ETF That Bets Against Bitcoin to Launch

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The first exchange-traded fund to short the world’s largest digital currency for the first time amid crypto’s massive price slide

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The fund launch comes as a brutal sell-off in the cryptocurrency shows no signs of scarcity. Bitcoin is down 56% this year, while Ethereum is down 69%, according to data from CoinDesk. The total market capitalization of all digital currencies stood at $857 billion on Sunday, down from its peak of nearly $3 trillion last November. As the Federal Reserve unwinds its easy-money policies to fight inflation, investors are leaving more speculative assets.

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Last October, ProShares launched an ETF for bullish bitcoin investors—the ProShares Bitcoin Strategy ETF, the first US-listed bitcoin ETF. The fund trades under the ticker BITO and holds bitcoin futures contracts rather than cryptocurrencies. It raised more than $1 billion in assets from investors in two days.

Bitcoin soared to its all-time high of $67,802 in November, shortly after the fund began trading. There has been a sharp decline in the assets of the fund. As of Friday, the futures fund, which has $643 million in assets, is down 56% this year, according to data from Morningstar.

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The ETF came to the market after years of effort by asset managers to create a fund that would hold real bitcoin. The Securities and Exchange Commission has rejected applications for ETFs that invest directly in bitcoin because bitcoin trading is not transparent enough to protect investors from fraud and market manipulation.

SEC Chairman Gary Gensler has expressed a preference for ETFs that hold bitcoin futures that trade on regulated venues such as the Chicago Mercantile Exchange. But one drawback of futures-based ETFs is that the futures market can sometimes underperform the underlying assets they must track. Investors and analysts have also raised concerns about the additional cost of rolling out futures contracts from one month to the next.

Nate Geraci, president of investment-advisory firm ETF Store, said the short bitcoin futures ETF is designed to track the performance of just one day, unlike the S&P CME bitcoin futures index, which means investors are tracking over time. will experience error. When the index falls, the value of the ETF rises — and vice versa.

“While for a long time only bitcoin futures ETFs have done a commendable job of tracking the spot price of bitcoin, the bottom line is that futures-based products are not a perfect substitute,” Mr. Geraci said. “Inverse products with a daily reset will only amplify that fact.”

ProShares chief executive Michael Sapir said the disparity in performance between bitcoin and bitcoin futures is minimal this year as the futures market matures.

“Of course there can be no guarantees,” he said, “but based on how the futures market is tracking the spot market, we are optimistic that the inverse product will also track well.”

ProShares manages more than $65 billion in assets and is one of several asset managers jockeying to launch the first ETF to bet against bitcoin futures. Direction Fund and AXS Investments filed for similar products in April.

Write to Vicky Ji Huang at [email protected]

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