April 2021 saw exchange platform Coinbase (NASDAQ:COIN) launch its IPO (initial public offering), an event which directly coincided with the price of Bitcoin hitting record highs at $50,000, a gain of 66% since the start of the year. Despite attacks from financial titan Charlie Munger against Bitcoin, Ethereum and Dogecoin continue to rise. Clearly cryptocurrencies don’t care about the feelings of old, wealthy boomers.
Bitcoin may be in for another shock, though. The Toronto Stock Exchange recently played host to the first inverse Bitcoin ETF (exchange traded fund), which opened on Thursday, May 6.
BetaPro Inverse Bitcoin ETF (TSX:BITI) will allow investors to take short positions against Bitcoin. This fund will allow investors to gain ‘short’ exposure without having to employ the use of a margin account. All transactions can be completed without opening a separate currency account, essentially making the process as straightforward as buying or selling stocks. Even investors with individual retirement accounts will have the ability to gain this type of exposure through Bitcoin.
What does this mean for Bitcoin, and more generally for cryptocurrency? As of now, it’s too soon to say for sure. Here’s what we do know.
Bitcoin may live at the intersection of technology and finance, but this particular matter is one of economics. Because like all economic matters, it comes down to a word that most economists are obsessed with - incentives. This development should serve to remind us that cryptocurrency, as a field, is ripe for economic analysis, particularly as more data is constantly emerging.
Since its creation, much of Bitcoin’s strength has stemmed from its incentive-based structure in which compensation lies in trying to sustain the network. Until this point, the only incentives were to work with the system, not against it. That is, until now.
This new system, which extends to investors the possibility to make money by betting against Bitcoin, has the potential to change the ways in which cryptocurrency is valued, although this ETF deals only with Bitcoin. This development is coming along at an opportune time — the higher an asset’s price climbs, the more interest there will be in short-selling it.
This isn’t the first-time investors have sought to bet against Bitcoin. What makes this development noteworthy is it marks the first time that the concept has garnered any serious interest, at least enough for investors to stop and consider what it could mean for them. Instances for shorting Bitcoin have typically been offered by offshore institutions, exactly the type of scenario that tends to raise red flags for investors.
Failing to inspire investor confidence, these questionable systems posed only minimal threats to cryptocurrency markets, largely because they were missing the vehicle necessary for betting against a major cryptocurrency — exactly what an inverse Bitcoin ETF allows for.
The demand for such a vehicle is far from new. The United States Securities and Exchange Commission (SEC) has been receiving Bitcoin ETF applications from Wall Street for years, but unlike Canada has found cause to reject everyone, often citing reasons involving the potential for currency and market manipulation. Their inability to move faster has allowed Canada to beat them in what could be one of the most important milestones to date involving cryptocurrency.
What can investors expect from the launch of this inverse fund? In short, the potential looms for a large market opportunity for people who are wealthy in traditional currencies, many of whom have criticized Bitcoin since it first began making headlines. For the Bitcoin skeptics who run in high financial circles, the chance may have finally arrived for them to finally prove their points on decentralized currency.
Crypto enthusiasts will likely remember the day in 2018 when Bill Gates, in an appearance on CNBC’s Squawk Box, called Bitcoin a “greater fool theory’ type of investment,” and stated that he would short Bitcoin “if there were an easy way to do it.” Gates did not offer any explanation as to what that might look like. At the time, he likely didn’t realize it. Today, we know.
An inverse Bitcoin ETF can potentially provide exactly what he was seeking. For Gates and others like him, it could grant them the opportunity to lower the price of Bitcoin by betting against it and creating downward pressure on the currency’s price. Ironically, the aforementioned Squawk Box episode also featured noted Bitcoin critics Warren Buffett and Charlie Munger. The latter recently made headlines for stating that he hates Bitcoin’s success and citing its alleged usefulness to “kidnappers and extortionists.”
While controversy in public discourse is as old as Bitcoin itself, many crypto enthusiasts don’t believe that certain currencies deserve their current valuation. The ability to take short positions that an inverse ETF grants could enable them to finally take the action to drive its value down.
Should investors be worried about this new vehicle undermining the sustainability of Bitcoin or of general cryptocurrency markets? So far, it’s uncertain, but it doesn’t seem likely yet.
While it’s true that this ETF will likely have a negative effect on Bitcoin’s price, it’s also important for the system to be able to withstand natural market forces, such as people who want to take out positions against it. If Bitcoin wants to be able to stand on its own, its asset prices must be able to withstand short pressure.
This Inverse ETF was inevitable, as it is part of the market maturing, a natural evolution of a mainly healthy progression. Bitcoin will serve as the canary in the coal mine for this market experiment. If it proves successful, it is likely that we will see similar inverse funds launched for other popular cryptocurrencies, such as Ethereum and Ripple.