Timing is everything in finance, and Pro Shares certainly has a knack for capturing the prevailing market sentiment by launching its investment vehicles in a well-timed fashion. Coming at the heels of a historic downturn in the crypto sphere, Pro Shares is launching a short Bitcoin ETF today to cater to the prevailing overly bearish sentiment. Readers would remember that the Pro Shares Bitcoin Strategy ETF (BITO), launched back in October 2021 to much fanfare, almost perfectly marked the top for Bitcoin. Well, its counterpart might well mark a cyclical low for the world’s premier cryptocurrency. Let’s elaborate.
The Pro Shares Bitcoin Strategy ETF (BITO) Vs. the Pro Shares Short Bitcoin Strategy ETF (BITI)
Before delving deeper into our thesis, let’s go over the fundamental structural differences between these two ETFs. As is evident from the snippet above, BITO maintains exposure to US Treasury Bills as well as two front-month Bitcoin futures contracts that trade on the CME. Instead of buying Bitcoin on the spot market, sophisticated traders can take a theoretical long position on the cryptocurrency by buying the Pro Shares Bitcoin Strategy ETF. Nonetheless, BITO does have a structural flaw – vulnerability to contango. Basically, contango is the norm in the futures market and refers to a situation where the spot price of a commodity (in this case, Bitcoin) trades at a discount to the price of futures contracts that are further ahead on the calendar. Normally, traders maintain their existing futures-based positions by rolling over the front-month contract that is nearing expiration to the next one. However, due to contango, traders would sell the front-month contract at a slightly lower price and buy the next one at a slightly higher price. Over time, these costs build up and result in chronic underperformance. It is for this reason that Bitcoin proponents have been urging the SEC to approve a spot-based Bitcoin ETF. Unlike BITO, the Pro Shares Short Bitcoin Strategy ETF (BITI) aims to replicate a synthetic short on Bitcoin by maintaining a short position in the two front-month Bitcoin futures contracts that trade on the CME. Crucially, while contango works against the holders of BITO, it would actually bolster the performance of BITI. This means that the ETF can be a convenient way for Bitcoin detractors to bet against the cryptocurrency. Moreover, it can also allow Bitcoin holders to hedge their long positions in a cost-effective manner.
Will the Pro Shares Short Bitcoin Strategy ETF (BITI) Mark a Cyclical Low for Bitcoin?
Readers would remember that BITO was hailed as a game-changer for Bitcoin bulls at its inception, with Fundstrat predicting that the ETF would attract upwards of $50 billion in funds during its first year of trading, equivalent to around $50 million in additional demand for Bitcoin per day. The basis trade was expected to play a major role in the ensuing bull thrust. As a refresher, the basis trade is one where traders exploit the arbitrage opportunity that arises due to a difference between the spot and futures-based price of an asset. In this case, BITO’s gargantuan inflows were expected to create a sizable demand for the underlying Bitcoin futures contracts, resulting in a premium relative to the cryptocurrency’s spot price. Accordingly, the basis trade would have seen traders short futures and buy the spot Bitcoin, resulting in a near-constant source of bids for the world’s premier cryptocurrency. In fact, these dynamics had led Fundstrat to call for an equilibrium price of Bitcoin at a whopping $168,000. What followed, however, was a spectacular bust, with Bitcoin losing around 70 percent of its value relative to the all-time high of $69,000 recorded back in November 2021.
11/10: $BITO sudden +$1.5b inflow↓ATH day ✖️Shitty long?or✔️Solid short? pic.twitter.com/aXbBtIbDCz — Weston Nakamura (@acrossthespread) June 21, 2022 This brings us to the crux of the matter. Weston Nakamura (@acrossthespread) has published an interesting thread on Twitter. The ex-derivatives trader at Goldman Sachs contends that the gargantuan $1.5 billion inflow that BITO recorded on the 10th of November was, in fact, a massive short bet against Bitcoin. This is done via an ETF’s create-to-lend mechanism where new ETF shares are created and then lent out to short-sellers.
— Weston Nakamura (@acrossthespread) June 21, 2022 Basically, the alleged playbook here is quite simple. The massive inflow in BITO on the 10th of November 2021 was interpreted by retail traders as institutions jumping all-in. This then lured in “suckers” for the massive plunge that was to follow. With Bitcoin now at multi-year lows, are the same institutions gearing up for a massive rally by luring ordinary investors to short the world’s premier cryptocurrency via BITI? We would have to wait a few days for additional clarity on this topic. Meanwhile, we will continue to focus on BITI’s inflows for any inkling as to the accuracy of this hypothesis. Do you think the financial behemoths are about to pull off another rip-roaring rally in Bitcoin? Let us know your thoughts in the comments section below.
