Bitcoin’s rise to over $100,000 has captivated investors worldwide and turned attention to crypto once again. But what if you could profit when the market takes a nosedive? Welcome to the world of shorting Bitcoin ETFs, a strategy for those looking to turn price declines into opportunities. 

With tools like the ProShares Short Bitcoin Strategy ETF (BITI), you don’t need to manage complex futures contracts or deal directly with volatile cryptocurrency exchanges. You can just use the simplicity of ETFs to bet against Bitcoin’s price.

Ready to learn how to profit from Bitcoin’s downturns? Let’s get started.

Understanding Bitcoin shorting and inverse Bitcoin ETFs

Shorting Bitcoin ETFs follows many of the same principles as shorting Bitcoin or other cryptocurrencies, aiming to profit from a decline in cryptocurrency prices.

BITI is an inverse Bitcoin ETF which offers a simplified way to gain short exposure to Bitcoin through standard brokerage accounts. It tracks the inverse of the S&P CME Bitcoin Futures Index. It’s a straightforward method to hedge against or capitalize on Bitcoin market downturns.

This ETF aims for daily inverse performance, so you need to monitor and adjust your strategy regularly. Holding periods longer than one day may result in performance deviating from the daily target due to compounding effects and market volatility.

Biti aims to provide returns that are the opposite of Bitcoin price movements. Specifically, it targets a -1x performance relative to the Bloomberg Bitcoin Index.

BITI uses Bitcoin futures contracts to achieve its investment strategy. It’s easier and more cost-effective to access declining Bitcoin prices compared to strategies like direct short selling or margin trading. With an expense ratio of 1.03%, BITI is accessible through traditional brokerage accounts.

Of course, in order to make consistent profits, you need to be able to make correct Bitcoin price predictions.

Key inverse Bitcoin ETFs in the market

Two notable options you should consider are: 

• ProShares Short Bitcoin Strategy ETF (BITI) 
• ProShares UltraShort Bitcoin ETF (SBIT)

The difference between the two is very simple. It’s the Leverage.

• BITI: Aims to deliver -1x the daily performance of the Bloomberg Bitcoin Index
• SBIT: Provides -2x the daily performance of the same index, so the inverse exposure is doubled

Here’s an example to illustrate why this difference matters.

Let’s say Bitcoin’s price drops by 2% in a single day. If you invested $1,000:

• BITI would gain 2%, leaving you with $1,020.
• SBIT would gain 4%, leaving you with $1,040.

However, if Bitcoin’s price rises by 3%, the reverse happens:

• BITI would lose 3%, reducing your investment to $970.
• SBIT would lose 6%, bringing your total to $940.

Steps to invest in inverse Bitcoin ETFs

Steps to Invest in Inverse Bitcoin ETFs

1. Open a Brokerage Account: Choose a brokerage platform that supports ETF trading and lists inverse ETFs like BITI or SBIT. Ensure the platform is reputable and offers easy access to major exchanges.
2. Understand the ETF’s Objective: Familiarize yourself with BITI’s goal. It aims to deliver -1x the daily performance of the Bloomberg Bitcoin Index. This means BITI profits when Bitcoin prices decline.
3. Consider the Expense Ratio: Note that BITI has an expense ratio of 1.03%, which impacts long-term profitability. Be mindful of how this fee affects your net returns over extended holding periods.
4. Buy BITI or SBIT Shares: After funding your account, place an order to purchase BITI/SBIT shares based on your investment budget. Start small if you’re new to inverse ETFs.
5. Monitor Performance Daily: Track BITI’s performance regularly. Its daily return goal means holding it for more than one day could result in returns deviating from the target due to market volatility and compounding effects.

Regulatory and tax implications

Maneuvering through the regulatory and tax world of Bitcoin ETFs is never the fun part. However, it’s necessary if you’re looking to short these financial instruments. 

When you consider shorting a Bitcoin ETF like the ProShares Short Bitcoin Strategy ETF (BITI), you must understand that regulatory requirements, overseen by the U.S. Securities and Exchange Commission (SEC), focus on investor protection and market integrity.

From a tax perspective, when you sell a Bitcoin ETF short, you’re liable for paying any dividends or distributions made by the ETF during the period your short position is held. This can impact your overall profitability.

Also, tax implications include recognizing capital gains or losses, with typical short-term capital gains taxed at ordinary income rates. Always maintain accurate records of all transactions for proper reporting on tax returns, especially considering the potential complexity of short sales and diverse holding periods.

Be accurate with your documentation. Your wallet will thank you.

Shorting Bitcoin: Alternative options

If you want to benefit from Bitcoin’s price drops, shorting Bitcoin ETFs is definitely a viable option, but it’s not the only one. You can explore several alternative options to short Bitcoin, each with its own risk profile and requirements.

Let’s take a look at what they are.

Margin trading

Margin trading is a strategy that allows you to short Bitcoin by amplifying your exposure to its price movements. You borrow funds from a brokerage, and you can enhance potential gains through leverage. But, it increases both the risks and rewards associated with price fluctuations. 

Many crypto platforms, like Binance and KuCoin, support margin trading with varying leverage options.

Why Binance Margin is one of the best crypto leverage trading platforms.

You should know that this is a risky strategy. The immense volatility of Bitcoin can lead to rapid price changes. It can greatly affect margin trading outcomes and result in substantial capital losses if you’re not careful.

Futures contracts

Beyond margin trading, another popular method to short Bitcoin involves futures contracts. These contracts allow you to agree to buy or sell Bitcoin at a predetermined price on a future date, which can help you hedge against price drops or take short positions.

Here’s how futures contracts work for shorting Bitcoin:

1. Speculate on Price Declines: By selling futures contracts, you’re fundamentally betting that the price of Bitcoin will fall. If the market price drops below the agreed-upon price before the contract expires, you profit from the difference.
2. Regulated Market: The Chicago Mercantile Exchange (NASDAQ: CME) provides a regulated space for trading Bitcoin futures. It’s great for hedging against price drops or taking short positions.
3. Perpetual Futures: Exchanges like BitMEX offer perpetual futures, allowing you to maintain short positions indefinitely. However, these contracts come with specific liquidity and margin requirements.

Options trading

Options trading allows you to profit from Bitcoin price declines by purchasing put options. They give you the right (but not the obligation) to sell Bitcoin at a specific price (strike price) before the option expires. If Bitcoin’s price drops below the strike price, the option’s value increases, offering potential profits.

Example: If Bitcoin trades at $30,000, and you buy a put option with a $28,000 strike price for $500, you profit if Bitcoin falls below $28,000. If it drops to $25,000, your net profit would be $3,000 – $500 = $2,500.

The biggest advantage of options is limited risk, your maximum loss is the premium paid ($500 in this case). However, options expire, so timing is critical. If Bitcoin doesn’t drop as expected, the option becomes worthless. In other words, you lose your $500.

When exploring strategies like this, it’s helpful to consider the platforms you’ll be using. For traders interested in alternatives to options, the best crypto contract trading platforms also provide opportunities to profit from market fluctuations

CFDs and Prediction Markets

• Contracts for Difference (CFDs) allow you to speculate on Bitcoin price movements without owning the asset. You profit by selling high and buying low, with gains reflecting the difference between the opening and closing prices.
  For example, if Bitcoin starts at $30,000 and drops to $28,000, your profit is the $2,000 difference, minus any fees. CFDs offer flexibility but are often unregulated, increasing risk.
• Prediction Markets let you wager on Bitcoin’s future price movements. Platforms like Augur or Polymarket allow you to place bets on whether Bitcoin’s price will drop, offering rewards if your prediction is accurate.

Of course, both methods carry risks. CFDs involve leverage, amplifying both gains and losses, while prediction markets require a deep understanding of price trends to make accurate bets.

Managing risks and considerations

Cryptocurrencies are very volatile. That’s why shorting Bitcoin, whether through ETFs, options, CFDs, or other instruments, is risky. Managing these risks is essential to protect your capital and maximize potential returns. 

Here are some practical strategies to help you manage those risks and help protect your capital:

• Understand the Instrument: Know how your chosen shorting method works. For example, ETFs have expense ratios that reduce returns over time, and options expire worthless if market predictions are incorrect. Make sure to understand these nuances to avoid nasty surprises.
• Set Stop-Loss Orders: Always use stop-loss orders to limit potential losses. For instance, if Bitcoin moves against your position by a predetermined percentage (e.g., 5%), the stop-loss will automatically close the trade to prevent further losses.
• Use Position Sizing: Never risk more than a small portion of your capital on a single trade. A common rule of thumb is to risk no more than 1–2% of your portfolio on any one trade.
• Monitor Daily Performance: For instruments like inverse ETFs, you need to track it daily. These products aim for daily returns, and holding them longer can have compounding effects that deviate from expected performance.
• Diversify Your Strategy: Avoid putting all your capital into one shorting method. Combine strategies, such as using both options and CFDs, to spread risk across instruments.
• Account for Fees: Understand the costs associated with your trades, such as ETF expense ratios, options premiums, or CFD broker fees. These can eat into your profits if not factored into your calculations.
• Keep Emotions in Check: The crypto market is highly volatile, and emotional decisions can lead to losses. Stick to your trading plan and avoid panic selling or over-leveraging in response to sudden price movements.
• Stay Informed: Continuously monitor market trends, Bitcoin price movements, and macroeconomic factors. For example, regulatory news or major market or geopolitical events can drastically affect Bitcoin prices.

The bottom line

To short a Bitcoin ETF, you’ll need a brokerage account that allows ETF trading. Buying shares in an inverse ETF like BITI provides exposure to Bitcoin’s price drops. 

Monitor performance closely due to the -1x daily goal and 1.03% expense ratio. Implement risk management strategies, such as stop-loss orders, to mitigate losses during high volatility. Also, always be aware of regulatory and tax implications, as well as alternative shorting options.

If you are just starting out in cryptocurrency trading, then it might be best to avoid short selling to start and instead stick to the spot markets, which are easier to navigate and less risky. For a full overview, check our comprehensive guide on how to invest in cryptocurrency. If you aren’t interested in altcoins and instead want to trade BTC exclusively, check out our guide on how to invest in Bitcoin.

Source: https://coincodex.com/article/56751/short-bitcoin-etf/