An inverse bitcoin ETF functions as a financial instrument offering returns that move in the opposite direction of the underlying asset, bitcoin. When the price of bitcoin declines, the value of the ETF increases, and conversely, when bitcoin’s price rises, the ETF’s value decreases. This setup enables investors to capitalize on bitcoin price downturns without engaging in direct short-selling of the asset.
Using derivatives, an inverse bitcoin ETF aims to mirror the inverse movement of bitcoin’s price. While designed for short-term trading, these ETFs may not perfectly mirror bitcoin’s inverse performance over extended periods due to factors such as fees and tracking discrepancies.
In comparison to regular spot bitcoin ETFs that seek to track bitcoin’s performance, inverse ETFs introduce additional complexities and risks by employing financial derivatives.
Distinctions also exist between short and inverse bitcoin ETFs, with each employing different strategies to profit from bitcoin price declines. Short spot bitcoin ETFs typically achieve this by directly selling bitcoin or derivative contracts representing bitcoin, while inverse ETFs use financial derivatives or alternative strategies to mirror the inverse daily return of bitcoin’s price, allowing investors to profit from declines without directly shorting the asset.
For instance, the BetaPro Inverse Bitcoin ETF (BITI), a Canadian exchange-traded product, utilizes the Horizons Bitcoin Front Month Rolling Futures Index to provide 1x inverse daily bitcoin price performance.
In January 2024, investment firm ProShares filed for an inverse bitcoin ETF shortly after the United States Securities and Exchange Commission approved spot bitcoin ETFs. ProShares detailed in prospectus materials for the ProShares UltraShort Bitcoin ETF their intention to employ derivatives such as swap agreements, futures contracts, forward contracts, 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.
