Vitalij Sova
By Rob Isbitts
On 2/6/23, I took a small position within my “go anywhere” personal account to buy some shares of S&P CME Bitcoin Futures TR (NYSEARCA:BITI), an 8-month-old ETF that dares to bet against Bitcoin (BTC-USD), even for tactical purposes. As with anything I write for Seeking Alpha, my articles (and I suspect those of many other folks) are to discuss what we see. My BITI purchase in small size is simply an acknowledgement that the recent move in the now-iconic cryptocurrency from $17,000 to nearly $24,000 in 4 weeks was more likely a trading frenzy move, and not the start of a secular Bitcoin bull market.
Any investor should realize by now that Bitcoin’s price acts like it has a mind of its own. And in a market starved for good long-term ideas, angling in to try to grab a piece of a potential retracement of a move of 40% in 4 weeks is, if nothing else, a good reward/risk tradeoff. As they say on Wall Street, trees don’t grow to the sky. Especially trees you can’t touch, as is the case with Bitcoin.
Strategy
S&P CME Bitcoin Futures TR shorts Bitcoin futures. It is managed by ProShares, a longtime market leader and innovator in providing inverse ETFs.
ETF Grades
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Offense/Defense: Defense
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Segment: Inverse
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Sub-Segment: Bitcoin
Technical Ratings
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Short-Term (next 3 months): N/A (limited data)
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Long-Term (next 12 months): N/A (limited data)
Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor
For a detailed description of MII’s proprietary technical rating system, see disclosures at bottom of this report.
Holding Analysis
BITI is simply a short position in Bitcoin futures. That single position is backed by US Treasury Bills. This aims to provide the opposite return of Bitcoin futures.
Strengths
ProShares has been a very helpful firm over the years to those of us who like to express our market views and pursue profits by owning ETFs that go up when a part of the market does, and also by owning ETFs that go up when that same part of the market goes down. Importantly, I prefer to do the vast majority of my investing on the short side of the market not by using levered ETFs, but by owning transparent, straightforward, unlevered securities.
Just as with many ETFs before it that deliver that -1X exposure to the S&P 500, Nasdaq 100, Dow Jones Industrial Average, Russell 2000 Smallcap, High Yield Bonds and more, BITI leaves an investor just one click away from being able to profit from a decline in Bitcoin. Importantly, there are multiple ETFs that also allow an investor to take the other side of that trade, rather than owning Bitcoin directly.
Weaknesses
Anyone buying an ETF linked in any way to Bitcoin should understand what they are getting themselves into: a probable wild ride which on any given day can see your investment change in value by 5-10% without breaking a sweat (even if the investor does). Bitcoin is as much a revolution and a mission for many investors as it is an “investment.” That means that at any moment, the crowd can again whip itself up into a frenzy, and take down a chunk of your investment.
It is reminiscent of an old Henry Winkler movie, “Night Shift,” in which his character bears no resemblance to his classic Fonzi character from “Happy Days.” Winkler’s character works the night shift, and is shown throughout the movie going up the subway himself to return home, with a throng of New York City workers rushing past him on their way to start their work day. Shorting Bitcoin might feel like that sometimes.
In addition, BITI is not a very big ETF, at $100mm in AUM. That size should not be a big issue, given the single holding other than the T-Bill collateral for those short Bitcoin futures. But it is worth mentioning here.
Opportunities
I look at every investing decision the same way:
1. Is the reward potential greater than the potential for major loss?
2. Does this ETF fit in alongside the rest of my portfolio holdings?
On question 1, my answer is yes, given the latest sharp upward move in Bitcoin, and my broader view that risk assets at best need a break, and at worst are poised to break down, following a vibrant start to 2023. However, in the case of BITI and some other notoriously volatile ETFs I have opined on for Seeking Alpha, position size is absolutely everything. As an example, if I were to normally take, say, a 10% position in a single inverse ETF, I would be inclined to take a small fraction of that with something as volatile as BITI.
If the tactical position works out, there’s a nice profit to be made. But if the decision ultimately fails, the loss is limited, since the position size was. I fear that this is a part of investing that many do not sufficiently account for when managing their own assets. There is a lot of emphasis on “what should I buy now” and much less on “what should I surround it with.”
I am hoping to continue to provide some insight on portfolio construction to this audience as time goes on. And that essentially answers question 2 from above. BITI can be viewed in isolation, but it is truly a powerful tactical opportunity when it is used to allocate a relatively small portion of a portfolio to something (BITI) that could rally 50% if it simply returns to where it was during the first week of 2023.
Threats
Have you heard of Bitcoin?! But seriously, the threat of Bitcoin when contemplating a time frame of months or even weeks, not years, is two-fold: owning it is a threat. And so it shorting it. If you play in this sandbox, you are likely to get some sand in your face along the way. Again, my modest venture into BITI is more about an attempt to find tactical value in an indecisive market for stocks and bonds, rather than as a major statement about where Bitcoin, crypto and the blockchain are going over the next decade. BITI is simply an ETF that allows investors to try to make money whenever Bitcoin falls in value.
Conclusions
ETF Quality Opinion
I wrote a piece for another publication a while back entitled “How Bitcoin could go to $10,000, not $100,000.” Bitcoin stood at around $34,000 when that article published on January 24, 2022. It has since dropped as low as about $16,000, and the recent price surge in early 2023 has been one of Bitcoin’s most impressive moves in some time. But as the guy who penned that article, allowing for the potential for Bitcoin to ultimately fall to new multi-year lows, albeit with plenty of wild price changes along the way, BITI is an ETF I’m glad to have access to.
ETF Investment Opinion
I am a big believer in the future of blockchain technology. But as cryptocurrencies go, they still operate like trading and sentiment-monitoring vehicles to me. So at a moment like this, and with my usual willingness to “take big risks with small amounts of money” (that’s me quoting me), I place a Buy on BITI here.
Modern Income Investor’s proprietary technical rating system was created by the firm’s founder, Rob Isbitts, a chartist for more than 40 years. The ratings emphasize risk management, and the belief that while any investment can appreciate in price at any time, each investment carries a different level of potential for major loss. The balance of reward and risk is calculated each night for thousands of securities, using a formula that analyzes price trend, strength of that trend and key price levels. It analyzes data over multiple time frames to produce a short-term rating (looking 3 months out) and a long-term rating (looking 12 months out).
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.