Proshares launched a Short Bitcoin Strategy ETF (BITI) on 21 Jun 2022. It is a fund meant to deliver a performance inverse (opposite) to the price of Bitcoin. In other words, if the price of Bitcoin (BTC) goes down, the value of the fund will increase. If the BTC price goes up, the fund value will decrease.
I bought into this fund on 27 Jun 2022 @ US$ 39.9762 per unit. I’m expecting it to go up to about US$ 60 in the next 6 months. In this post, I’ll explain why I’m shorting BTC, and how BITI works as a good vehicle to do it.
Why I’m Shorting BTC
In my article “3 Drivers of Asset Demand“, I stated that prices in the crypto market had been overly inflated by excessive demand for expected returns and that it was an asset bubble.
I had entered too late in Oct 2021 when BTC was US$ 63,000, close to its all-time high. By the time I recognized it as an asset bubble in May 2022, I liquidated all my crypto holdings, at which point BTC’s price had already tanked to US$ 27,000.
But I believe BTC still has room to drop to below US$ 10,000. In the 2018 “crypto winter”, BTC prices dropped from US$ 19,497 on 16 Dec 2017 to US$ 3,236 on 15 Dec 2018. It was an 83% drop taking place over 12 months. At that time, the market probably consisted mainly of HODLers (people who Hold On for Dear Life).
Fast forward 4 years, and the current crypto winter we’re in started on 8 Nov 2021 with BTC at US$ 67,566. If I make a simplistic assumption that the drop will also be about the same magnitude and take 12 months, I arrive at a future price of US$ 11,486 on or around 7 Nov 2022.
However, the conditions now are worse than in 2018. COVID hadn’t happened yet, there was no war in Europe, and monetary policy was still loose. Therefore, I think it is quite likely the drop will be steeper than the last crypto winter, and we may see BTC go below US$ 10,000.
Whether it’s going to be US$12,000, US$ 11,000 or US$ 10,000, I’m not sure. What I am quite confident about is that the probability of BTC prices going down further in the next 6 months is very high. This is why I’m making a short bet on BTC.
What is BITI?
According to the prospectus, the BITI fund strategy is to enter into cash-settled BTC futures contracts as the seller. These were the holdings as of 29 Jun 2022.
Basically, in a cash-settled futures contract, the seller pays the buyer if the price of the asset goes up from the contract price and receives cash from the buyer if the price of the asset goes down.
Let’s use the CME Bitcoin Futures Contract which forms the bulk of BITI’s position as an example. Each contract is 5 BTC. If BITI sells a contract to a buyer at a price of BTC = US$ 20,000, the value of the contract is US$ 20,000 x 5 BCT = US$ 100,000.
If BTC’s price goes down to US$ 19,000, the value of the contract is now US$ 95,000, which means the buyer has lost US$ 5,000 and the seller has won US$ 5,000. If, on the other hand, BTC’s price increases to US$ 21,000, the seller has to pay the buyer US$ 5,000.
In a cash-settled contract with a daily settlement, this difference is settled daily. On some days, the seller wins the bet (i.e. price drops) and receives money. On other days, the seller loses the bet (i.e. price increases) and loses money. Thus, BITI, as the seller, may not make money every day.
As you can see, the BTC Futures Contracts is basically a casino. Sellers bet that the price of BTC will go down (i.e taking a short position), while buyers bet that it will go up (i.e. taking a long position). However, if the BTC price does drop in the long run, the BITI fund will make money, because the money it makes from winning bets will exceed the money it loses.
If you are like me and believe that the short- to mid-term price trend of BTC is to go down, the traditional way to make money is to wait till the price bottoms out, buy it, and then wait for the price to go up again before selling. You can only make money on the uptrend.
However, prices take time to bottom out. And while waiting, you won’t make any money. By being the seller of a Bitcoin Futures contract, you can make money while BTC prices go downwards. And when it has bottomed, you can cash out from your contracts and buy BTC like a traditional investor. So you make on BOTH slopes of the valley, on the downtrend as well as the uptrend.
You can, of course, trade the futures contracts yourself. But that requires a lot of money, as one contract is 5 BTC, which is about US$ 100,000. That’s too high for retail investors like me. Any even if I had the money, I wouldn’t put so much money into a speculative trade like this, because it is just too risky.
The Micro Bitcoin futures are more digestible. Still, they are 0.1 BTC per contract, or about US$ 2,000 each. And you’ll have to monitor and trade the contracts yourself, setting reminders to roll over your contracts once they get close to expiry.
Furthermore, I’m a newbie investor who has never traded futures before. So if I were to do it directly, it is yet another learning curve I have to climb.
Therefore, BITI offers a low-quantum, hassle-free way of getting into a short position on BTC.
Do you know what the irony is? I’ve liquidated all my crypto assets. But despite not owning any crypto, I’m still invested in the crypto market. I just own a part of BITI, which doesn’t own any crypto either.
Futures contracts, unlike stocks, do not need to be bought or borrowed before they are sold. Thus, BITI can sell any number of contracts without having to buy anything. They just need to put up enough cash to fund the accounts needed for them to execute trades.
Also, futures contracts which are cash-settled do not require either the buyer or seller to own the asset; they just need to pay each other the difference between the asset’s spot price and contract price. BITI does not need to physically send BTC to the buyer when the contract ends, it just needs to pay or receive the price difference to or from the buyer.
Shorting vs HODLing with DCA
Many HODLers believe that they cannot time the market, and that crypto has a long-term future, so they will just keep buying crypto and use Dollar-Cost Averaging (DCA) to lower their average cost.
But if the market continues to go down, shorting will deliver superior returns to HODLing.
Let’s say you use DCA and buy US$ 1,000 worth of BTC at 3 intervals with BTC prices at US$ 20,000, $15,000, and $10,000, respectively.
Interval 1: US$ 1,000 / US$ 20,000 = 0.05 BTC
Interval 2: US$ 1,000 / US$ 15,000 = 0.0667 BTC
Interval 3: US$ 1,000 / US$ 10,000 = 0.10 BTC
At the end of 3 intervals, you will have 0.2167 BTC.
Now, what if you did DCA with BITI? Since BITI was launched at US$ 40 per unit with BTC at about US$ 20,000, and the target is a -1x return against BTC’s price, we can assume an X% drop in BTC price will (more or less) result in a corresponding X% increase in BITI price. So the BTC-BITI price correlation will be similar to this:
BTC US $20,000 / BITI US$ 40
BTC US $15,000 / BITI US$ 50
BTC US $10,000 / BITI US$ 60
By investing $1,000 into BITI at the same intervals, these are your holdings:
Interval 1: US$ 1,000 / US$ 40 = 25 BITI
Interval 2: US$ 1,000 / US$ 50 = 20 BITI
Interval 3: US$ 1,000 / US$ 60 = 16 BITI
You will have a total of 61 BITI, worth US$ 60 each. Your total holdings are now worth US$ 3,660.
Now, remember that by this time, the BTC price has fallen to US$ 10,000. You can now sell your BITI for US$ 3,660, and you’ll be able to buy:
US$ 3,660 / US$ 10,000 = 0.366 BTC.
Compared with HODLing, which gives you 0.2167 BTC at the end of 3 periods, shorting via BITI, for the same amount of money invested via DCA, gives you 0.366 BTC. This is a 69% improvement in asset performance!
In fact, I’m using an even more aggressive strategy. I’m putting all the money in upfront instead of splitting it into intervals. Using the example above,
a) Invest US$3,000 to buy 75 BITI
b) Wait till BTC drops to US$ 10,000, at which point each BITI is worth US$ 60
c) Sell 75 BITI x US$ 60 = US$ 4,500
d) Buy BTC with US$ 4,500 / US$ 10,000 = 0.45 BTC
In this case, my holding at the end of the period is 0.45 BTC, which is 108% more than the 0.2167 BTC I would have gotten using HODL + DCA.
I know this sounds like blasphemy to HODLers. But I’m not here to convince them. I’m just sharing what I’m doing, and why I do it, and you can use it to draw your own conclusions.
This is a speculative bet, which means it will only work IF I get the DIRECTION and the TIMING right. If BTC has already reached the bottom at US$20,000 and now starts to trend upwards, then I would have lost the bet.
As a matter of principle, being a conservative investor, the bulk of my investments will be in lower-return but safe assets such as property. Some of it will be in riskier income-generating assets such as stocks, which are more predictable. Crypto goes to the top of my investment pyramid, which forms the smallest part, consists of the riskiest investments, but also has the highest potential returns.
Don’t get me wrong, DCA is a great investment strategy, PROVIDED you’re buying a good asset that you know will appreciate in value over the long run. With shares, I’m prepared to use DCA, because, in the long run, the price of a stock is correlated with its ability to generate an income. Thus, by predicting that the company’s income will increase over time, I can also predict that its share price will increase over time.
However, cryptocurrencies provide no utility. They do not generate an income. They are useless as money as the value is unstable. They are not hedges against inflation as many have argued, otherwise, BTC will be at record highs right now with inflation also at record levels.
DCA is not useful here since the long-term value of BTC may vaporize over time as people realize that it is not going to fulfil any of its early promises as decentralized money and digital gold. Price is determined mainly by belief, much of it blind.
Therefore, in order to make money from crypto, I have to make bets based on speculation.
Is it risky? Of course! I will never do that with the bulk of my portfolio. But this is the top 5% of my investment pyramid, an amount I can afford to lose in the hope of generating exponential returns.
With the base of my pyramid generating predictable, safe returns, I have the peace of mind to take more risks at the top of my pyramid.
So why not?