What is Inverse Bitcoin ETF? Is It Better Than BTC Spot ETFs?

After 15 years of being first introduced, the cryptocurrency found its way quickly into various markets, from decentralised exchanges to traditional banking systems and centralised financial institutions.

The recent Bitcoin spot ETF approval spurred massive adoption of crypto assets among traditional financiers, encouraging investors to capitalise on the enormous growth of virtual coins. Investment firms now offer a variety of instruments that represent Bitcoin and Ethereum, which are the leading two cryptocurrencies.

The inverse Bitcoin ETF is an inventive way to benefit from market volatility, allowing crypto traders to gain from BTC price dips and short-term fluctuations. Let’s explain in more detail how it works and how you can invest in Bitcoin inverse ETF.

Understanding Inverse Bitcoin ETF

An inverse ETF means that a trader’s equity moves opposite to the price chart. As such, when the price line declines, the trader gains, and when it moves upwards, the trader loses.

It is an inverse approach to the classic exchange-traded funds, which are financial instruments that mimic the market performance of one or multiple securities. ETFs may include one asset, such as Bitcoin, or a combination of assets, like Vanguard S&P 500 ETF.

An inverse Bitcoin ETF aims to take advantage of the crypto market volatility, as the BTC price goes up and down multiple times daily. This approach allows traders to gain every time the Bitcoin price dips using derivatives contracts or inverse leverage exposure, which we will discuss later.

Investing in Bitcoin ETFs

Winklevoss Bitcoin Trust filed the first Bitcoin ETF in 2013, which the SEC rejected in 2017. However, the buzz about Bitcoin ETFs started in 2021, reached its peak in 2023, and became a reality in 2024.

Bitcoin ETFs bridge the gap between decentralised and centralised worlds by allowing traditional investors to trade cryptocurrencies through financial instruments. BTC ETFs simulate Bitcoin market prices and are issued by centralised investment firms.

These instruments offer a safer approach to investing in Bitcoin without the hassle of storing funds in digital wallets and dealing with decentralised exchanges. Since the SEC approved the spot and future ETFs for Bitcoin and Ethereum, the crypto ETF inflow increased significantly.

How Bitcoin Inverse ETF Works

Inverse ETFs work in two ways: short selling Bitcoins or BTC derivatives that investors anticipate their price to drop in the future before repurchasing them at a lower cost.

The other way is to use inverse Bitcoin futures contracts, which involve two parties agreeing to trade a derivative contract on a fixed date and price. In this way, the inverse futures contract buyer bets on a declining market price. If successful, the trader’s equity increases.

Both mechanics serve the same purpose, allowing traders to benefit from decreasing market prices.

Risks and Benefits of Investing in Inverse Bitcoin ETFs

Inverse BTC ETFs come with distinct features. They allow traders to capitalise on the volatile crypto market nature, where virtual coins swing widely during the day. However, this fluctuation is a two-edged sword.

Advantages

• The apparent benefit of investing in an inverse Bitcoin ETF is profiting from the short-term price fluctuations. This enables investors to accumulate wealth using the momentary declines in BTC value.
• The crypto market is speculative in nature, and speculators and communities strongly influence public opinion and market sentiment. Therefore, speculators can benefit from inverse ETFs when the crypto market shows bearish signs.
• Inverse ETFs in Bitcoin can be used to hedge against losing market positions. When traders’ long BTC market positions are exposed to unexpected movements, they can invest in inverted Bitcoin ETFs to gain from price declines and offset their losses.
• Inverse Bitcoin funds serve as a portfolio diversification method. Traders invest in multiple assets in opposite directions to minimise their risks and amplify their potential gains.

Disadvantages

• The crypto market volatility can go both ways. A Bitcoin price decline can be very brief and unpredictably make a recovery, making the inverse ETF investment unprofitable.
• ETF issuers may charge premium costs for managing these positions to ensure against rising risks. These charges may offset any gains the trader would realise from the inverse positions.
• The counterparty risk is another challenge, where the other party in the futures contract fails to deliver on their promise, leading to losses or unrealised gains.
• Liquidity risks arise in this niche investment approach, and when a broker faces liquidity gaps, the bid-ask spread can be broad, leading to increased trading costs.

Bitcoin ETF Inverse vs Bitcoin Short ETF

Bitcoin inverse ETFs and short selling are two strategies for profiting from declining BTC prices. However, they entail different risk factors, mechanics, and approaches.

Inverse ETF Bitcoin provides an inverted leverage exposure to Bitcoin price action, targeting daily market performance. It uses ETFs that mirror Bitcoin-tracking exchange-traded funds like the Grayscale Bitcoin Trust and simulate an inverted performance in the investor’s equity.

This approach can be challenging for the new trader because it involves complicated derivative concepts. Short-term investors prefer this method because it uses day-to-day price tracking and performance.

The other strategy is Bitcoin short-selling ETFs, which involves borrowing and trading BTC or BTC-based contracts to gain from estimated price declines.

This strategy entails maintaining short positions and rebuying Bitcoin contracts when their values decrease, which can be challenging for new traders. However, investors can keep their orders for longer periods than inversed ETFs.

Is Bitcoin ETF Inverse Better Than Bitcoin Spot ETF?

The inverse Bitcoin ETF instruments emerged after the adoption of the BTC spot and futures ETFs. They offer an alternative way to invest in cryptocurrencies and realise profits through trustworthy investment corporations, such as ProShares and BetaPro Inverse Bitcoin.

These instruments mirror regular Bitcoin ETFs and offer an inversed approach to gaining profits, focusing on short-term investment and returns.

On the other hand, spot Bitcoin ETFs track the performance of the underlying asset—here, BTC—and reflect a similar outcome on the ETF value. This way, the investor’s position gains when the market price increases and vice versa.

Types of Inverse Bitcoin ETFs

Financial institutions offer inverse Bitcoin ETF instruments in different combinations, such as 2x and 3x inverse ETFs for BTC, besides the typical 1x approach.

The 2x ProShares UltraShort Bitcoin ETF tracks the daily Bitcoin price performance and multiplies it by two, providing traders with more gain potential. However, this approach entails using leverage, which amplifies gains as well as losses.

The Bitcoin inverse ETF 3x, or BTC3L, multiplies the daily Bitcoin performance by three, leveraging the trader’s positions and signifying their gains if the position ends up successful. However, it exposes them to considerable losses if the market moves sideways.

Where to Find an Inverse ETF for Bitcoin?

Inverse Bitcoin ETFs were shortly created after the direct BTC ETF applications were filed. These instruments offer an alternative way to capitalise on the various opportunities in the crypto market. 

However, they focus on short-term investments because they yield gains when Bitcoin declines. Leading centralised investment firms offer multiple inverse Bitcoin ETF instruments.

ProShares Short Bitcoin Strategy ETF

ProShares is a leading exchange-traded fund firm and one of the oldest inverse ETF investment issuers, which the company started offering in 2006. ProShares launched its Bitcoin futures ETFs in October 2021. 

Later, the company launched the ProShares Bitcoin Strategy ETF, besides three Ethereum futures ETFs, becoming one of the leading US firms to launch ETH ETFs in history.

In 2022, ProShares launched its first inverse Bitcoin ETF (BITI), allowing traders to gain from declining Bitcoin prices. This ETF tracks the Bloomberg Galaxy Bitcoin Index and reflects (-1x) of the daily BTC price action.

The ProShares Short Bitcoin ETF engages in short-selling Bitcoin or Bitcoin-associated derivatives and repurchasing them when their value decreases to net the difference.

ProShares UltraShort Bitcoin ETF

The ProShares UltraShort ETF offers 2x the daily Bloomberg Bitcoin Index performance. As such, if the Bitcoin price depreciates by 1%, the SBIT increases by 2%. Similarly, if BTC increases by 1%, the SBIT drops 2% in value.

This Bitcoin inverse leveraged ETF approach amplifies the trader’s potential gains if the coin price decreases. However, it entails amplified losses if the price trend moves upwards.

Crypto traders invest in SBIT as a one-day trading strategy. However, if you speculate on persistent market stagnation, you can maintain your position for multiple days.

BetaPro Inverse Bitcoin ETF

BetaPro inverse BTC ETF is a Toronto-based exchange-traded product that uses the Horizons Bitcoin Front Month Rolling Futures Index to provide 1x an inverse performance.

This ETF was introduced in 2021 and is traded on the Toronto Stock Exchange. Investors use these ETFs to hedge their crypto market positions and diversify their trading portfolio without a margin account.

How to Invest Successfully with Inverse Bitcoin ETF?

When trading inverse Bitcoin ETFs, it is easy to confuse them with direct ETF instruments. Analysing direct price performance is more common while tracking the price and reflecting an inverted outcome can be challenging.

Additionally, cryptocurrencies are highly volatile, and their prices can change at any time. Therefore, it is essential to follow these indicators to succeed with inverse Bitcoin ETFs.

• MACD is a useful trend-tracking indicator that uses historical values over different timelines to predict future Bitcoin prices and make a correct market entry.
• The fear and greed index helps you understand the overall market sentiment, which can highly influence the traders’ activities and market prices.
• The relative strength index is a popular indicator that helps you identify price changes and determine overbuying and overselling points to predict potential corrections.
• The Bollinger bands are graphical representations that help track price momentum through upper and lower limits, allowing you to find entry and exit points.

Conclusion

The inverse Bitcoin ETF gained popularity for its short-term profit focus and its ability to allow investors to gain from the crypto market’s volatility.

These instruments track the coin price from classic indices such as the CME Bitcoin futures index and deliver inverse Bitcoin performance to the trader’s equity. In other words, they provide an inverted Bitcoin price performance, where traders benefit from price declines.

Inverse ETFs for Bitcoin are done using short-selling tactics, where traders borrow and sell BTC or BTC derivatives as they anticipate a future price decrease. Another approach is inverted futures contracts, where investors enter into agreements to predict potential price declines.