Summary Bitcoin's long-term potential is driven by unstable modern monetary policies, making it a strong hedge against fiat currency weaknesses. The 2x Bitcoin Strategy ETF is highly volatile and risky due to its 2x leverage, high expense ratio, and futures contango, making it unsuitable for long-term holding. Short-term speculation with BITX is possible, but sophisticated investors should consider direct futures, while unsophisticated investors should consider simpler ETFs. Holding bitcoin and shorting BITX was profitable before bitcoin ETFs, but now this niche has dried up. I have written a couple of articles recently looking at Bitcoin ETFs, as I believe Bitcoin USD ( BTC-USD ) to be very well positioned among the world of potential investments. Bitcoin has proven itself to be the highest-returning asset class time and again since its inception in 2009. By comparison, the SPDR S&P 500 ETF Trust ( SPY ) has returns that look like a drop in the bucket: Data by YCharts Even in a relatively quiet year for Bitcoin and a roaring one for SPY, Bitcoin smashes the index: Data by YCharts Investors looking for alpha would be remiss to avoid the single best-performing asset class for their portfolio. But past performance is no guarantee of future returns. Why would Bitcoin continue its ascent from here? Bitcoin and Money Fundamentally, my long-term case for Bitcoin remains the unstable nature of modern monetary policy. The US dollar emerged from the post-WWII Bretton Woods agreement as the sole global reserve currency, and has retained its status more recently through the tenuous petrodollar system. This dependence on the dollar has artificially strengthened its value, leading to ever-expanding trade and budget deficits that cannot continue indefinitely (known as Triffin's Dilemma ): Treasury.gov You might notice some spikes in spending around 2008 and 2020 in response to economic shocks, times when government spending can keep the economy afloat long enough for the private sector to regain its footing. But what about the steady climb from 2015 through today? How long can that kind of deficit expansion go on? The deficit has increased by approximately 416% since 2015, while revenue has only increased by about 14.4% (GDP 19.7%) in the same period, so the money is not being spent productively. The modern fiat system has only been around for about 50 years (post the demise of the Gold Standard ), and the dollar has lost almost 90% of its value since then. But whatever is bad for fiat systems, like deficits, inflation, and capital controls, is good for Bitcoin. It is reasonable to assume that as the world changes, so will its monetary policy, and that Bitcoin will be a larger part of the future than it has been in the past. To go along with this kind of hedging characteristic, Bitcoin's ever-important hash rate has continued to climb steadily: Data by YCharts That is another chart I would like to buy into! Institutional adoption continues to increase, and I believe that we are still in the early innings of Bitcoin's acceptance into more mainstream financial outlets. Leveraging Bitcoin Being bullish on the prospects of Bitcoin is one part of the story, but the question remains how to participate in further upside. January 10th of this year was a monumental moment for cryptocurrency when the SEC approved the first spot Bitcoin ETFs, allowing investors to buy Bitcoin exposure with a few clicks of a button in the brokerage accounts they already owned. Buying these ETFs, holding Bitcoin in a private wallet, or holding on an exchange like Coinbase Global, Inc. ( COIN ) are all reasonable options. Some investors have been intrigued by the possibility of adding leverage to their Bitcoin holdings, for truly explosive results. One of the easiest and most straightforward ways to do this is to buy the 2x Bitcoin Strategy ETF ( BITX ) by Volatility Shares, which aims to double the return, both positive and negative, of Bitcoin. This sounds good, but in practice, it is not quite as straightforward as it seems. There are a few factors to keep in mind. Extreme Volatility First, Bitcoin is already extremely volatile, so amping up the volatility even further is extremely risky. Bitcoin is about 4 times as volatile as the S&P 500 ( SPY ): Data by YCharts Doubling that would mean something like 8 times the volatility of stocks, and that is unlikely to go well for very long. Bitcoin on its own has experienced a 75%+ drawdown on four separate occasions since 2010. A drawdown like that would almost surely wipe BITX out completely. Most leveraged products currently on the market have not been around long enough to fully evaluate their track record during stressful times, as markets have experienced a protracted bull run. One product that I know of, though, ProShares Ultra S&P500 ETF ( SSO ), which has been around since before 2008. It is only 2x leveraged to the S&P 500 (recall that BITX is equivalent to around 8x leverage on the S&P 500). While it did survive 2008, it did not catch back up to the unlevered index for almost a decade afterward. Wrong directional calls using leverage for only a short time can offset years of potential gains. Data by YCharts Price Decay Second, BITX targets twice the daily returns of Bitcoin. Over the long run, its performance will vary greatly, but generally, it will not be equal to 2x the return of Bitcoin. For example, since inception, during a strong 123% bull run for Bitcoin, BITX managed to just about match Bitcoin's return, with much greater risk: Data by YCharts That is a far cry from the over 200% gains we would want by doubling Bitcoin's performance in the period. Over time, the performance of BITX will correlate with the performance of Bitcoin, but it will slowly decay and underperform expectations. This is due to several factors. The simplest factor is the hefty 1.9% expense ratio that BITX charges to manage the ETF. Every year, then, BITX will lose almost 2% of its value from fees, compounding over time. The next simplest factor is pure volatility decay. BITX is designed to match 2x the daily return of Bitcoin. So, if Bitcoin goes down 5% one day and then up 5.5% the next, it will end up with about a 0.2% gain. It would be wonderful if BITX ended up with a 0.4% gain! But what actually happens is that BITX loses 10% and then gains 11%, which results in a slight loss. So even though Bitcoin is heading up, BITX is heading down. These are small moves, but compounded over time, they result in massive underperformance from BITX compared to what we would expect. Futures Contango This is the biggest factor to consider when investing in BITX, and evaluating its performance: BITX does not actually invest in Bitcoin at all, but in Bitcoin futures , a derivative of the actual price. These futures are almost always in contango, which means that later-dated futures are pricier than nearer-dated ones. Here are the latest quotes from CME: CME Group The important thing to notice is that later futures are more expensive than nearer ones. These are the costs of holding futures, which can be leveraged, rather than holding Bitcoin itself. The issue with BITX is that it tries to maintain exposure to near-month expirations as much as possible, holding the shortest-dated futures. Here are its current holdings , which are concentrated in the front month November futures, but are beginning to roll into December futures: Volatility Shares Presently, then, it is selling November futures for 76615 and buying December futures for 77435. Then it will sell those December futures and buy January ones for an even higher price. On and on this goes, selling the cheaper future and buying the more expensive one. Over time, this will erode value at a steady and significant pace. These are essentially locked-in and guaranteed losses for BITX. Speculation So far, BITX is not looking like a good long-term hold. It does not tend to meaningfully outperform holding Bitcoin itself, and has tremendous risk, including what I believe to be a rather likely risk of total loss if held long-term. There are two other possible uses for BITX, however. The first, what leveraged ETFs are generally known for, is short-term speculation. If an investor believes that Bitcoin will go up in a very short time frame, then BITX can be a way to speculate on this move. This is a very risky strategy, as it can go very wrong in a very short amount of time, and take longer than expected to recover. Bitcoin is volatile enough. Buying the coins may be enough to profit from a short-term rise in their price. If an investor is dead set on leveraging their bet, then buying futures directly is likely a better play, avoiding BITX's other negatives (expense ratio, rolling costs, and daily decay). This is what futures are designed for, but it requires a significant amount of capital and knowledge of futures markets, limiting the play to sophisticated investors. For unsophisticated investors, I cannot recommend such a complicated product as BITX, so sticking with Bitcoin ETFs is preferable. Cash and Carry Arbitrage Long-term, I believe Bitcoin itself is a better play than BITX. Short-term, I believe Bitcoin futures are a better play than BITX. But there is again another use case, a more interesting one. The mention of futures to anyone who has followed Bitcoin for a long time should bring up the thought of the cash and carry arbitrage trade. Recently, it could produce a largely risk-free return of 25%+, and even higher rates in past years. The theory is simple. Buy Bitcoin, and sell Bitcoin futures. In that case, contango works in your favor, and you profit from the difference in price between Bitcoin and the futures. It is a neutral strategy in that it does not matter if Bitcoin skyrockets or crashes, you only earn the spread between the spot price and the futures price of Bitcoin. Arbitrage opportunities are usually quickly taken advantage of and corrected in the markets. In this case, though, there are some issues that prevented correction. Bitcoin is expensive, and a futures contract at CME is worth five bitcoins. So that is over $300,000 in notional value to short a single Bitcoin futures contract. Then you would have to buy another $300,000 in Bitcoin to offset the contract. That is a lot of exposure for most investors to stomach in the crypto market. Larger institutional players were also prohibited from or simply avoided dabbling in the crypto world and buying digital currencies themselves. So this left a fairly small group of hedge funds and very wealthy individuals to profit from the cash and carry arbitrage trade in Bitcoin. And they did make massive profits. BITX's Role This is the landscape that BITX entered in 2023. Now, BITX cannot come out and say "Short us!" However, they include some very interesting information in their pamphlet on how BITX works (emphasis mine): Put simply, arbitragers and market makers can cost-effectively hedge their Bitcoin futures positions with spot Bitcoin. For example, arbitragers can buy $1 of Bitcoin for every $1 of futures sold - or in the case of BITX, buy $2 of Bitcoin for every $1 of BITX sold . This cash and carry arbitrage is very common in the futures markets and helps explain how liquid futures can track their underlying so closely. In some sense, then, the cash and carry trade is integral to why BITX exists in the first place. Instead of paying $300k to short a Bitcoin futures contract, a smaller investor (or "arbitrager") could short BITX shares for a few thousand and hold half as much Bitcoin to hedge against it. This opened up the cash and carry trade to a greater retail audience. While there were costs involved, the potential 25% risk-free upside was enough to make it worthwhile to attempt. Indeed, this trade would have returned 39% since July 2023, with only a 5% max drawdown: Portfolio Visualizer Keep in mind that in 2023 when BITX was created, an arbitrager would still have to hold their own bitcoins. That changed this year when spot Bitcoin ETFs were introduced. Current Landscape The trade is now much easier since you can hold a spot Bitcoin ETF like the iShares Bitcoin Trust ETF ( IBIT ) in the same account as a short position in BITX, and the margin requirements should be much smaller. This opened up the trade to institutions as well, and indeed the arbitrage opportunity is now much less prolific. MarketWatch reported back in June: While Bitcoin ETFs saw five consecutive weekly inflows as of the end of last week, there was also a record number of Bitcoin futures being shorted by hedge funds...The basis, or the price difference between Bitcoin and Bitcoin futures, was in the range of 25% to 30% when Bitcoin ETFs were launched in January. However, the basis now stands in the range of 7% and 9%. With the basis between Bitcoin spot and futures prices narrowing, the carry trade may once again not make sense for smaller traders navigating high notional values, margin requirements, and borrowing costs on vehicles like BITX. The reward no longer justifies the costs. I do find it interesting that Volatility Shares mentioned shorting BITX in their very own description of how the fund works. I believe they may have had the idea of smaller traders using BITX as a way to short futures in a brokerage account on a smaller scale. Unfortunately, now that spot Bitcoin ETFs exist, the arbitrage opportunity is much smaller and may not be worth the costs. For my part, BITX can still be an intriguing play using options. Holding a Bitcoin ETF and selling naked short calls on BITX can be a way to profit from BITX's steady loss of value compared to Bitcoin. But this is not a true market-neutral position and is thus more of a hedge to existing Bitcoin holdings. Summary To sum up, BITX is a poor long-term hold due to extreme volatility, high expense ratio, daily volatility decay, and losses due to futures contango. There is a significant risk of losing one's entire investment in BITX. Holding Bitcoin is likely to outperform over the long run, though. In the very short term, it can be used to speculate on Bitcoin price movements. However, I believe that sophisticated investors can do this better by buying futures themselves, and unsophisticated investors should probably stay away from such a nuanced product as BITX. Bitcoin itself provides plenty of upside potential. Holding Bitcoin and shorting BITX was profitable before the arrival of spot Bitcoin ETFs. It may no longer be worth the costs now that institutions have entered the arbitrage trade. It may be worth considering shorting calls on BITX to profit from BITX's downside. I am assigning a hold rating because BITX can be used in so many ways depending on one's view and desired outcome. It should be viewed as a tool more than an investment. But since I am bullish on Bitcoin itself, I cannot assign a pure sell rating here. It is worth noting that patient investors may wish to wait for options on Bitcoin ETFs to arrive, having already been approved by the SEC. These will provide even more opportunities to express directional opinions and apply leverage to Bitcoin's price movements. Distributions Astute investors may be curious about the stated 11.22% dividend yield on Seeking Alpha. This further complicates the investment. It is not itself an investment case. The dividend is largely a return on investors' original capital. For more information, I suggest reading the "Tax Risk" section of the summary prospectus . Basically, the fund can identify as an RIC and avoid paying taxes on its gains if it distributes them to shareholders. It is quite complicated. But the short answer is that by paying distributions of capital back to shareholders, the fund can avoid being taxed on its gains. So there is nothing magical or exciting about the income potential of the dividend, it is just capital gains being returned to investors that will be reflected by a corresponding decline in the share price of the ETF. Risks I hope the risks of this investment are sufficiently clear. On the long side, leveraged Bitcoin's extreme volatility means that investors in BITX could easily see their entire investment wiped out in a short period of time. Please review the risks of leveraged ETFs as explained in the linked SEC bulletin before placing any trades in this product. These risks include extreme volatility, time and volatility decay, and the real possibility of losing all of your investment. The normal risks can be exaggerated with single-asset ETFs such as this. Only experienced traders who fully understand the risks should trade them. This article further explains the important risks of such ETFs with examples. Increased contango in the Bitcoin futures market for any reason would significantly erode the value of BITX as it rolls its contracts from one expiration to the next. The high expense ratio and daily volatility decay all but guarantee that the fund will lose value over time. This is not suitable as a long-term investment. In the sponsor's own words : "The Fund is not intended to be used by, and is not appropriate for, investors who do not actively monitor and manage their portfolio." On the short side, the daily leverage in BITX can result in greater than 2x returns when compared with Bitcoin. So it is not a perfect hedge and can rise at a rate much faster than double that of Bitcoin in a strong bull market. As risky as this investment is to hold, it is also risky to short. The extreme volatility is present on the upside as well as the downside. Any protracted bull market or rapid rise in the price of Bitcoin could see BITX well outperforming the coins themselves. In the short term, BITX is a bet on those movements that may indeed pay off, even if the long-term picture for BITX is not positive.
