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How ETF Investors Can Bet on the Crypto Crash

Brendan McDermid | Reuters

Digital currency investors have been under pressure this year due to a range of factors, from inflation and recession fears to a liquidity crisis among high-profile crypto companies. Bitcoin's steady freefall has brought the flagship coin down almost 70% off its historic high last November.

For investors mulling a bet against bitcoin, ProShares launched BITI, the first U.S. short bitcoin-linked ETF, on June 21.

"This is the companion to BITO, the long bitcoin strategy ETF," Simeon Hyman, Global Investment Strategist at ProShares, said on CNBC's 'ETF Edge' on Monday. "And we wanted to be able to offer investors the short exposure."

BITI operates inversely (-1x) to the S&P CME Bitcoin Futures Index, offering an opportunity to potentially profit from its decline. The ETF is tied to bitcoin futures contracts and is rebalanced every day.

"What we've seen over the past several months with the volatility of bitcoin is more and more challenges in the spot market," Hyman said.

Unlike the spot market, futures have matured this year, he explained. That means the roll costs that investors were concerned about have shrunk.

"Advisers are interested in crypto ETFs because they can keep them on the platforms that manage their clients," Tom Lydon, vice chairman of VettaFi, told CNBC's Bob Pisani on 'ETF Edge' on Monday.

Lydon sees an upside with BITI in part because of its flexibility. Investors do not need an options, margin or futures account, and there's no need to monitor or maintain margin levels. What's more, investors do not have to worry about losing anything more than what they've invested.

"Now with the fact that we've got ETFs, they're available on platforms, and [now that] we've had a great decrease in the value of ETFs, more advisers are getting in," Lydon said.

The fee for BITI is .95%, but Hyman explained that the financing costs and restrictions on shorting bitcoin make the ETF a less costly avenue for exposure.

"It's tough to pull this off," Hyman said. "If you were to go on margin in a brokerage account, the borrowing costs are as high as close to 20%."

June was bitcoin's worst month on record, losing more than 38% of its value in the period alone. The digital currency remains under pressure while falling below $19,000 this past week. It costs up to $18,000 to produce one bitcoin.

But the correlation between bitcoin and futures remains tight, despite investor concerns last year that there would be too much variation between the spot market and the futures market.

"The futures market is something the ETF industry has been a part of for a long period of time," Lydon said. "You've got the plumbing down, the market makers and the authorized participants all doing what they need to do. It was up to them to make sure that they performed — that those spreads are tight, and the correlation is accurate."

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