Bitcoin Prize Games: How to Choose the Right Strategy

by James · July 8, 2022

How can you make money on price fluctuations on Bitcoin? Especially during a summer whose nickname might be Cryptocurrency Apocalypse?

We subjectively chose the most prominent crypto-oriented funds to assess. Nineteen of them, including ETFs and an equity fund, which specializes in cryptocurrency exposure and cryptocurrency-related activities, are down sharply this year. Only other funds that have shorter crypto are up.

It also does this summer at the best time to find out if it is time to buy shares in such funds since they have fallen into the bargain bucket. Or is their sale a sign that you should avoid the Bitcoin price range because it is the falsehood that critics have long claimed?

Another option: is it time to join investors who short Bitcoin and other cryptocurrencies?

Table of Contents

Bitcoin Price Fall

Among crypto-Bitcoin price funds in retreat, 16 that are old enough to have year-to-date returns from Morningstar Direct that goes in on Wednesday, take backs from over 21% to almost 75%.

Another three funds that opened in early February and March this year have a total return since start-up up to and including 30 June of approx. minus 59% to approx. 66%.

At the heart of the problem is a cryptocurrency. Bitcoin, the most prominent cryptocurrency, traded at 20,126 on Wednesday, according to Coindesk.com. It was down from 67,413 on November 9th.

Other cryptocurrencies have plummeted accordingly. Taken together, the tumbling has made strategies for playing Bitcoin price movements toxic – at least on the face of it.

Bad news across the realm

The bad news has rippled and shaken financial firms elsewhere in the cryptocurrency sphere. A court in the British Virgin Islands has ordered the liquidation of Singapore’s headquarters, BVI-incorporated hedge fund Three Arrows Capital. 3AC has been subjected to major liquidations in the wake of the collapses in the cryptocurrency market. Among the reported problems: non-payment on loans.

Crypto brokerage house Voyager Digital said last week that it suspended trading, deposits and withdrawals.

Celsius Network, a lender in the crypto area, stopped withdrawals from depositors in June.

Crypto lender Vauld suspended withdrawals on his platform on Monday.

Terra stablecoin collapsed in May.

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Different approaches

Variations between the returns of Bitcoin price funds and the like reflect differences between their holdings. First, only one fund open to US shareholders has direct exposure to cryptocurrencies. Instead, some invest in crypto futures contracts. Some also invest in several companies with a certain shareholding in digital money.

These additional exposures include companies engaged in crypto mining or mining services. Cryptomining is the calculation process that creates cryptocurrency.

Crypto funds can also invest in crypto exchanges, payment platforms and asset managers.

Biggest loser this year

How are different funds doing? Global X Blockchain ETF (BKCH) is down most among funds and fund-like units. (More on what we mean by “fund-like” units in a moment.) The loss so far this year is 74.87%.

The fund follows the Solactive Blockchain Index. This index includes stocks that use or benefit from digital assets and blockchain technologies. Blockchain is the general ledger that tracks crypto transactions.

Grayscale Bitcoin Trust

Grayscale Bitcoin Trust (GBTC) is a “fund-like” security. Technically, it is neither an ETF nor an equity fund. It’s a closed spruce trust. It issued a certain number of shares when it was first listed on the stock exchange. Since then, these stocks have traded in the over-the-counter (OTC) market.

The trust has actual Bitcoin. And it tracks Bitcoin price movements based on the CoinDesk Bitcoin Price Index. A key wrinkle: The trust can trade at a discount or premium to Bitcoin. The discount increased to more than 31% from 1 July.

So the good news is that you more or less pay only 69 cents for every $ 1 worth of Bitcoin in the trust. The bad news? GBTC had a decline of 57.23% for the year, until Wednesday.

Bitcoin Strategy ProFund Investor (BTCFX) is an equity fund. The fund invests heavily in Bitcoin futures. It can also invest in Canadian ETFs that hold Bitcoin directly. And it can hold securities such as US government bonds.

The fund, which is not fully one year old, is down 56.44% this year.

Least decline this year

The fund with the smallest YTD decline is the First Trust Indxx Innovative Transaction & Process ETF (LEGR). The fund is down 21.30%.

Its 12-month return is 3.11%.

The fund follows the Indxx Blockchain Index. That curve follows stocks that have some connection to blockchain technologies. The index favors companies that develop blockchain technology versus those that use or explore such technology.

The ETF’s three largest sectors are finance, with a weight of 41%; technology, with a weight of 28%; and communication services, at 10%.

ProShares Bitcoin Strategy ETF (BITO) was the first US ETF to give shareholders a spin on Bitcoin futures. Since it is an ETF, a shareholder does not need an account on a cryptocurrency exchange. A shareholder also does not need a crypto wallet. That shareholder also does not have to struggle with the problems and risks of holding Bitcoin himself.

The $ 637.5 million fund is down around 57% this year.

Bitcoin pricing strategies

So, should you buy, sell, short or avoid the Bitcoin price arena? Financial Advisor Dawn Dalby, CEO of Releve Financial Group, said she “is still a pro-cryptocurrency, but I advise clients to invest only what they can afford to lose because it is so speculative.”

Beyond that, any Bitcoin pricing game should fit into your long-term investment plan, she says. Think of crypto as an additional asset class in your asset allocation.

And beware of risks with cryptocurrency games. These include:

The lack of diversification. Many of them have nothing but futures contracts.
High fees. “It’s typical in the crypto-ETFs area,” she said. Several have fees above 1%. The average cost ratio for US equity ETFs is 0.12%.
Tracking error. Prices tend to differ from the prices of underlying crypto and other assets.

Shorting Bitcoin Price Fluctuations

How challenging is it to play Bitcoin price up and down? If you think cryptocurrencies are in a sustained price decline, it’s safe to short Bitcoin price movements, right?

And of course, the market offers ETFs dedicated to that strategy. The latest is ProShares Short Bitcoin Strategy ETF (BITI). This tiny $ 69.6 million ETF opened on June 21st.

BITI delivers the opposite of the performance of the S&P CME Bitcoin Futures Index. In June, the fund rose quite sharply, rising 10.32%.

But as with everything with crypto, tread carefully. In the last week, the fund fell 1.96%.

Follow Paul Katzeff further Twitter on @IBD_PKatzeff for tips on pension planning and actively managed portfolios that consistently outperform and rank among the best equity funds.

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