BITI: A Way To Short Bitcoin Without Leverage; Buy rating in small size

By Rob Isbitts

On 2/6/23 I took a small position in 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 everything I write for Seeking Alpha, my articles (and I suspect those of many others) are for discussing what we see. My small size BITI purchase is simply an acknowledgment 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 now realize that Bitcoin’s price seems to have a mind of its own. And in a market starved for good long-term ideas, angled in to try and grab one part of a potential retracement of a 40% move in 4 weeks is, if nothing else, a good reward/risk trade-off. 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 long-time market leader and innovator in offering inverse ETFs.

ETF Grades

• Attack/Defense: Defense

• Segment: Reversed

• Subsegment: Bitcoin

Technical assessments

• Short term (the next 3 months): N/A (limited data)

• 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 assessment system, see disclosures at the bottom of this report.

Holding analysis

BITI is simply a short position in Bitcoin futures. This single position is backed by US Treasuries. This aims to provide the opposite return of Bitcoin futures.

Strengthens

ProShares has been a very useful firm over the years for those of us who like to express our market views and pursue profit 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 does of the market goes down. Importantly, I prefer to make the vast majority of my investments on the short side of the market, not by using leveraged ETFs, but by owning transparent, uncomplicated securities.

Just as with many previous ETFs that deliver the -1X exposure to the S&P 500, Nasdaq 100, Dow Jones Industrial Average, Russell 2000 Smallcap, High Yield Bonds and more, BITI puts an investor just one click away from profiting from a decline in Bitcoin . Importantly, there are several ETFs that also allow an investor to take the other side of that trade, instead of owning Bitcoin directly.

Weaknesses

Anyone buying an ETF tied to Bitcoin in any way should understand what they’re getting into: a likely wild ride that, on any given day, could 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”. This means that at any time the audience can again whip themselves into a frenzy and take away a portion of your investment.

It’s reminiscent of an old Henry Winkler movie, “Night Shift,” where 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 film getting on the subway himself to go home, with a crowd of New York City workers rushing past him on their way to start their work day. Shorting Bitcoin can feel like that sometimes.

Additionally, BITI is not a very large ETF, with $100mm in AUM. That size shouldn’t be much of a problem, given the individual holdings other than the T-Bill security for the short Bitcoin futures. But it is worth mentioning here.

Possibilities

I look at every investment decision the same way:

1. Is the potential for reward greater than the potential for major loss?

2. Does this ETF fit with the rest of my portfolio holdings?

To question 1, my answer is yes, given the recent sharp rally in Bitcoin, and my broader view that risk assets need a pause at best, and are poised to crash at worst, after a buoyant start to 2023. in the event with BITI and some other notoriously volatile ETFs I’ve 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, there is a good gain to be had. However, if the decision ultimately fails, the loss is limited, as the position size was. I fear that this is one part of the investment that many do not take into account 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 hope to continue to provide some insight on portfolio construction to this audience as time goes on. And that actually answers question 2 from above. BITI can be viewed in isolation, but it is truly a powerful tactical opportunity when used to allocate a relatively small portion of a portfolio to something (BITI) that could increase 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 considering a time frame of months or even weeks, not years, is twofold: owning it is a threat. And that short-circuits it. If you play in this sandbox, you’ll probably get some sand in your face along the way. Again, my modest bet on BITI is more of an attempt to find tactical value in an indecisive stock and bond market, rather than an important statement on where Bitcoin, crypto, and the blockchain are headed over the next decade. BITI is simply an ETF that allows investors to try to make money when Bitcoin falls in value.

Conclusions

ETF quality statement

I wrote a piece for another publication a while back titled “How Bitcoin Could Go to $10,000, Not $100,000.” Bitcoin was around $34,000 when the article was published on January 24, 2022. It has since dropped as low as around $16,000, and the latest price rally in early 2023 has been one of Bitcoin’s most impressive moves in some time. But like the guy who wrote that article, so the potential for Bitcoin to eventually fall to new multi-year lows, albeit with a lot of wild price swings along the way, BITI is an ETF I’m happy to have access to.

ETF Investment Statement

I am a big believer in the future of blockchain technology. But as cryptocurrencies go, they still serve as trading and sentiment monitoring vehicles for 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 myself), I’m placing a buy on BITI here.

Modern Income Investor’s proprietary technical assessment 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 increase in price at any time, each investment has a different level of potential for large losses. The balance between reward and risk is calculated every night for thousands of securities, using a formula that analyzes the price trend, the strength of that trend and key price levels. It analyzes data over multiple time frames to produce a short-term assessment (looks 3 months) and a long-term assessment (looks 12 months).

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Be aware of the risks associated with these stocks.