offering investors the ability to go short Bitcoin via an ETF product.

We dive into what this means and whether this is a good decision or not for most investors and traders in today’s market.

Understanding Bitcoin ETFs

The Exchange Traded Fund (“ETF”) was first created in Canada in the 1990’s as a simple way for investors to gain exposure to a specific asset class or subsector. Today there are approximately 4,000 ETFs in the USA with exposure to various sectors ranging from Pet Care ETF (for those betting that pet care stocks will perform well) to the Vice ETF, for those who are bullish on alcohol/tobacco stocks.

This is where Bitcoin ETFs come into the picture. While there are many different ETF issuers (Blackrock, Fidelity, Grayscale etc.), they all represent ownership of the underlying asset itself (i.e.bitcoin). These institutions all buy/sell BTC on behalf of their clients, who then receive proportional ownership of those underlying assets.

When the price rises, the Net Asset Value of the underlying bitcoin also increases and investors all obtain indirect, passive, long exposure. These instruments are perfect for buy and hold investors who are either inexperienced, seeking tax advantages, or do not want to worry about acquiring and self custodying their own physical BTC.

The Short Bitcoin ETF

In contrast to the long-only investor, there are also opportunities for investors who are “short” Bitcoin to earn money if the price decreases.

The concept of going short Bitcoin is simple:

• Entity A borrows 10 BTC from Entity B.
• Entity B then immediately sells their 10 BTC for $1M (assuming a price of $100,000 per coin) and waits 30 days for the price of Bitcoin to decrease.
• In 1 month, the price is now $90,000/coin so Entity B uses the ~$1M to acquire 10 Bitcoin for $900,000.
• Entity B then returns the original 10 BTC to Entity, making $100,000 in profit from the price decline.

In reality, if an investor acquires a share of the short Bitcoin ETF (ticker ‘BITI’, for example), then Entity A in the example above would be ProShares, the financial institution responsible for indirectly acquiring/selling the underlying BTC on behalf of the investor.

Investors would thus acquire a representative share of the short position at that specific time, and the $100,000 of profits would be split to all investors accordingly based on their pro rata ownership (less fees charged by ProShares of course).

It is worth noting there are various other ways to bet against Bitcoin, however they are significantly more complex and have significantly higher counterparty risk (see below the most common).

1. Short Bitcoin ETF [Beginner]

Investors can purchase a share of various different short ETFs, such as the ProShares Short Bitcoin ETF. ProShares also offers investors various different leverage options (both -1x or -2x) for those looking to take on additional exposure.

2. Centralized Exchanges [Intermediate]

Another way to bet against Bitcoin’s price rising, is to simply open an account at a centralized exchange such as Kraken. However, you’ll first be required to be verified to trade with margin before opening a spot position.

3. Decentralized Exchanges aka “Dex’s” [Advanced]

The final option to bet against Bitcoin appreciating in value, is to use a decentralized exchange such as DYDX or Hyperliquid. These platforms can be traded on without having to go through any formal KYC verification process, however they require extreme caution.

These Dexes have a significantly increased risk of capital impairment due to the added risks of rugpulls (where liquidity is rapidly removed from a pool) and various other smart contract failures.

Risks of Short ETFs

Although investors are able to capture positive returns using short Bitcoin ETFs, there are a few hidden risks they should be aware of, namely:

1. Expense Ratios

The biggest drag on investment returns over the long run are fees. The expense ratio is a common metric for assessing all fees an investor pays the financial institution for their services (management fees plus various other fund administration expenses).

These range from 0.25% of total assets under custody to as high as 1.5% for some ETFs such as Grayscale’s Bitcoin ETF. The underlying structure of these ETFs are typically very similar so investors should choose the product with the lowest expense ratio when possible (ETF screeners are a popular tool to help with this).

2. Ownership Structure

The ETN (“Exchange Traded Note”) is often confused with ETFs. While the ETF represents ownership in the underlying asset (in our case, bitcoin), Exchange Traded Notes are debt obligations. As such, ETNs include credit risk, which have a completely different risk profile altogether.

3. Volatility

As mentioned before, Bitcoin is incredibly volatile, resulting in a heightened degree of “tracking risk”. This is the risk when the daily performance of the ETF differs from the performance of its underlying index (such as the Bloomberg Bitcoin Index which tracks the return of a single BTC traded in US dollars).

All of the above reasons are why most investors typically ‘DCA’ (dollar cost average) into Bitcoin. By slowly taking an incrementally larger position in the asset class, investors are able to mitigate Bitcoin’s volatility by obtaining an average buy price, giving them long-only exposure (compared to those looking to profit from Bitcoin’s price dips).

Conclusion

In summary, trying to gain inverse exposure to Bitcoin’s daily price using an ETF may sound simple and easy. In reality, however, it is anything but and investors should first understand the risks involved before buying them.

This is especially true given the relatively niche nature of Bitcoin as an asset class compared to traditional stocks and the fact that short exposure may not be suitable for all investors.

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