What is an inverse bitcoin ETF?

An inverse bitcoin ETF is a financial product that provides the opposite returns of its underlying asset, bitcoin. If the price of bitcoin falls, the value of the ETF will rise.

How does an inverse spot bitcoin ETF work?

An inverse bitcoin ETF uses derivatives to move in the opposite direction of bitcoin's price. When the price of bitcoin goes down, the value of the ETF increases, and when the price of bitcoin goes up, the value of the ETF decreases. This allows investors to profit from declines in the price of bitcoin without needing to directly short-sell the asset.

Inverse ETFs are typically designed for short-term trading and may not perfectly track the inverse performance of bitcoin over longer periods due to factors like fees and tracking errors.

Inverse vs. regular spot bitcoin ETF

An inverse bitcoin ETF aims to provide the opposite returns of bitcoin. A regular spot bitcoin ETF seeks to track bitcoin's performance and reflect the overall movement of the token's price.

Inverse ETFs also often use financial derivatives to obtain their objectives, which can introduce additional risks and complexities compared to traditional spot bitcoin ETFs.

Short vs. inverse

While both types of ETFs offer ways to profit from bitcoin's price decline, short and inverse bitcoin funds employ different mechanisms to achieve this goal.

A short spot bitcoin ETF aims to profit from a decline in the price of bitcoin by directly selling bitcoin or derivative contracts representing bitcoin.

In contrast, an inverse bitcoin ETF tries to achieve the inverse daily return of the bitcoin price using financial derivatives or other strategies, allowing investors to profit from a bitcoin price decrease without directly shorting it.

Examples

The BetaPro Inverse Bitcoin BTC +4.20% ETF (BITI), a Canadian exchange-traded product, uses the Horizons Bitcoin Front Month Rolling Futures Index to provide 1x the inverse daily bitcoin price performance. 

The investment firm ProShares filed for an inverse bitcoin ETF on Jan. 16, 2024, nearly a week after the United States Securities and Exchange Commission approved spot bitcoin ETFs. 

ProShares noted in prospectus materials for the ProShares UltraShort Bitcoin ETF, its inverse bitcoin ETF, that it would use derivatives such as swap agreements, futures contracts, forward contracts and options on futures contracts, securities, and indexes to deliver inverse bitcoin performance. 

"The Fund obtains short exposure to bitcoin in a manner designed to provide inverse leveraged exposure to the single day returns of the Index. The Fund does not directly short bitcoin. Investors seeking to short bitcoin directly should consider an investment other than the Fund," ProShares wrote.